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TMI Blog2010 (2) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... specific provisions of the Companies Act, 1956; lost sight of the very concept of free transferability of the shares of a public limited company and failed to apply the provisions of section 9 under which overriding force is given to the Act notwithstanding anything to the contrary contained in the memorandum, articles or agreement. The award of the learned arbitrator would have to be set aside. The petition is, accordingly, made absolute in terms of prayer clause (a) by setting aside the award - ARBITRATION PETITION NO 174 OF 2006 - - - Dated:- 15-2-2010 - DR. D.Y. CHANDRACHUD, J. Rohit Kapadia, Pravin Samdani, Ms. Bindi Dave, Kunal Vajani and Ankit Virmani for the Petitioner. Aspi Chinoy, J.J. Bhat, Snehal Shah, Shiraj Dhru, Mrs. Lata Dhru and Ms. Ranju Yadav Respondent. JUDGMENT 1. The challenge in these proceedings under section 34 of the Arbitration and Conciliation Act, 1996, is to an arbitral award dated 14-1-2006, of a sole arbitrator, Mr. Justice A.V. Savant. The protocol agreement 2. On 2-10-1974, a protocol agreement was entered into between the petitioner and the respondent pursuant to which Maharashtra Scooters Ltd. (MSL) was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbitration. The party desiring to part with or transfer its shares or any part thereof shall give to the other party a written notice of such intention specifying the number of shares and the rate at which it is willing to sell the same and if the other party within 30 days of the receipt of such notice, agrees, to such proposal for purchase of such shares, the party giving the notice shall be bound to sell and transfer such shares to the other party at the rate specified in such notice. If the other party is willing to purchase the shares but considers the rate proposed to be too high or unacceptable, it shall, within 30 days from the receipt of the notice, give written intimation to the party giving notice of its intention to purchase the shares and the question of rate shall be referred to arbitration of a sole arbitrator if agreed to by both the parties or two arbitrators one to be appointed by each party in accordance with the provisions of the Indian Arbitration Act. If the party receiving a notice within 30 days of its receipt, fails to accept the proposal for purchase of the shares, the party giving the notice will be free to sell the shares to any other party but only at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolve the price. On 6-6-2003, the respondent made a counter offer on the price of Rs. 75 per equity share of MSL stating that it reflected a premium of 5.6 per cent over the prevailing market price as on 6-6-2003. By a letter dated 31-7-2003, the respondent stated that in the event that the price offered of Rs. 75 per share was not acceptable to the petitioner, the next step in terms of clause 7 of the protocol agreement was to initiate the arbitral process. Reference to arbitration 6. On 23-9-2003, the Principal Secretary in the Industries, Energy and Labour Department of the State Government, forwarded a set of names of former Judges of this Court for appointment of an arbitrator. On 27-10-2003, the petitioner addressed a letter to Mr. Justice A.V. Savant, stating that under the protocol agreement, the petitioner had to make the first offer to the respondent and, in turn, the respondent had to accept or reject the offer made by the petitioner for divesting its shareholding in MSL. The letter recorded that "this process has been completed and since no agreement has been reached, on the value of the shares, as per the agreement, the parties involved have to proceed to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the relevant date for valuation would be 30-6-2002. The petitioner by its letter dated 13-2-2004, denied that there was any agreement, by which the cut off date was to be 30-6-2002. The respondent in its letter dated 17-2-2004, once again reiterated that the parties had agreed to 30-6-2002, as the relevant date for valuation. 8. At the third meeting before the arbitrator on 6-3-2004, it was agreed that the parties would urge their submissions on the preliminary issue as to what should be the relevant date for valuation. The challenge to jurisdiction 9. On 6-4-2004, an application was filed by the petitioner, questioning the jurisdiction of the arbitrator. The contention of the petitioner was that ( i ) the protocol agreement dated 2-10-1994, was illegal and void on the ground that ( a ) the agreement was a forward contract prohibited by the Securities Contracts (Regulation) Act, 1956; and ( b ) the agreement contained restrictions on the transferability of the shareholding of MSL which were violative of the provisions of section 111A, read with section 9 of the Companies Act, 1956 and, hence, void; ( ii ) the joint reference dated 29-12-2003, was void, inter alia, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e date for valuation of shares. The arbitrator noted that on 9-4-2003, the petitioner made a specific offer to the respondent in terms of clause 7 of the protocol agreement and in terms of the decision of the Government of Maharashtra to sell its equity shareholding in MSL to the respondent at Rs. 232.20 per share. The price of Rs. 232.20 was based on a valuation report submitted by Crisil Advisory Services on 3-9-2002. In response to the offer of the petitioner, the respondent conveyed its acceptance