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TMI Blog2007 (3) TMI 793X X X X Extracts X X X X X X X X Extracts X X X X ..... oper reconstitution of the board to usurp control over the Company, have invoked the equitable jurisdiction of the CLB under Sections 397 and 398 of the Companies Act, 1956 ( the Act ), seeking the following reliefs: (i) to rectify the register of members of the Company by substituting the names of the petitioners in the place of respondents 9 to 29, on payment of fair value of the shares; (ii) to declare that the appointment of respondents 2 to 7 as directors of the Company is illegal and void ab-initio; (iii) to declare that the appointment of first respondent as managing director of the Company is illegal and void ab-initio; and (iv) to reconstitute the board of directors of the Company by election of directors afresh by the general body of members. 2. Shri R. Vidhya Shankar, learned Counsel, while initiating his arguments submitted: The second petitioner and ninth respondent promoted the Company in July 1998, and is engaged in the business of manufacturing bread, bun and related items. The Company commenced commercial production in October 2000. The registered office originally located at Erode, came to be subsequently shifted to Old Mahabalipuram Road, Kanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners was taken into confidence in the matter of appointment of additional directors and no one director moved out of Erode District on any of the dates of alleged board meetings. The minutes of various board meetings recording leave of absence to the first petitioner is an evidence of the camouflaged meetings. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a ) Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (1997) Vol. 88 CC 245 that (a) the company shall give notice of board/general meetings to directors/members so long us they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Limited and Ors. v. R.S. Chowdhury and Ors. (2000) Vol. 102 CC 387 that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at such board meeting is invalid; (c) Parmeshwari Prasad Gupta (deed., through legal representatives) v. Union ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the shares. The transferor, under Article 20, must give notice to the Company of the intended sale of his shares, upon which, the Company becomes the agent who shall conclude and effect the transfer of shares. Before execution of the instruments of transfer as envisaged in Article 22, the requirements of Articles 18 21 should be complied with. Therefore, the board is placed in a fiduciary position to act in a fair, transparent and bonafide manner in ascertaining a willing transferee. This would require due intimation in favour of all the members, of the notice received from the transferor-member and pro-rata distribution of the transfer of shares among them who are evincing interest to purchase shares, at a mutually agreed value. No notice was sent to the first petitioner for the board meetings approving the impugned transfer of shares. The transfer of shares from the existing shareholders in favour of respondents 2 to 5, being non-members and without giving any option to the existing shareholders as per Article 19 is not valid. In the absence of any valid transfer of shares to the respondents 2 to 5 and in the absence of their holding qualification shares as contemplated in Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vol. 86 CC 658 that where there is a provision in the articles of association of a company for pre-emption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert and Anr. v. Kopnkan Chemicals Private Limited and Ors. (1997) Vol. 88 CC 245 that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the first respondent in fabricating the transfer of shares and in creating a majority for her group. The Supreme Court held in (a) Dale and Carrington Investment Private Limited and Anr. v. P.K. Prathapan and Ors. (2004) Vol. 122 CC 161 that the directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for benefit of the company in accordance with the memorandum and articles of association of the company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent; and (b) Vaishnav Shorilal Puri and Ors. v. Kishore Kundanlal Sippy and Ors. (2005) 1 Comp LJ 407 that any person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affected as observed by this Board in M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) . The board resolution dated 07.07.2003 indicates that duplicate share certificates were issued on request by the respondents 9 10 in respect of their shares, whereas the board resolution dated 31.07.2003 approving share transfer contains details of the original share certificate numbers, establishing the apparent illegality and irregularity in effecting the transfer of shares held by the respondents 9 10. The transfer deeds bear the stamp of the Registrar of Companies, Coimbatore, as 19.08.2003, whereas the transfer deeds are found to be executed on 19.08.2003 and filed on the very same date. Therefore, the transfers are in clear violation of the mandatory provisions of Section 108 of the Act. If the mandatory requirements of Section 108 of the Companies Act, 1956, are not complied with, while registering the transfer of shares, the transfer is not valid, as held in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (2004) Vol. 118 CC 147 . The statutory records are with the first respondent's husband, as borne out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointment. There is no prohibition to appoint relatives of a director as directors of the Company and therefore, the respondents 2 and 3 do not suffer any legal disability in becoming directors of the Company. The appointment of first respondent's children as directors of the Company is neither a contract nor an arrangement attracting the provisions of Section 299/300 of the Act, 1956, in which case, the question of disinterested quorum does not arise and particularly Section 300 does not apply to the Company under Section 300(2)(a) of the Companies Act, 1956 being a private limited company and neither a subsidiary nor a holding company of a public company. There is no age limit fixed for the appointment of directors and hence the appointment of the first respondent's children does not become invalid on account of the fact that they are college students. The directors who had resigned from the post of directors attended the board meetings from time to time and particularly the board meeting held on 31.07.2003, as borne out by an extract of the attendance register maintained by the Company. Furthermore, there is no denial of such fact from those directors and therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed not be oppressive; (b) even if there is violation of the provisions of the articles of association, the same could not be considered an act of oppression, especially when, the aggrieved shareholder would have been entitled to only 23% of the shares; and (c) if there is nothing in the articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. It is enough, if the board of directors approved the transfer of shares and there is no requirement on the part of the board to approve second time the transfer of shares, to meet the requirements of Article 18. Article 20 would apply where a member intending to sell his shares has not identified any member who is willing