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TMI Blog2016 (4) TMI 176X X X X Extracts X X X X X X X X Extracts X X X X ..... eems fit to find out whether there has been a contravention of any law for the time being in force and direct any company to rectify its register or record. The question that was required first to be established was whether :- (a) The respondents 1 to 3 and 8 to 11 had any obligations to the erstwhile UWB ; (b) Whether the respondents have committed a breach of those obligations ; and if answer to these two issues are in the affirmative ; (c) Whether that would amount to contravention of law. Therefore, though it is open to the appellant to take such legal recourse, they may be advised. Adopting action under Section 111A of the Companies Act, 1956 is not an option. Thus in view, the appellant has not made out any case to show that the respondents 1 to 3 & 8 to 11 have contravened any law. Even if take the case of the petitioners at face value that the respondents 1 to 3 & 8 to 11 have breached the Articles of Agreement, still in view, that cannot be contravention of any law.In fact, the Company Law Board while signing off, made it clear that dismissal of the petition would not bar the appellant from availing any other remedy as may be available in law. Section 111A(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as were offered to the nominees of erstwhile UWB. It is the case of the appellant that the Makharias have breached the said Article of Agreement in as much as when the due diligence was done, it came to light that 10th, 11th and 12th respondents who belonged to Makharia group have on 3.5.2006 transferred 11,90,989 shares to respondent no.9- L T Finance Limited and L T in turn, has on 5.9.2006 transferred 4,50,000 shares to respondent no.7 Kotak Securities Limited. It also came to light, according to the appellant, that the respondent nos. 1, 2 3 had also pledged 16,80,000 shares in favour of 5th 6th respondents and Canara Bank Limited. According to the appellant, these transfers as well as the pledge were in violation of the terms of the articles of agreement and therefore, they filed the petition praying that the transfer and pledge should be cancelled and the register of members to be rectified by inserting the names of the original shareholders viz. transferrers and the pledgers in the register of members. We are not, for a moment, going into the merits of these issues as to whether it is possible at all because UWB has ceased to exist having got amalgamated with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferable and the companies should register the transfer of all shares and if the company refuses to register the transfer of shares within two months without sufficient cause, the transferee may appeal to the CLB which shall direct such companies to register the transfer of shares. 5 From the facts narrated earlier, it is not the appellant's case that the company refused to register the transfer of shares. The appellant cannot raise those grounds because the appellant itself is a company with whom the erstwhile UWB has got amalgamated. If anyone has to transfer, it has to be only the appellant. Sub-section 3 is the provision that applies to the matter in hand. Under sub-section 3 of Section 111A, if the transfer of shares is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) or any other law for the time being in force, the CLB may, on an application made by the company, within two months from the date of transfer of any shares held by a depository or from the date on which the instrument of transfer or intimation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. In a given case even contravention of some existing contractual obligations or some other obligations attached to those shares would come up. The court held that the declaration of free transferability contained in sub-section (2) of section 111A of the Companies Act must be understood in the background of pre-existing legal position that the Articles of association of the company could restrict the rights of the shareholders to transfer his shares and all that section 111A declares was that such a right cannot be restricted. Paragraphs- 45, 46, 47, 51 to 54 of the said judgment read as under :- 45 The only question which still remains to be considered is that apart from the violation of any law in acquiring the shares is there any other reason for which a company could refuse to register the transfer of shares ? As it is already noticed that Section 111A(2), proviso of the Act contemplates the refusal to register the transfer of shares for sufficient cause . 46. Learned counsel for the appellants--Sri Chagla very vehemently argued that the said expression sufficient cause should be understood only in the light of the various grounds enumerated under Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Court of Appeal reported in Swiss Bank Corporation v. Lloyds Bank Ltd. [1980] 2 ALL ER 419 (CA). 47.2 The principle of law was confirmed by the House of Lords on an appeal from the above decision in Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2 ALL ER 449 (HL). Though on the facts of the case both the courts held that there was no violation of any contractual obligation. It therefore follows that a party seeking to transfer shares held by him which would result in the breach of an obligation attached to the shares created by a prior contract could be injuncted from transferring the shares. It logically follows that the transfer if made and registered even before the aggrieved party could obtain an order of injunction, the transfer could be declared illegal in an appropriate action before a court of law. In which case the company would be bound by such a declaration made by the court, of the illegality arising out of a breach of the contractual obligation and bound to give effect to the decree of the court to refuse registration of transfer. 48 to 50..... 51. Similarly if the transfer of shares in favour of a person is likely to create, or, would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld also include contravention of some obligations of the transferer or some other obligations attached to this shares, like for example, when certain shares are pledged to a lender or where the transferer has entered into an agreement giving preemptive rights to a third party under an agreement. That is why the expression used under sub section 2 is `sufficient cause' whereas the expression used under sub section 3 is specific to mean where after the transfer it has to come to light that the transfer has been `in contravention of law'. A situation may arise where the transfer has been effected due to a fraud played by somebody or a forgery or it could be even stolen. Such a situation would be in contravention of law. Therefore, to say that sub section 2 and sub section 3 have to be read together as both effectively overlap each other, is not correct. 8 Further, the word contract is defined under Section 2(h) of the Indian Contract Act, 1872 as an agreement enforceable by law. Article 13(3) (a) of the Constitution of India provides that law includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption) at the prevailing market price at the relevant time and so long as the member agrees to pay such prevailing market price and abides by other stipulations in the Act, Rules and Articles of Association, there can be no violation. 11 The counsel for the appellant also submitted that the Company Law Board erred in rejecting the petition by placing reliance on the judgment of the Supreme Court in 1992(1) SCC 160V.B.Rangaraj Vs. V.B.Gopalakrishnan, as the ratio laid down by the said judgment was not applicable to the present case. In V.B.Rangaraj (supra) the supreme court has held that the shares are freely transferable and the only restriction on the transfer of shares of a company will be as laid down in its Articles, if any. The Apex Court held that the restriction which is not specified in the Articles, therefore, was not binding either on the company or on the shareholders. In the impugned order the CLB has only stated the preposition from V.B.Rangarajan (supra) but has not dismissed the petition relying on the said judgment. 12 The counsel for the appellant also submitted that the Notification of amalgamation issued by the Government of India was akin to laying a law ..... X X X X Extracts X X X X X X X X Extracts X X X X
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