on 3-5-2003, clarifying at the same time that the price was not acceptable. The respondent s subsequent letter dated 10-5-2003, once again confirmed that the earlier letter of 3-5-2003, was in response to the offer in terms of clause 7 of the protocol agreement and that by its letter, the respondent had confirmed its intention to accept the offer though the price was not acceptable. The arbitrator held that the correspondence exchanged between the parties, between 9-4-2003 and 6-6-2003, left no manner of doubt that there was a concluded contract under which the petitioner was to sell its shares to the respondent and the respondent was to purchase those shares and the contract was conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that fixing of a 30 per cent discount would be just, fair and reasonable and would meet the ends of justice. This constitutes an error apparent on the face of the record, since the arbitrator has proceeded on a basis which is not permitted by section 28(2); ( v ) The invocation of a rationale of 20 to 40 per cent discount as a reason by the arbitrator to apply a 30 per cent discount discloses a total non-application of mind or perversity, on the part of the arbitrator, considering the context in which the discount of 20 to 40 per cent came to be stated. The fact that 20 to 40 per cent of the discounted price of MSL shares is translated to a percentage discount in the holding of BAL shares is such as to shock the conscience of the Court; ( vi ) The application of a discount to the BAL holding and the use of only the book value in the non-BAL holding affects the rights of the petitioner and causes a direct financial loss and injury. The value of the discount applied is Rs. 50 crores in the shares of BAL alone; ( vii ) The evidence of Mr. Bansi Mehta was liable to be considered irrelevant, non-germane and extraneous to the reference after his answer to questions 14 to 16 in the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the parties also shows that all the letters related to the date of valuation and there was no dispute about the date of the contract. Until the reference was made to arbitration, the common premise was that the agreement was arrived at, with refe-rence to the offer dated 9-4-2003, on 3-5-2003. This was the position until January, 2004. The arbitrator directed that the pleadings to be filed on the valuation of the shares and on the relevant date. It was only in the application of 6-4-2004, that the petitioner sought to raise a dispute on whether a concluded contract has come into existence. Hence, the question as regards the date of valuation was raised not in the context of the contract not being concluded, but as an ingredient of the rate and it was only in the application of 6-4-2004, that the petitioner sought to link the date of valuation to the submission that the contract had not been concluded; ( ii ) Insofar as the question of valuation is concerned, the only ground which has been raised in the arbitration petition (ground AA) relates to the discounting of the value of BAL shares held by MSL; ( iii ) Considering the scope of section 34 of the Arbitration and Conciliat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion as regards the legality of clause 7 of the protocol agreement vis-a-vis section 111A of the Companies Act, 1956, was not in the original reference. Yet, the question was specifically referred to the arbitrator during the pendency of the reference. The decision of the arbitrator was invited as a jurisdictional issue, before the arbitrator considered the merits of the dispute. Hence, the determination of the arbitrator is final and cannot be enquired into; ( viii ) In any event, the arbitrator has followed the decision of the Supreme Court in M.S. Madhusoodhanan v. Kerala Kaumudi (P.) Ltd. [2003] 46 SCL 695 ; ( ix ) The restriction in the present case, imposed by clause 7 of the protocol agreement is valid, because it is not one that binds all shareholders, but which binds two shareholders in a specified contingency. The restriction is contained in the articles of association. Section 111A of the Companies Act, 1956, does not prohibit agreements entered into between specific shareholders regarding specific shares, particularly when incorporated in the articles of association. 15. The challenge to the arbitral award can now be taken up for consi-deration. Did the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell its shareholding in MSL. However, what remained in dispute was the price per share and, hence, in accordance with clause 7 of the protocol agreement, the "question of rate" for the purchase by the respondent of the equity shares held by the petitioner in MSL, was being referred. What emerges from the material on record, therefore, is, that in terms of clause 7 of the protocol agreement, the petitioner had made an offer to sell its shares in MSL, to the respondent. The respondent by its letters dated May 3 and again 10-5-2003, accepted the offer to purchase the shares, but indicated that the price suggested by the petitioner was not acceptable. The parties at that stage and, as would be noted, even later were ad idem on the fact that the contract for the sale of shares, stood concluded by the acceptance of the offer made by the petitioner. Clause 7 of the protocol agreement contemplates that if the party, to whom an offer is made, "is willing to purchase the shares, but considers the rate proposed, to be too high or unacceptable", it shall, within thirty days from the