to purchase the shares. Furthermore, the petitioners have not made out any prejudices caused to them, pursuant to the impugned transfer of shares. By a mere transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred to a non-member so long as any member is willing to purchase the same at a mutually agreeable value between the transferor and transferee. Article 20: Any member intending to transfer his share shall give notice in writing to the company, specifying the number of shares proposed to be transferred together with the value and further appointing the company as his agent for the sale of shares mentioned therein. This is intended to ascertain the willingness of any member to purchase the shares offered by the transferor. Article 2: The board of directors, after receipt of any notice under Article 20, may decide regarding the transfer of such shares, which shall be final. Article22: The intending transferor as well as the purchasing member shall execute the instruments of transfer as per Section 108 of the Act and complete the transactions. Article 23: The board of directors may in their discretion refuse to register the transfer of shares - (a) to any person who is not desirable to be admitted as member, in the interest of the company; (b) if the company has a lien on such shares; and (c) if the number of members exceeds the limit prescribed under the art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procedure, will not be in consonance with the letter and spirit of the relevant articles discussed supra. The articles do not envisage, as rightly pointed by Shri Vidhya Shankar, learned Counsel, any negotiated transfer of shares between the existing members, without adhering to the requirements of relevant articles. By virtue of Section 36, the articles of association of a company are a contract between the members as reiterated in John Tinson and Company Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra) and any member in his capacity as a member can enforce rights given to him by the articles, such as the rights of pre-emption etc. Having found the binding nature of various articles, 1 shall proceed to consider as to whether the impugned transfers are in strict compliance with such articles, in view of the settled position of law that every transfer of shares of a private company has to be strictly in accordance with articles. The company shall always follow the terms of applicable articles in respect of any transfer of shares. It is observed from copies of the instruments of transfer and minutes of various board meetings of the Company produced before the Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard resolutions that the transfer deeds duly executed and stamped had been submitted to the Board for necessary approval. It is, therefore, beyond doubt that none of the transfer instruments impugned in the present proceedings, is preceded by previous sanction of the board of directors of the Company in tune with the mandatory requirements of Article 18. The respondents have not caused production of any material to establish that the transfers were made in favour of the first respondent and her associates, with previous sanction of the board of directors of the Company in strict compliance with Article 18. The Supreme Court in John Tinson and Company Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra), while interpreting the articles which provided that no transfer of any share in the capital of the company shall be made or registered with the previous sanction of the directors , categorically held that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over the shares. This legal proposition has been adopted by this Board in Radhe Shyam Tulsian and Ors. v. Panchmukhy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disapproved in Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (supra). This Board held in (a) S. Varadarajan and Anr. v. Udhayem Leasings and Investments Private Limited; and (b) M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) that any transfer of shares without exhausting the rights of pre-emption in violation of the articles would constitute an act of oppression. In this context, the assertion made on behalf of the respondents that all the impugned transfers would have been approved by the boards even with participation of the first petitioner does not merit any consideration. Shri R. Vidhya Shankar, learned Counsel, while placing reliance on M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) pointed out the spirit behind the pre-emptive provisions of the articles and urged that the equity of the transferors is no way affected if the respondents herein are directed to make an offer to the other shareholders in proportion to their shareholding in the Company. However, considering the requirement of previous sanction and exclusive authority of the board of directors, bestowed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a, progress of the affairs and business of the Company, approval of accounts, transfer of shares, co-option of directors, appointment of managing director, purchase of assets, issue of duplicate certificates etc. The first petitioner never attended any of the board meetings save the lone board meeting held on 30.10.2003 and it is found that he was granted leave of absence from attending these board meetings, thereby the first petitioner was not involved in the day-to-day affairs of the management of the Company since November, 2002. Furthermore, in the absence of any material to substantiate the purported request from the first petitioner seeking leave of absence, it is quite improbable that the first petitioner had either knowledge of the board meetings or requested leave of absence from attending the board meetings and therefore, the extracts of the attendance register produced by the respondents, to my mind, are self serving documents, without advancing the case of the respondents. The first respondent has not even produced copies of the notice of various board meetings of the Company said to have been sent to the first petitioner and there is no material whatsoever, to substant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited and Ors. (supra) do exist in the present cases. The apparent discrepancies pointed out by Shri R. Vidhya Shankar, learned Counsel, in relation to certain instruments of transfer produced by the respondents would lead to the conclusion that the mandatory requirements of Section 108 of the Act, as emphasised in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (supra ) have not been duly satisfied before effecting the transfer of some of the shares in favour of the first respondent and her family members. The impugned transfers having been found to be violative of the articles of association of the Companies, it is nothing but futile to go into various deficiencies appearing in the instruments of transfer produced in the present proceedings. The grievances of the petitioners on account of the statutory records which were never produced before the Advocate Commissioner for authentication, procurement of raw materials and day-to-day operations of the factory, shall appropriately be dealt with by the board of directors of the Company, in terms of the order proposed to be made in this behalf. In view of my foregoing conclusions and (i) in exercise of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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