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TMI Blog2009 (7) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... Application No. 161 of 2006 before the Company Law Board for dismissal of the said company petition on the ground of maintainability. That application came to be dismissed by the Company Law Board on the basis that the issue raised by the appellants require, consideration in detail, which can be done only in the main company petition. 3. The grounds on which the appeal is filed are that, the Company Law Board cannot decide about the title in respect of shares stated to have been transferred while exercising jurisdiction under sections 397 and 398 of the Companies Act; that the decision of the Company Law Board in rejecting the application on the ground of maintainability is perverse and without basis: and that the Company Law Board ought to have dismissed the company petition on the admitted ground that the respondents are not holding shares in the company and, therefore, they are non-members, who cannot maintain the petition under sections 397 and 398 of the Companies Act, 1956. Besides, the appellants have also raised other legal issues. 4. The facts which are relevant for the purpose of disposal of this appeal are as follows : ( a )The appellants 2 to 5 along with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is stated that thereafter, the first respondent sought permission to withdraw all the said suits with liberty to claim remedy before the appropriate forum, however, the Civil Court permitted the first respondent to withdraw his suits on 18-1-2006, without granting liberty as sought for by him. Nearly six years after withdrawing the suits, the first respondent approached the Company Law Board by filing the company petition against the appellants for oppression and mismanagement. However, the suit filed by the appellants 2 to 5 for specific performance against the first respondent is still pending. ( e )It was the case of the appellants that the filing of company petition by the first respondent is an abuse of process of law and inasmuch as the first respondent has not purchased the qualification shares and ultimately become a shareholder of the company, the petition filed by him for oppression and mismanagement under sections 397 and 398 of the Companies Act is not maintainable by virtue of section 399 of the Companies Act, 1956. 5. On the other hand, it was the case of the first respondent before the Company Law Board that the application filed by the appellants questioning t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sections 397 and 398 of the Companies Act, cannot decide as to whether the transfer has been effected or not and whether the transfer of shares is valid or not, and what the Company Court, while exercising its powers under sections 397 and 398, can do is to prima facie satisfy that the person who approaches it under the abovesaid provisions is a member of the company on the said date. When, on the admitted pleadings, the first respondent cannot be treated as a member of the company and a shareholder of the company, according to him, the very filing of the company petition by him should be treated as meaningless and the Company Law Board cannot be expected to keep the petition which is on the face of it not maintainable. 7( b ). It is his submission that while rejecting the application filed by the appellants for maintainability of the company petition, the Company Law Board shall have referred to the income-tax returns of the 12th respondent/transferor about his assets and rights in respect of the share certificates. 7( c ). It is his further submission that the returns filed on behalf of the appellants in respect of investment, especially relating to that of 3rd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince it would include even a legal heir of a person in whose name the transfer has not yet been effected but still is a member within the meaning of section 2(27) of the Act. He would rely upon the judgment of the Supreme Court in World Wide Agencies (P.) Ltd. v. Margaratt Desor [1990] 1 SCC 536. 8( d ). He would submit that the company petition filed by the first respondent is one of composite in nature which not only seeks for an action under sections 397 and 398 of the Companies Act, but also for a direction to rectify the records by issuing duplicate certificates, etc., and therefore, the first respondent having an indisputable and unchallengeable title as a member can maintain the company petition. 8( e ). He would also submit that the petition under sections 397 and 398 is filed on just and equitable grounds and therefore, the word, member should be construed liberally. He would refer to the judgments cited by the learned senior counsel for the appellants to substantiate his contention. 8( f ). He would submit that the question of considering tax returns, etc., is a matter to be decided on merits of the case and that cannot be construed while decidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a shareholder or a member of the company, in my considered view, it does not require any leave to be granted by the civil Court. Of course, the question whether the non-transfer of shares in the name of the first respondent by the company is valid or not may not be strictly within the purview of the Company Law Board while deciding the issue under sections 397 and 398 of the Companies Act. But as correctly pointed out by the learned counsel for the respondents, the term member has to be construed based on the broader object of sections 397 and 398 of the Companies Act. 12. On facts as elicited above, the crux of the issue appears to be that the first respondent and the respondents 2 and 3 have entered into an agreement on 27-3-1995 with the 6th respondent and his family members for acquiring the entire shareholdings of the 12th respondent, Mr. V.R. Govindarajulu and his family members, relatives and friends in the erstwhile G.S.S. Spinners Private Limited, which has been subsequently converted as M/s. S.V.T. Spinning Mills (P.) Ltd., for a sum of Rs. 60 lakhs and that was for transferring 19580 equity shares of Rs. 100 each aggregating Rs. 19.58 lakhs, apart from the buil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant to note that it is not as if the appellants who are the respondents in the company petition have lost their right of proving their case that the respondents are not either the shareholders or members of the company on merits and that the respondents are not entitled to maintain the company petition under sections 397 and 398 of the Companies Act. Therefore, on the face of it, the appellants cannot have any grievance. The contention of the learned senior counsel for the appellants that when the respondents prima facie have no status of shareholders or members of the company, allowing the company petition to prolong for some more time would be only an abuse of process of law and also unnecessarily taking away the court s time, has no application to the facts and circumstances of the case. On facts, it is not possible to draw an inference that the pendency of company petition would be an empty formality. 