receipt of the notice, furnish a written intimation to the offerer of the intention to purchase shares and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate at which the shares held by the petitioner would be sold to the respondent. The arbitrator has held that the relevant date of valuation would be 3-5-2003, which was the date on which a concluded contract was arrived at between the parties. In Part I of his award, the arbitrator has held that the date of valuation would be the date on which the offer to purchase was accepted. In holding thus, the arbitrator has not transgressed his jurisdiction. The challenge to the arbitral award on this ground must fail. Scope of challenge under section 34 of the Arbitration and Conciliation Act, 1996 20. Section 34 of the Arbitration and Conciliation Act, 1996, defines the parameters of a recourse to a Court against an abitral award. This recourse is, by an application for setting aside the award, in accordance with the provisions of sub-sections (2) and (3) of the provision. For this case, the focus on the scope of judicial intervention is on sub-clause ( iv ) of clause ( a ) and on sub-clause ( ii ) of clause ( b ) of sub-section (2) of section 34. Under these provisions, an arbitral award may be set aside by the Court, only if ( i ) The arbitral award deals with a dispute not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al reference to the Tribunal for deciding the dispute and if an award is based on an erroneous and illegal proposition, the Court would interfere. In the case of a reasoned award, the Court can set aside the award if on the face of the award, there is an erroneous proposition of law or on its application. However, if a specific question of law is submitted to the arbitrator an erroneous decision on a point of law does not make the award bad, unless the Court is satisfied that the arbitrator has proceeded illegally. The decision of the Supreme Court in Oil Natural Gas Corpn. Ltd. s case ( supra ), does not contemplate an appellate review of an arbitral award or a reappraisal of the evidence. The Court cannot substitute a conclusion on evidence, which appears to the Court to be just and proper for the conclusion that is arrived at, by the arbitral forum. The emphasis in the judgment in Oil Natural Gas Corpn. Ltd. s case ( supra ), is that the judicial intervention can be warranted where the arbitral Tribunal has not followed the mandatory procedure prescribed by section 24, 28 or 31(3), which affects the rights of the parties or where the award is contrary to the substantive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rights of parties. In Hindustan Zinc Ltd. s case ( supra ), the Supreme Court held that an award contrary to the substantive provisions of law or the provisions of the Act or the terms of the contract, would be patently illegal and if it affects the rights of the parties would be open to interference of the Court under section 31(2). 25. The question as to whether a ground for the interference of the Court has been established in the facts of this case, must now be considered, in terms of the law laid down by the Supreme Court. The question of valuation 26. MSL has an operating section and an investment section. MSL s assembly plant was set up under technical know-how from the respondent. The assembly, the Court is informed, was of the Chetak scooters of Bajaj. The investment section of MSL has holdings in the Bajaj group of companies and others. MSL held 3.4 per cent of the equity capital of the respondent ("the BAL shares"), Bajaj Hindustan Ltd., and Bajaj Auto Finance Ltd. The non-Bajaj holding was in fully paid-up bonds and mutual funds. 27. Principally, two submissions have been urged on behalf of the petitioner. Firstly, the arbitrator has selected a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everses. (5) Where the company is ripe for winding up then the break-up value method determines what would be realised by that process." (p. 633) 29. The arbitrator adverted to certain admitted facts, these being as follows : ( i ) The principal activity of MSL involved the assembly of scooters for which completely knocked down kits were received from the respondent. The respondent and MSL had entered into a technical know-how agreement. MSL was assembling Bajaj Chetak scooters; ( ii ) Admittedly, the management of MSL was with the respondent. Five persons on the board of directors were to be nominated by the petitioner and four by the respondent. The chairman and managing director of the respondent was to be the chairman of MSL. Under clause 154 of the articles of association, several important decisions to be taken by MSL, were subject to the approval of the respondent. Moreover, the chief executive of MSL was to be appointed by the board, out of a panel of names suggested by the respondent. Key management functions of MSL were virtually integrated with the respondent. MSL only has an assembly plant by which it cannot manufacture, but can only assemble scooters; ( iii ) As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Mehta worked out two different valuations : ( i ) A valuation of Rs. 125 per share was worked out by applying a 45 per cent discount on the six monthly average value on the National Stock Exchange (NSE); and ( ii ) A value of Rs. 102 per share was worked out on the basis of a 60 per cent discount on a six monthly average taken from NSE. The arbitrator considered it fit to apply a 30 per cent discount "in the facts of the case" and considered that