9911796707
TMI Blog1988 (1) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, 6, 8, 11, 12, 13 and 14. The petitioners also challenge the issue and allotment of 17, 666 shares in favour of respondents Nos. 11, 12, 13, 15 and 16. It must be mentioned at this stage itself that both Mr. Cooper and Mr. Chagla have, in their usual fairness, admitted that respondents Nos. 11 to 16 are companies owned and/or controlled by respondent No. 5 and that respondents Nos. 6 to 9 and 11 to 16 constitute a group headed by respondent No. 5. At this stage itself, it must also be mentioned that at the very outset, Mr. Cooper and Mr. Chagla had on behalf of their clients made a with prejudice offer that the respondents were willing to offer to the petitioners 7,345 shares at par, i.e , at Rs. 100 so that the petitioners' original shareholding of 41 per cent. in the first respondent company is still maintained. This offer was not accepted by the petitioners and the petition was argued. On a question from the court, Mr. Chagla had stated that, the respondents would be keeping the with prejudice offer open for the petitioners to accept for a period of two months from the date of this order. However, as explained subsequently, this offer is in fact meaningless. The facts sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under these articles, no shares can be transferred so long as any member or any person selected by the directors is willing to purchase the same. The articles also provide that the person proposing to transfer shares shall give a notice in writing to the company of his/her intention to transfer the shares. The directors of the company are bound to offer the same to the members of the company and if no member is willing to take up the shares, the directors have an option to select some other persons for the purpose of having the shares transferred to that person. The price to be paid was to be fixed by the auditors of the company. If the directors do not find any member or other person to purchase the shares within 30 days of the notice, the member concerned could, within 30 days thereafter, sell the shares to any person, at any price. Article 65 provides that the directors may, at their absolute and uncontrolled discretion, refuse to register any transfer of shares without giving any reasons for such refusal. At a meeting of the executors held on November 27, 1984, respondents Nos. 2, 3 and 4 resolved to sell the 3,417 shares. It was further resolved that any one of the executor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioners also filed a complaint against the auditors with the Institute of Chartered Accountants. The petitioners, thereafter, on or about March 2, 1985, filed before the Civil Judge, Pune, a suit bearing No. 624 of 1985 for an injunction restraining respondents Nos. 2, 3 and 4 from selling these shares. It must be mentioned here that while the body of the plaint contains averments regarding 3,417 shares as well as the 93 shares, in the prayer, ultimately, an injunction is sought only in respect of 3,417 shares. In the affidavit in reply to the interim application, the respondents aver as follows; "...the plaintiffs have not made any prayer for purchasing of the share and they cannot merely prevent the defendants from selling the shares without purchasing the shares by themselves". In the said affidavit, the respondents also contend : "...that the procedure for transfer of shares as laid down under article 57A of the articles of association of the company have been duly completed by the defendants. Hence, the executors of the will of the late Dr. Parulekar are now free to sell the shares to anybody other than Madam Parulekar and/or her nominee". The respondents al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent No. 5. Further, the share transfer forms in respect of 3,417 shares bear the name of the first petitioner as one of the transferors, but are signed only by respondents Nos. 2, 3 and 4. The forms also show that the same are not even signed "for and on behalf of the first petitioner". The shares stood in the names of four parties, viz. , respondents Nos. 2, 3, 4 and the first petitioner. There was, therefore, clear non-compliance with the provisions of section 108 of the Companies Act. The share transfer forms were clearly not in order. One really fails to understand how the secretary and the directors of the company, having examined the forms, found them to be in order. Again, respondents Nos. 2 and 3 are aware that on August 5, 1985, by the ex parte order, the plaint in Suit No. 624 of 1985 is only returned for presentation to the proper court. Therefore, these respondents are aware that the petitioners are still invoking article 57A and contending that respondents Nos. 2, 3 and 4 cannot sell the shares to anybody else. This fact is not brought to the -notice of respondents Nos. 7 and 9. Also, respondent No. 2, being an interested party, cannot, under these circumstances, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they had already sold the shares. However, in the said letters, these respondents do not mention that in the meeting held on September 21, 1985, the transfers have already been registered by the first respondents and/or that the purchaser has been appointed as a director of the first respondent-company. A notice dated October 13, 1985, is, therefore, issued calling an annual general meeting of the first respondent-company on November 16, 1985. The agenda for this annual general meeting as well as the explanatory statement annexed thereto do not contain any item regarding increase in share capital and/or issue and allotment of the further shares. The petitioners attend this meeting and protest against respondents Nos. 5, 6 and representatives of respondents Nos. 11, 12, 13 and 14 being present at the meeting. However, their objections are overruled. At this