9911796707
TMI Blog1995 (9) TMI 264X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent-company. Another partnership firm called Godavari Electrical Conductors was set up and it purchased 4,436 out of 5,450 equity shares in the first respondent-company utilising a sum of Rs. 1.55 crores taken from the second respondent. The said loan was being repaid with the dividends earned on the shares with the result that in 1988 the outstanding principal was only Rs. 10.09 lakhs and unpaid interest amounted to over Rs. 1.30 crores. On October 21, 1982, the third respondent executed a trust-deed with an initial fund of Rs. 1,116 reciting as the object, the maintenance of a controlling interest in the company by holding more than 66 per cent. of the equity shares and to provide reasonable income for life for the members of the family. It was declared to be a private non-discretionary and irrevocable trust. The beneficiaries under the trust were a charitable trust known as A.V. Reddy Charitable Trust 15 per cent., with the other beneficiaries as Smt. A. Saraswathy, the fourth respondent 12 per cent.; the first petitioner 20 per cent.; the second and third petitioners 5 per cent. each; the fourth, fifth and sixth petitioners 12 per cent. each; and the seventh petitioner 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute for control of the company which could not be agitated in the form of a rectification petition. The further pleading is that the conflicting issues of fact had to be gone into by recording voluminous evidence and it should be done in an appropriate suit in the civil court and not in summary proceedings under section 155. According to the respondent, a 100 per cent. subsidiary company called, Anam Machinery Fabricators Limited with an authorised capital of Rs. 2 crores and paid up capital of Rs. 1.5 crores was established in February, 1978, by which a substantial portion of cash of the first respondent passed to the second respondent which in turn gave a loan to the partnership firm Godavari Electrical Conductors with which it purchased 4,436 shares of India Fruits Limited at the rate of Rs. 3,450 per shares totalling to Rs. 1.53 crores. Thereafter, the firm pledged the shares with the second respondent as security for the loan which carried interest of 18 per cent. Between 1978 and 1983, Rs. 1.20 crores were repaid and adjusted against the capital account. The third respondent states that he executed a trust deed on October 21, 1982, with an initial fund of Rs. 1,116 and purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s section. Secondly, that the section provides for a decision on any question relating to the title of the person who wants to have his name entered or omitted from the register, and since the application does not seek such prayer it is not maintainable. Thirdly, that no notice of any trust can be entered in the register of members under section 153 and, therefore, notice of such trust entered under section 187C cannot be regarded as part of the register of share members amenable to rectification. It is also argued that the section itself was meant for recording or removing the names of shareholders who acquire shares by transfer and those who apply for recording devolution by transmission which was by operation of law and not by any inter-party transaction. On the other hand, learned counsel for the petitioners submitted that the section had to be construed liberally as a beneficial legislation to see that the real owner of the share finds his place in the register of members. It is also submitted that section 155 is not in the nature of summary procedure since the title to a share could be gone into just as in a suit and further, there being no review against the action of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the failure of the company to comply with the provisions of the section. Obviously, the question of punishment would arise only after a declaration is made and the company does not record the same. At the same time, it is clear that section 187C does not provide for any machinery for rectifying an error in the declaration made by the shareholder or in the note recorded by the company in the register of members. We may now turn to section 155, which reads as follows: "155. Power of court to rectify register of members. (1) If ( a )the name of any person ( i )is without sufficient cause, entered in the register of members of a company, or ( ii )after having been entered in the register is, without sufficient cause, omitted therefrom; or ( b )default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member; the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register." A literal reading of this section would indicate that it refers to the rectification with reference to the "name of any person" entered in the register of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt section 155, where the question arose whether the devolution by operation of law could also be considered as a transfer for the purpose of. rectification, and the Supreme Court observed that the jurisdiction created by the section is very beneficial and should be liberally exercised. The court stated that the directors of the company in that case on the most frivolous of objections, prevented the State of Orissa from becoming the member for the last sixteen years and hence there was no reason why the court should not grant the applicant's relief under that section. I derive inspiration from this passage to hold that the essential purpose of section 155 is to see that the register of members reflects truly and correctly the members of the company and their status with reference to the capacity as declared under section 187C so that both the rights of the company to call for the share capital as well as the rights of the persons having beneficial interests with reference to the voting power that could be exercised by the public trustee under section 187B could be protected in view of the latest amendments to the Act. Even though before these amendments came into force, the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 150 read with section 187C, correctly. Learned counsel for the respondent submitted that sections 187A and 187B were concerned with the voting rights and section 187C also was stated to be brought in for the purpose of recording benami transactions and hence that section should be considered to be inapplicable to the facts of this case and consequently an entry made under that section would not be amenable to rectification. I am unable to accept this contention because section 187C by itself is not confined to benami transactions and after all such transactions were also in the nature of trusts under section 82 of the Indian Trusts Act. There is