this would be "just, fair and reasonable and would meet the ends of justice". The six monthly average on the NSE for 33.87 lakhs BAL shares was Rs. 494 per share on which a 30 per cent discount was applied. Paragraph 100 of the award which reads thus : "In the light of the above, I think interests of justice would be met by fixing the rate on the basis of the calculations made by Mr. Bansi Mehta in Appendices 8 and 9 to his report subject, however, to two changes. In Appendix 9, he has calculated discount of 60 per cent on the six monthly average rate on National Stock Exchange, namely, discount of Rs. 296.40 on the rate of Rs. 494 per share. This results in the value of a share being Rs. 102.46. In Appendix 8, he has calculated 45 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished details of his working in respect of ( i ) Tata Investments; and ( ii ) Industrial Investment Trust, where the discounts were 82.85 per cent and 91.4 per cent. In Appendix 6B, where the example of TISCO Ltd., was considered, the discount applied was 56 per cent. Appendix 6C dealt with Bajaj Auto Ltd. Consequently, an empirical comparison suggested that the discount which is to be applied while valuing the shares held by an operating company, in other entities, would vary between 56 to 91 per cent. On the other hand, in Appendix 7, Mr. Bansi Mehta applied a conceptual or common sense basis, which showed that the discount on the shareholding held in other companies, would be approximately 28 to 40 per cent. Mr. Bansi Mehta, in his answer to question 147 in the course of his cross-examination explained the basis on which the discount had been calculated, firstly, taking an empirical comparison and secondly, on a conceptual analysis. While explaining paragraph 5.3 of his report, Mr. Bansi Mehta makes a reference to what is described as the "C, D, E" approach : The acronym stands for "constraint", "distance" and "empirical data". The arbitrator has made a reference in his award to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st that the arbitrator was applying his own notion of what is equitable, fair and just. 34. Section 28 of the Act postulates that the arbitral Tribunal has to decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force, in India. The arbitral Tribunal can decide ex aquo et bono or as amiables compositeurs only if the parties have expressly authorised it, to do so, this being the mandate of sub-section (2) of section 28. The arbitral Tribunal under sub-section (3), has to decide in accordance with the terms of the contract and is required to take into account the usages of the trade. In the present case, the discount of 30 per cent that has been applied to the BAL holding, is not adopted by the arbitral Tribunal as amiables compositeurs or on notions fairness and equity. The discount is founded upon considerations which are germane and which were based on the evidence on record. The sufficiency and quality of the evidence, are matters for the arbitral Tribunal to determine. The arbitral Tribunal accepted the evidence of Mr. Bansi Mehta for valid reasons, recording that the cross-examination has not resulted in any signific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would result in a value even lower and not higher. In the circumstances, there is a cogent justification on the evidence for applying the book value for non-BAL quoted investments. 36. The arbitrator accepted the liquidation basis from the report of Mr. Bansi Mehta for valuation and applied a discount. There is an adjudication and determination by the arbitrator. During the course of the submissions, a considerable degree of emphasis was sought to be placed on the methodology adopted by Mr. Mehta of determining the rate based on an objective fair valuation. Paragraph 3.2 of the report states that the classical concept of valuation is the price, which would be fetched between a willing buyer and willing seller. BAL being a listed company, whose shares are held by a wide body of investors, Mr. Mehta stated that his approach to valuation was guided by the "concept of an objective valuation between a willing buyer and a willing seller". Mr. Mehta was asked, during the course of the cross-examination, to demonstrate what part of clause 7 of the protocol agreement requires a determination of an objective fair valuation. In his answer, he clarified that in the absence of any parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that clause 7 creates a right of pre-emption. MSL is a listed public company. The protocol agreement is incorporated in the articles of association. Section 111A of the Companies Act, 1956, provides that the shares or debentures of a company and any interest therein, shall be freely transferable. Section 9 stipulates that the provisions of the Act shall have effect, notwithstanding anything to the contrary contained in the memorandum or articles of association. Hence, the pre-emptive right recognised by clause 7 of the protocol agreement and incorporated in the articles of association, must yield to section 111A. In the present case, it was submitted that on the challenge to the legality of the pre-emptive right created by clause 7 of the protocol agreement, as incorporated in the articles, there is virtually no adjudication by the arbitrator. Was there a reference on a specific question of law ? 