meeting, one of the items on the agenda was declaration of dividend by the first respondent company. The minutes show that at the time this item was being considered, respondent No. 6 requested the second respondent (who was the chairman of the meeting) to allow him to express his views on this item. Respondent No. 6, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gramme, the first respondent company is requested to consider the possibility of increasing the share capital. No particulars are given even now as to for how long the expansion programme has been under consideration, the exact nature of the expansion programme and when applications were made to the banks and/or financial institutions. Further, it is rather strange that the bank writes one or two letters suggesting an increase and the company immediately rushes to implement that suggestion without at all considering in great depth or detail the pros and cons of that suggestion. That everything was in fact preplanned and all these reasons trotted out at this meeting are merely excuses is clear from what happens at the meeting of the board of directors held immediately after this annual general meeting. On the same date, after the conclusion of the annual general meeting, the board of directors meets. At this meeting, the item regarding the increase of share capital is taken up immediately on the ground that the same has been sanctioned by the general body. It need not be mentioned, but it is interesting to note that the general body consisted of exactly the same people who are now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now enjoy. Therefore, notice is issued of an extraordinary general meeting to be held on January 31, 1986. At the extraordinary general meeting held on January 31, 1986, the resolutions passed earlier authorising the issue and allotment of these additional share capital is ratified and/or confirmed. The earlier resolution is ratified by the use of the 3,417, 93 and the 17,666 shares which are by now issued and allotted. On these facts, Mr. Dada has argued that the sale of 3,417 and the 93 shares is contrary to and in violation of the articles of association. He submitted that it is, therefore, illegal, null and void and not binding on the petitioners. Mr. Dada has also argued that this transfer in favour of respondents Nos. 5, 6, 8, 11, 12, 13 and 14 is not a bona fide transfer and has been made with the intention of transferring the controlling interest in the company to respondent No. 5 and to defeat the rights and claims of the petitioners. Mr. Dada has also argued that the transfer forms in respect of 3,417 shares have not been signed by all the transferors and that there being no validly executed transfer forms, the first respondent-company could not have transferred the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, under section 108 of the Companies Act, the transfer forms could be signed by the shareholders or anybody authorised on their behalf. He has submitted that at the meeting of the executors held on November 27, 1984, it was resolved that the 3,417 shares be sold and that it was further resolved that any one of the executors may take steps to execute the transfer forms and to complete the transaction. Mr. Cooper submits that even though the first petitioner was not present at the meeting, this resolution has, at no stage, been challenged by the petitioners. Therefore, the authority to sell the shares and the right of any one executor to execute the transfer deed is not in question. According to Mr. Cooper, it is pursuant to this decision that the shares were offered to the first petitioner under the provisions of article 57A. Mr. Cooper submits that it is under these circumstances that the other three executors have signed the transfer forms. Mr. Cooper submits that the forms must be deemed to have been signed for and on behalf of the first petitioner also. He points out that the second respondent in her affidavit in reply dated April 7, 1987, to this petition has stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even though the same did not form part of the agenda. He cites the cases of La Compagnie De Mayville v. Whitley [1896] 1 Ch. D. 788, Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390 (Delhi) and Suresh Chandra Marwaha v. Lauls Pvt. Ltd. [1978] 48 Comp. Cas. 110 (P H) in support of the proposition that directors can, at a meeting of the board, deal with all affairs of the company and that no notice or agenda is necessary. Mr. Cooper submits that all that would be required would be for the respondents to submit fresh forms duly and properly executed. Mr. Chagla has further submitted that the sale in favour of respondent No. 5 and his group cannot and is not impugned and, therefore, these respondents will remain the beneficial owners of the shares and will call upon respondents Nos. 2, 3 and 4 to rectify the defect. It is, therefore, submitted that, merely on a technicality, the transaction cannot be set aside and the court should not order rectification of the register as it would be a futile exercise. In this behalf, the authority in the case of Unit Trust of India v. Om Prakash Berlia [1983] 54 Comp. Cas. 723 (Bom) was relied upon and it was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditors was the correct price and that this is admitted by the petitioners as they have, on October 1, 1985, accepted the price as fixed by the auditors. He submits that the earlier objections raised by them were merely with a view not to pay the same. In this behalf, Mr. Cooper has taken me in detail through the correspondence between the parties and it is necessary to consider this correspondence. The correspondence starts with the letters dated November 10, 1984, and November 29, 1984, from respondents Nos. 3 and 4 and respondent No. 2, respectively, to the first petitioner as well as to the first