also a circular of the Company Law Board (at page 1189 of the Companies Act, 13th edition of Ramaiya ) clarifying that section 187C is applicable to private trusts. Counsel also argued that the proceedings under the Companies Act are considered to be of a summary nature and not of exclusive jurisdiction as held in Sree Krishna Jute Mitts v. Krishna Rao, AIR 1947 Mad 322, which was a decision binding on this court being a pre-1953 decision according to the decision in M. Subbarayudu v. State [1955] 1 An WR 150; AIR 1955 Andhra 87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision in Princess Usha Trust v. CIT [1983] 144 ITR 808; [1983] Tax LR 838 referred to a case where after distributing the trust property nothing remained in the corpus so that the fulfilment of the trust had become impossible and, therefore, the trust had been extinguished. But, in a case like this where the trust property admittedly exists, but according to the respondents, the value of that property is less than the debts charged thereon, it cannot be said that the property itself has been destroyed. I am of the opinion that the word "destruction" would mean that the property has gone out of existence and hence is unavailable for distribution. The word "otherwise" would also have to be read ejusdem generis such that whatever be the process, the trust property itself is not in existence or virtually unavailable. In a case such as this where the shares do exist though may be burdened with some debt, I do not consider it possible to accept the contention that the property does not exist and thereby it could have led to a situation where the purpose of the trust becomes impossible of fulfilment. It is also necessary to consider the provisions of the trust deed which clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the majority of shares to control the company and that purpose has not in any way become diluted or impossible by reason of the outstanding liability being more than the estimated value of the shares, nor has the corpus become unavailable. I am of the opinion that it would be necessary for the trustee to liquidate the shares and demonstrate that the amount realised is less than the outstanding debts. To a pertinent question in the parol evidence, the third respondent stated that the current price will be more, but the shares were not for sale. It is also significant that while claiming that the value of the shares has become less than zero by reason of the outstanding liability, he also claims that the property has reverted to him and he is the owner of the shares, which is sufficient to indicate that the corpus of the trust existed and was not destroyed by reason of certain debts. The third respondent in his pleadings as well as parol evidence attempted to explain his action with reference to certain wealth-tax assessment. Learned counsel for the respondents submitted that in the income-tax and wealth-tax assessments, the income-tax department did not accept the declaration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot concerned with the question whether the third respondent took the step bona fide of not, as the real issue is only whether there could be an extinction of the trust by reason of the trustee, or author estimating the value of the assets to be less than the outstanding liabilities. As discussed above, since the valuation would fluctuate from time to time it is not possible to accept this contention, as the claim under section 77 that the trust property is unavailable or that the corpus has become exhausted by the outstanding dues, has to be established in actual fact and not by an assumption. With reference to section 77( c ), there cannot be an extinguishment by operation of law but only by the happening of an event, viz ., that the corpus is wiped off actually by realisation to clear off the trust debts akin to destruction. Unless the corpus is liquidated and reduced to nil by paying off the outstanding debts, it is not possible to claim that the trust has become extinguished under section 77( c ). Learned counsel for the respondent submitted that the trust deed did not provide for sale of the shares and since the income beneficiaries have no interest in the shares and the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were actually purchased with borrowed funds and the shares form part of the corpus of the trust but did not originally belong to the author of the trust. As long as the shares exist and form part of the corpus of the-trust, there is liability on the part of the trustees to hold it for the benefit of the beneficiaries. Since the trust is declared to be irrevocable, the interest of the author has ceased according to the declaration of the trust and he has no right except in terms of section 83 to get back any part of the corpus of the trust even assuming that the shares subsequently purchased by borrowed funds would be declared as property of the trust by the author. It follows that no part of the trust can be treated as the property of the third respondent and he cannot declare any beneficial interest in the property for himself. This conclusion, however, does not lead to the inference that the petitioners are the owners of the shares. The petitioners are entitled only to the distribution of income as and when given. They have no right to receive the corpus. Only the heirs of the first, fourth, fifth and sixth petitioners are entitled to the corpus on the last of them attaining m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n its register of members, the matter would have to be placed before the board of directors for acceptance. Where a shareholder declares that he does not hold beneficial interest, that declaration is against his interests and can, therefore, be accepted on its face value. But, when the same shareholder declares subsequently that the beneficial interest is reverted back to him, the principles of natural justice would require that the persons whose names have been registered as having beneficial interests must be notified and their objections taken before recording the declaration under sub-section (3). Even though the section does not provide for such an opportunity, or consideration by the board of directors, I am of the opinion that the principles of natural justice, by necessary implication, form part of the process, and by merely recording a declaration made under section 187C(3), the beneficial interest in others which is declared earlier by the same holder of the shares, cannot be wiped off. Courts have held that the principles of natural justice are attracted and there is an implied, obligation to give notice even though the relevant Act or rules made no express provision for ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
