| Headnote |
Companies Act, 1956-Sections 36, 108, 155 and 188: Company Shares-Transfer, issue and allotment of-Joint shares and shares of two of the shareholders-Transfer of-By 3 of the 4 shareholders- To third party skipping the hierarchy of purchasers of shares provided under Articles of Association of Company-Despite acceptance of offer made to first category of purchasers-Validity of transfer-By virtue of the transfer of shares, third party got majority of shares-Issue of increased share capital by the third party-Without compliance of Articles of Association and Section 188 of the Act-Allotment of the same in favour of the third party-Validity of issue and allotment of increased share capital-Held : The transfer of the shares to third party was invalid being violative of Articles of Association of Company and Section 108 of the Act-The transfer was in breach of concluded contract between the transferors and the first category of purchasers~The issue and allotment of the shares in favour of third party was invalid being without compliance of the Articles of Association and Section 188-In view of the facts of the case the relief of rectification cannot be granted-Hence compensation awarded-Sale of Goods Act, 1930-Section 9(1)-Transfer of Property Act, 1882. Section 108-Provision under-Nature of-Held : It is mandatory- Non-compliance of the same is not a technicality. Section 155-Petition under-Challenging transfer of shares, issue of increased share capital and allotments of the same to third party-Seeking rectification of Register of Members-Maintainability of-Held : Maintainable. Appellant's father and her mother 'S' promoted respondent No. 1 company. Appellant's father died after executing a will and appointing 'S' and respondent Nos. 2 to 4 as Executors thereof. The will empowered the Executors, inter alia, to sell the properties vested in them by the Will and invest the same as the Executors and the Trustees thought fit. All the four executors were entered in the register of members of the Company as joint shareholders of 3417 shares of the Company held by the Appellants father. Respondent Nos. 2 and 3 also had 93 shares of the company. The Articles of Association of the Respondent-Company gave the hierarchy of the persons entitled to purchase the shares upon transfer. First right is a preemptive right under Article 57 A claimed by the appellants, second is 'any member who is willing to purchase' the shares at a fair value as given under Article 58 r/w Article 64, third is a 'person/ persons selected by Directors as being desirable in the interest of the Company to admit to membership, and the last category is 'person to whom the transferor may choose to sell the shares'. Respondent Nos. 3 and 4 offered to sell 93 shares to 'S' or her nominee under Article 57 A at a price of Rs. 2250 per share. In the letter written by them to 'S' it was stated that if she was not agreeable to pay the price the letter would be treated as notice to the Directors calling upon them to fix the price under Article 61; that if she was not agreeable to pay the price the letter would be treated as notice to the Directors calling upon them to fix the price under Article 61; and that if she would not exercise her right under Article 57-A, or not willing to pay the price or not willing to complete the transaction in accordance with Article 61, respondent Nos. 3 and 4 would be free to sell the shares to any other person in accordance with the Articles of the Company. In a Board meeting attended by two of the four executors, one of the executors was authorized to sell the sliares. The request of 'S' to adjourn the meeting due to her illness was not accepted by the respondent-executors on the ground that she would be given notice under Article 57-A. In the meeting, in respect of 93 shares it was resolved to offer the same to the other members of the Company subject to the preemptive right of 'S'. In respect of 3417 shares it was resolved that if 'S' did not exercise her rights or did not pay the price fixed under Article 61, then the Executors could sell them to any other person/persons for the price of Rs. 2250 per share. Executors gave the notice to 'S' in respect of the shares. Company also gave notice to all the shareholders to indicate whether they were willing to purchase the shares subject to right of 'S' under Article 57-A. 'S' and Appellant wrote a letter that 'S' was agreeable to buy 3417 shares by herself/or her nominee (her daughter-appellant) and agreeable to pay the price as certified by the Auditors of the Company as stipulated in Article 57-A. After draft certificate by the Auditor, 'S' demanded the copies of the documents submitted by the Company to the Auditors. But without heeding to the request, Auditors straightway issued certificate certifying the price of the 93 shares as Rs. 2,10,273 and of the 3417 shares as Rs. 77,25,837. Respondents 3 and 4 called upon 'S' to pay the certified ' amount in respect of 93 shares within a stipulated time, failing which they would dispose of the shares as they thought fit. 'S' and the appellant protested the certification. Without prejudice to their protest they were willing to deposit an amount of Rs. 20 lacs as an earnest of their bonafides to purchase the shares. Two suits were filed by the appellant and 'S' in 1985 praying for permanent injunction to restrain the respondents from selling the shares contrary to the concluded contract with them. The suits were rejected. The shares were then sold to respondent No. 5 and his group. A notice was issued by the Board of Directors to hold a meeting. Request of 'S' and the appellant to adjourn the meeting was not heeded to. At the meeting despite there being no item in agenda, a resolution was passed to register the transfer of the shares to respondent No. 5 and his group, and respondent No. 5 was appointed as an Additional Director of the Company together with another member of his group. Thereafter the appellant and 'S' wrote to respondent Nos. 2 to 4 saying that they were willing to purchase the shares at the price fixed by the Auditors, in answer to which the respondents told that the shares had already been sold. In an Annual General Meeting, it was resolved to immediately issue increased share capital of Rs. 17,66,600 of 17,666 shares of Rs. 100 each. The same were allotted to respondent No. 5 and his group. 'S' and appellant filed application under Section 155 of Companies Act, 1956, challenging transfer of 3417 and 93 shares and issue and allotment of 17 ,666 shares in the name of respondent No. 5 and his group. Single Judge of High Court held that the transfer of 3417 shares was made contrary to the appellants right of preemption under Article 57-A and in violation of Section 108 of Companies and of Articles of Association of the Company. It was also held that the issue and allotment of 17,666 shares was invalid. However, it set aside the transfer of shares conditional upon the appellants depositing a particular sum in the Court As regards 17,666 shares, it was directed that they should be allotted to such persons at such price as the Board of Directors may decide. The Company was directed to pay back Respondent No. 5 and his group Rs. 17 ,66, 600 in respect of the 17,666 shares. The appellants as well as the respondents filed appeals. In the meanwhile in 1988 appellants filed two suits against respondents seeking specific performance of the contracts of sale of 3417 and 93 shares to them. Alternatively they sought for damages by way of compensation of Rs. 4 crores. The suits are pending. Division Bench of High Court dismissing the appeal of the appellants and allowing that of the respondents, held that violation of Section 108 was mere irregularity which was curable; that transfer of 3417 shares had been validly made and that although there was irregularity in issuing the 17,666 shares, the same had been cured by the subsequent ratification of the decision. Hence the present appeals. |