40. On behalf of the respondent, an objection was raised to the maintainability of the challenge under section 34, on the ground that by an application dated 6-4-2004, the legality of clause 7 was squarely placed in issue for a decision by the arbitrator. This, it was urged, would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e : ( i ) What are the requirements that must be fulfilled in law in order to postulate that parties have referred a specific question of law; and (ii) Whether in the present case, the parties must be regarded as having made a reference to the arbitrator on a specific question of law. The specific question doctrine 44. Since the judgment of the Supreme Court in Thawardas Pherumal v. Union of India AIR 1955 SC 468, it is now a settled principle of law that a distinction has to be made between those cases in which a question of law is specifically referred for the decision of the arbitrator and those in which a question of law incidentally arises while deciding the question that is actually referred. If parties refer a question of law specifically to the arbitrator and it is manifest that they seek a decision from the arbitrator in preference to a decision of the Court, the decision of the arbitrator would be binding on the parties and the Court would not impose its perspective on the law in supersession of the decision of the arbitrator. In Thawardas Pherumal s case ( supra ), the Supreme Court formulated the principle in the following terms : "If a question of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom." (p. 706) 47. In that case, the reference to the arbitrator was on the following questions : ( i ) Whether the claim for compensation fell within the purview of the arbitration clause, clause 40 of the general conditions of the contract; and ( ii ) If it did, whether the claimant was entitled to compensation. The Supreme Court held that the parties agreed to submit a specific question even with regard to the scope, ambit, with and construction of the arbitration clause, including the question as to whether the arbitration clause would cover the dispute raised between the parties. The arbitrator was required to decide whether the dispute is arbitrable and, if it was, to decide the extent of compensation. There was, therefore, held to be a reference of a specific question of law. 48. In a judgment of a learned Single Judge of this Court in Lubrizol (India) Ltd. v. Lubrizol Corporation U.S.A. [1998] 1 All MR 435, these decisions were followed, and the Court held that there is a distinction between a case where disputes are referred to an arbitration in the decision of which, a question of law becomes material from a case in which a specific question of law is referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhusoodhanan s case ( supra ). The arbitrator has, after citing the judgment of the M.S. Madhusoodhanan s case ( supra ), held thus : "In view of the above, it is clear that the ratio of the decision in V.B. Rangaraj s case [1992] 73 Comp. Cas. 201 ; [1992] 1 SCC 160, has no application to the facts of the present case which is governed by the protocol agreement dated October 2, 1974. In the present case, the so-called restriction is in fact incorporated in the articles of association which is a feature of distinction from the facts in V.B. Rangaraj s case [1992] 73 Comp. Cas. 201 ; [1992] 1 SCC 160." 51. Section 111A of the Companies Act, 1956, provides that subject to the provisions of the section, "the shares or debentures and any interest therein of a company shall be freely transferable". Section 9 provides that save as otherwise expressly provided in the Act, the provisions of the Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors. Any provision contain in the memorandum, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al as may be prescribed, and by its articles : ( a ) restricts the right to transfer its shares, if any; ( b ) limits its members to fifty not including those who are or were formerly in the employment of the company and were members while in employment; ( c ) prohibits any invitation to the public to subscribe for any shares or debentures; and ( d ) prohibits any invitation or acceptance of deposits from persons other than its members or directors or relatives. A company which is not a private company, falls within the definition of expression "public company" under section 3(1)( iv ). 55. The Companies Act, 1956, makes a clear distinction in its governing provisions relating to private and public companies in regard to the transferability of shares. By definition, a "private company" is a company, which restricts the right to transfer its shares. Consequently, upon a refusal of a private company to transfer its shares, a remedy is provided by the Act. In the case of a public company, the Act provides that the shares or debentures and any interest therein of a company shall be freely transferable. 56. The expression "transfer" is defined in Webster as "to convey or remov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d thus : "That restrictions may be placed upon a shareholder s right of transfer of his shares cannot be questioned. The cases are numerous in which such restrictions have been upheld. Shares are prima facie transferable. But there is no law which precludes the shareholders from contracting for value that they shall each submit to any reasonable restriction which they choose to agree to. It may be for the benefit of the company that, for instance, shares shall not be transferred to rivals in the company s trade. A restriction which precludes a shareholder altogether from transferring may be invalid, but a restriction which does no more than give a right of pre-emption is valid." (p. 293) 58. The judgment of the Privy Council in Ontario Jockey Club Ltd. s case ( supra ), therefore, involved a situation in which the legislation in Ontario Jockey Club Ltd. s case ( supra ), authorised the board of directors to regulate the transfer of shares and transferability of the shares of the company. The bye-laws specifically contemplated a restriction on transferability otherwise than to a member of the company. 