2010 (5) TMI 694 - Board - Companies Law

Summary

Issues Involved:
1. Status of R1-company as a deemed public company or private company.
2. Characteristics and compliance of R1-company with private company norms.
3. Characteristics and compliance of R1-company with public company norms.
4. Free transferability of shares in a public company.
5. Validity of pre-emption clauses in public company articles.
6. Entitlement of petitioners to be on the Board of R1-company.
7. Reliefs sought by petitioners.

Detailed Analysis:

1. Status of R1-company as a deemed public company or private company:
The R1-company was initially incorporated as a private limited company but became a deemed public company under Section 43A of the Companies Act, 1956, effective from August 17, 1988. Post the amendment in 2000, Section 43A was deleted, removing the category of deemed public companies. The R1-company did not revert to private company status by amending its articles or approaching the RoC. Consequently, the R1-company is not a deemed public company but a public company.

2. Characteristics and compliance of R1-company with private company norms:
The R1-company does not meet the characteristics of a private company as defined in Section 3(1)(iii) of the Act. It failed to limit its members to 50 and did not amend its articles to prohibit the acceptance of deposits from non-members. Therefore, it does not possess the characteristics of a private company.

3. Characteristics and compliance of R1-company with public company norms:
The R1-company fulfills the characteristics of a public company as defined in Section 3(1)(iv) of the Act. It has more than 50 members and did not revert to private company status. The High Court of Bombay also held that R1-company is a public limited company. Thus, R1-company is a public company.

4. Free transferability of shares in a public company:
As a public company, the shares of R1-company are freely transferable under Section 111A of the Act. Despite the existence of Article 57 in the AoA, which restricts share transfers to non-members, the statute prevails over the articles. Section 9 of the Act overrides any article contrary to the statute, making Article 57 void and unenforceable.

5. Validity of pre-emption clauses in public company articles:
Pre-emption clauses in the articles of a public company, such as Article 57 in R1-company's AoA, are invalid as they contradict the statutory provision of free transferability of shares under Section 111A. The legal position is clear that any article contrary to the statute is void.

6. Entitlement of petitioners to be on the Board of R1-company:
The petitioners hold 17% of the issued and subscribed paid-up capital and have been shareholders since the company's incorporation. However, the appointment of directors is within the discretion of the General Body of the company, not the CLB. Therefore, the petitioners are not entitled to be on the Board by default.

7. Reliefs sought by petitioners:
The petitioners sought to restrain respondents from selling or transferring shares without following Article 57 and to appoint one of the petitioners to the Board. Given the findings that Article 57 is void and the appointment of directors is the prerogative of the General Body, the petitioners are not entitled to the reliefs sought. The petition alleging oppression and mismanagement fails and is dismissed.

Conclusion:
The R1-company is a public company with shares freely transferable under Section 111A. Article 57 of the AoA is void. The petitioners' request to be on the Board is not within the CLB's purview. The petition is dismissed, and all interim orders are vacated.