respondent-company, intimating the offer to sell the shares and the company's letters dated November 29, 1984, to all members. The first petitioner, by her two letters dated December 14, 1984, addressed to these respondents accepted the offer and agreed to purchase 3,417 and 93 shares herself or by her nominee, i.e , petitioner No. 2, at a price that may be certified by the auditors of the company. On January 29, 1985, the auditors of the company wrote to the first petitioner stating that they have received the memorandum and articles of association, copies of audited statements o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise. We further wish to make it clear that after such a certificate is issued by the company's auditors, the time and modalities of payment will have to be negotiated and settled between the buyers and the sellers. ...Without prejudice to all that has been stated in the foregoing paragraphs and also without prejudice to our legal rights to take such action relating to the certificate dated February 21, 1985, issued by the auditors, we are willing to deposit with any shareholder of our mutual choice an amount of Rs. twenty lakhs as an earnest of our bona fides and genuine desire to purchase the said shares. The said amount will be paid to the stakeholder within three days from the receipt of your confirmation that you are ready and willing to accept this interim arrangement. The stakeholder shall hold these monies until such time, but not later than one month within which we hope the company's auditors will submit a just, fair and impartial certificate and it will be accepted by us. In case a just, fair and impartial certificate is not issued by the company's auditors within the said period, then the stakeholder shall return the said monies to us without any objection immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les of association and is, therefore, illegal and void. Further, the only right to sell to anybody else is under article 63. Under that article, such sale could only take place within 30 days of the members not taking up or the directors not finding anybody else or in this case on the petitioners not accepting the price. Clearly, the sale to respondent No. 5 and his group is not within those 30 days. For this reason also, the sale is contrary to the articles. At this stage, an argument advanced by Mr. Parekh may be noted. Mr. Parekh had argued that respondent No. 5 and his group had purchased the shares with full knowledge of the articles and of the correspondence. According to Mr. Parekh, therefore, the proper remedy for the petitioners was a suit for specific performance only. According to Mr. Parekh, the petitioners should be asked to file such a suit and no reliefs should be granted in this petition. In my view, Mr. Parekh is right when he contends that respondent No. 5 and his group cannot be said to be bona fide purchasers for value without notice. Respondent No. 5 in his affidavit dated September 9, 1985, has admitted that before he and his group purchased the shares, resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian Trusts Act, which, inter alia, prescribes, that no trustee shall, without the permission of the civil court, bid for or become a mortgagee or a lessee of trust property or any part thereof. The contention is that if the plaintiff cannot even become a mortgagee or a lessee, much less can the plaintiff purchase the property. In our judgment, this is one of the obstacles in the way of the plaintiff for seeking enforcement of the agreement". Reliance in this behalf was also placed on the case of Wright v. Morgan [1926] AC 788 (PC). It is, therefore, argued that the first petitioner not having relinquished her position as executrix, even if there was a concluded contract in favour of the petitioners, the same would be void and could not be enforced. This argument coming from respondents Nos. 2, 3 and 4, exhibits great significance. It must be considered in the light of the fact that respondents Nos. 2, 3 and 4 had offered the 3,417 shares to the first petitioner and/or her nominee. At the time that they so offered, they were aware that she was an executrix along with them. They were aware that she could not have purchased the same herself or nominated anybody els ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... challenged, it is asserted that the respondents are free to sell to anybody else and the shares are sold off without any insistence that the petitioners are bound to pay the price. In my view, therefore, this argument that the contract, if any, is void, coming from respondents Nos. 2, 3 and 4 clearly shows mala fides. There can be no denial that the second petitioner had, independently of article 57A, the right to purchase the shares. This court, being a court of equity, the interest of justice requires that her rights cannot be allowed to be affected by this pre-planned and devious method. The offers being both under article 57A and articles 58 to 64, the acceptance by the second petitioner must be deemed to be not only as a nominee, but also as a member of the first respondent-company entitled to take up the shares in her own right. There is a concluded contract to sell the shares to the second petitioner. The second petitioner was and is not an executrix or a trustee. This contract cannot, therefore, be said to be void or unenforceable. That the provisions of articles 57A to 64 have been completely bypassed even for all future sales of shares is also clear from one further fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exercising their votes. Mr. Chagla submits that, only at the initial stage, the petitioners had objected to respondent No. 5 and his group participating and that at all subsequent meetings on and after November, 1985, no objections have been raised to the respondents participating in the affairs of the company and