59. In India, the Supreme Court held in V.B. Rangaraj s case ( s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in circumstances specified in the Explanation to section 10. One of the exceptions is where the property is of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market . It has been held by a long line of authority that shares in a private limited company would come within the phrase not easily obtainable in the market ( see : Jainarain Ram Lundia v. Surajmull Sagarmull AIR 1949 FC 211, 218). The Privy Council in the Bank of India Ltd. v. Jamsetji A.H. Chinoy AIR 1950 PC 90 said : it is also the opinion of the board that, having regard to the nature of the company and the limited market for its shares, damages would not be an adequate remedy specific performance of a contract for transfers of shares in a private limited company could be granted." [Emphasis supplied] (p. 62) 60. The judgment in M.S. Madhusoodhanan s case ( supra ), therefore, deals with a private company. The observations of the Supreme Court noted earlier, expressly clarified that as far as private companies are concerned, the articles of association restrict shareholders rights to transfer the shares and prohibit invitation to the public to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption between the petitioner and the respondent in the event that either of them seeks to part with or transfer its shareholding in MSL. In that event, the party desirous to transfer its shareholding is obligated to furnish a first option to the other for the purchase of the shares at such rate, as may be agreed to between the parties or decided upon by arbitration. The consequence of clause 7 of the protocol agreement, which has been incorporated in the articles of association, is to preclude sale to or purchase by the members of the public of the shares, which are offered for sale if the offer is accepted by the petitioner, or as the case may be, by the respondent within thirty days of the receipt of the notice. The effect of a clause of pre-emption is to impose a restriction on the free transferability of the shares by subjecting the norms of transferability laid down in section 111A to a pre-emptive right created by the agreement between the parties. This is impermissible. Section 9 of the Companies Act, 1956, gives overriding force and effect to the provisions of the Act, notwithstanding anything to the contrary contained in the memorandum or articles of a company or in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer are attracted in the case of public limited companies. While restrictions can be stipulated in the articles of association so far as transfer of shares of a private limited company is concerned, sub-section (2) of section 111A of the Act specifically provides that the shares or debentures and any interest therein of a company shall be freely transferable. The proviso to this sub-section further stipulates that if a company without sufficient cause refuses to transfer the shares within two months, the transferee may file an appeal to the Company Law Board and it shall direct the company to register the transfer of shares . Since respondent No. 1 company is a public limited company, the Company Law Board rightly opined that there could be no fetters on the right of a shareholder to transfer his/her shares. We have already noted that there is no such provision giving pre-emptory right to other promoters in the articles of association. Even if there was such a provision in the articles of association, it would have been ultra vires the provisions of the Act, as no company can provide in the articles of association any matter which offends the specific provision of an Act ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that in the case of a private company, the articles of association would restrict the right of shareholders to transfer shares and prohibit invitation to the public to subscribe for shares or debentures of the company. The position in law of a public company is materially different. By the provisions of the Companies Act, 1956, restrictions on the transferability of shares which are contemplated by the definition of a "private company" under section 3(1)( iii ) are expressly made impermissible in the case of a public company by the provisions of section 111A. Once that be the position, the submission urged on behalf of the respondent cannot be accepted. In essence, the submission of the respondent is that the provisions of section 111A should be read as being subject to a contract to the contrary. A restriction to that effect cannot be read into the provision of section 111A; firstly because, such a restriction is not mentioned in the statutory provision; secondly, the word "transferable" is of the widest import; and thirdly, the context in which the provision has been introduced, is susceptible to the inference that it should be given a wide meaning. Where the language of the st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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