15. On the one hand, it is the contention of Mr. R. Thiagarajan, learned senior counsel appearing for the appellants that in the income-tax return filed by the 12th respondent, who transferred the shares as stated above for the financial years 1995-96 (assessment year 1996- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easance, fraud and cheating committed, and for a direction to investigate the affairs of the 1st respondent Company under section 235 of the Companies Act, 1956; ( g )For such other reliefs as this Hon ble Board may deem fit and proper in the circumstances of the case." Therefore, there is no doubt that the application filed by the respondents is one of composite in nature which includes the relief of issuance of duplicate certificates apart from the relief against misfeasance. 17. It is true that in Gulabrai Kalidas Naik s case ( supra ), the Gujarat High Court has held that the pre-requisite for invoking jurisdiction under sections 397 and 398 of the Companies Act is provided under section 399(1) and a person who makes a complaint of oppression must be a member of the company. But, in the said case, it was also decided that in cases where title of membership is in dispute, the relief is under section 155 of the Companies Act to get his name rectified in the register of members. In that case, of course, the High Court has taken note of the fact that admittedly the signatures were obtained from the transferor in blank papers, based on certain understanding and it was, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning into hundreds of pages and several issues, the issue relating to maintainability can be tried along with the other issues, because trial of such a case would not occupy a longer time and would not subject the parties to long trial. But in cases where the pleading run into several hundreds of pages and several issues arise, it would not be just and proper to subject the parties to the trial of the entire case for the purpose of deciding the issue of maintainability. If in such cases, the maintainability issue is decided as a preliminary issue, it would be convenient for both the parties because in the event it is held that the petition is not maintainable, several other issues involved in the case need not be tried and the evidence need not be adduced. On the facts, therefore, the single judge was justified in directing that the issue as to maintainability should be tried as a preliminary issue." I am of the view that on the facts and circumstances of the present case, while the pleadings are running to many pages and crucial issues are raised in respect of status and right of the respondents either as members or shareholders of the company, the above dictum is not of any he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interests of the company; may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1), the Tribunal is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Tribunal may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit." 21. The term, member is defined under section 2(27) of the Companies Act in the form of non-inclusive definition which says as follows : "Section 2(27) members , in relation to a company, does not include a bearer of a share-warrant of the company issued in pursuance of section 114." Therefore, the term member under section 2(27) of the Companies Act has to be construed on a larger connotation, which means that the persons other than bearers of share warrants are to be treated as members. This is in apparent contravention of section 41 of the Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... locus standi to maintain an application under sections 397 and 398 of the Act. Mr. Nariman submitted that the rights under sections 397 and 398 of the Act are statutory rights and must be strictly construed in the terms of the statute. The right, it was submitted, was given to "any member" of a company and it should not be enlarged to include "any one who may be entitled to become a member." The Supreme Court has held, "20. We are clearly of the opinion that having regard to the scheme and the purpose of sections 397 and 398 of the Act, the reasoning on a pari materia provision of the English Act would be a valuable guide. The said construction, appears to us, to further the purpose intended to be fulfilled by petitions under sections 397 and 398 of the Act. It facilitates solution of problems in case of oppression of the minorities when the member is dead and his heirs or legal representatives are yet to be substituted. This is an equitable and just construction. This construction, as suggested by Pennycuick, J. Does not militate against either equity or justice of such situation. We would, therefore, adhere to that construction. In this connection, it may be mentioned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members. If, in a given case, it is shown that, though the name of a person is not shown in the register of members, if he had been treated as a member by the company, the Company Court can always exercise its equity jurisdiction. This Court should not decline to exercise its equity jurisdiction on the ground of mere technicality. Till the year 1986, i.e., till the matter was taken to this Court in this petition, there was no shred of doubt on the rights of the petitioner to represent his interests as a shareholder in respondent No. 1 company. It was contended that in a number of meetings he has signed the proceedings of the said meetings and even the balance-sheet prepared by respondent No. 1 company right from the years 1971 to 1986 does not show any indication that the petitioner had been excluded from the membership of the company either on the ground that he has not inherited the shares or otherwise. In the circumstances, I am of the view that the decision of the Division Bench in Balaji Textile Mills [1988] ILR 1988 Kar. 1213/[1989] 66 Comp. Cas. 654, is applicable on the undisputed material on record." 26. In these circumstances, I am of the considered view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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