in fact certain resolutions have been passed unanimously with the petitioners also giving their consent to those resolutions. Mr. Chagla also points out that respondent No. 5 was originally appointed as a director and then appointed as the joint managing director along with the second petitioner. Mr. Chagla argues that respondent No. 5 has been authorised to act on behalf of the company, that the second petitioner has in fact accepted office as the joint managing director and has participated in the activities of the first respondent-company as the joint managing director, Mr. Chagla, also relies upon a declaration published under the provisions of the Newspaper Central Rules, 1956, wherein the names of the respondents have been shown as directors and shareholders of first respondent company and states that the first petitioner as publisher has published this declara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the petitioners "only formally objected". Mr. Dada submits that this clearly shows that the petitioners had not given up their objections and contention. He submits that respondent No. 5 and his group were aware that the petitioners were not accepting them and that at no stage have the petitioners given any indication to the contrary. Mr. Dada also argues that merely because the petitioners have come to court after a period of about eight months but well within the period of limitation, there cannot be said to be acquiescence and/or estoppel. Mr. Dada points out that the provisions of section 155 are equitable provisions and equitable reliefs are to be granted. In my view, Mr. Dada is right, in a case like this, where clearly the petitioners have been deprived of their just dues and rights, it cannot even be argued that merely because of some delay, they are not entitled to any relief. The petitioners have, at no stage, given any indication that they were accepting the respondents or accepting the transfer or allotment of shares. They had in fact filed a suit in the Pune court which suit is still pending. Therefore, to my mind, it cannot be said that the petitioners have not av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase in circulation for the past number of years (even before respondent No. 5 and his group purchased the shares). In para 2 of the abovementioned affidavit, respondent No. 5 himself states that for at least three years prior to 1986, the expansion programme and importation of new machinery were under active consideration. It is clear that these proposals have now been implemented and would have, no doubt, been implemented even in the absence of respondent No. 5 and his group. Therefore, no exclusive credit can be claimed for any of this by respondent No. 5 or his group. Mr. Parekh has, however, submitted that respondents Nos. 2, 3 and 4 as executors and trustees are interested in receiving the highest possible price for the 3,417 shares. Of course Mr. Parekh does not state that respondents Nos. 3 and 4 are also personally interested in getting the best possible price for the 93 shares. Mr. Parekh submits that the executors have received a sum of Rs. 78,59,100 for the said 3,417 shares. He states that the executors have made an application for registration of the trust as per the directions given in the will. He submits that the first petitioner has filed objections to the regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly ratified, the court would not, normally, interfere. In this case, however, the use of the 17,666 shares renders invalid the entire action of ratification and it is no use to now argue that these votes should be ignored. The fact remains that till date there is no valid ratification and it is now not possible to ratify this action. This is so because in the view that I have now taken the respondents clearly do not have a majority. The majoirity is now with the petitioners. Therefore, normally, the issue and allotment of 17,666 shares would have to be set aside. However, Mr. Cooper is right when he argues that the fact that it was ultimately necessary for the first respondent company to increase its share capital is not disputed. Mr. Cooper has argued that, accordingly, the issue of the 17,666 shares cannot be set aside. He submits that under article 8, the directors could, in any case, decide on the question of issue and/or allotment of shares. He submits that, in any case, therefore, the action of the board of directors in issuing and allotting the 17,666 shares cannot be challenged. This argument overlooks the fact that the board of directors have, firstly, acted in pursuance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that respondents Nos. 15 and 16 were not members of the company. There is not the slightest doubt that action in issuing and allotting the 17,666 shares was taken without considering the interest of first respondent-company. There is not the slightest doubt that the whole purpose was to corner the shares. No court can encourage this. However the only argument that appeals to the court is that on the basis of this increase, certain facilities have been granted by financial institutions. It is not denied by the petitioners that these facilities are granted on the basis of this increase. Whilst the initial increase may not be justifiable, the fact remains that now to order the first respondent-company to reduce its share capital may result in these facilities being withdrawn. Under these circumstances, in my view, it would be more appropriate not to order a reduction in the share capital, but to rectify the register merely to the extent of the allotment of shares in favour of respondent No. 5 and his group. In my view, these shares should then be allotted to such person or persons and at such price as the board of directors (after it is reconstituted) may decide. Under these ..... 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