TMI Blog1988 (3) TMI 389X X X X Extracts X X X X X X X X Extracts X X X X ..... essrs M. R. Narayan and Company, were arrayed as respondents Nos. 3 and 4 in view of certain allegations made against them by the petitioners. It is not necessary to go into the various acts of oppression and mismanagement alleged by the petitioners in the company petition since they are not the subject-matter for consideration in this appeal. In the statement of objections filed by the respondents, a plea was taken that the petition is not maintainable in view of the fact that the membership of the petitioners in the first respondent-company is not in accordance with the requirements of section 41 of the Act. It should be noticed at this stage that, in the statement of objections filed by respondents Nos. 1 and 2, they have stated amongst other things : "The respondents herein dispute and deny that the petitioners or any of them is/are members/shareholders of respondent No. 1 and therefore, the answering respondents are advised that all valid and available defences open to them in regard to the challenge to the petitioners as members/shareholders of respondent No. 1 need not be placed in extenso in these proceedings but they reserve their right to plead by way of defence in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Textiles and in regard to which proportion ? Answer. It had been allotted in proportion to the profit and loss account of Ashok Textiles." On this evidence of P.W.-l in the company petition, an argument was constructed by learned counsel for the contesting respondents that the petition was not maintainable on the ground that the requirement of section 41(2) of the Act was not complied with by the petitioners before they obtained shares in their names and, therefore, the company petition was not maintainable. This plea was rejected by the learned company judge and hence this appeal. The learned company judge observed in the course of his order that this point is not covered by any precedent, in that no decision of the Supreme Court or any other High Court on this point is found. But, after consideration of the language of section 41(2) of the Act, he came to the conclusion that: "Public interest would greatly suffer and share transfers particularly in public companies become very difficult if the first part of sub-section (1) of section 41 of the Act should be held to be a condition precedent. In any event, nothing in the language of sub-section (2) is suggestive that cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to be considered in this appeal. He read certain passages from the English law on the Companies Act to drive home the point that unless the condition precedent as stipulated under sub-section (2) of section 41 of the Act is satisfied, there could not be any valid membership of the company. But, in this case, P.W. 1 having admitted that he had not made any application in writing before he became a member of the company, has not satisfied the condition precedent and, therefore, his petition under sections 397 and 398 is not maintainable. Whatever may be said about P.W. 1 in the light of his deposition in cross-examination, the same cannot be stated with regard to the 2nd petitioner and petitioners Nos. 3 and 4. Petitioner No. 2 holds 1,500 shares, the 3rd petitioner holds 750 shares and the 4th petitioner holds 750 shares. Nothing is suggested either in the statement of objections or in the cross-examination of P.W. 1 that petitioners Nos. 2 to 4 had obtained shares allotted to them without complying with the first requirement of sub-section (2) of section 41 of the Act. Therefore, the petition, in so far as it relates to petitioners Nos. 2 to 4 is maintainable without going into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... membership and the second part of it deals with persons other than subscribers to the memorandum of the company. Now, the point for consideration is whether this definition of "member" in section 41(2) of the Act would, in any manner, control the meaning of the word "member "in the other provisions of the Act which confer on these members certain substantive rights as shareholders of the company, e.g., sections 397 and 398 of the Act under which this petition is filed. Chapter VI of the Act provides for prevention of oppression and mismanagement of the minority shareholders of a company. Under section 397 of the Act, the minority shareholders can approach this court for relief against acts of oppression. Under section 398 of the Act, they can approach this court for reliefs against acts of mismanagement. The right to apply under sections 397 and 398 is controlled by section 399 of the Act. So, for the purpose of considering whether an application under sections 397 and 398 of the Act is maintainable, the line of enquiry should be as to whether the persons who claim relief under sections 397 and 398 of the Act come within the scope of the provisions of section 399 of the Act. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this amendment was designed to protect the interests of persons who would have been otherwise fastened with liabilities as contributories, even in the absence of any request for allotment of shares to them. Perhaps there had been innumerable cases where such liabilities have been passed on even in the absence of a request for allotment. To avoid such a contingency, the committee made a recommendation that in case of any dispute about allotment, that dispute could be satisfactorily resolved by insisting on an application in writing for allotment of shares. So, this amendment has a limited scope and has to be interpreted by applying the rule of mischief as understood in the law relating to the interpretation of statutes. What is the effect of section 41(2) of the Act on shareholders whose names are found in the register of members, who have been allotted shares, who have participated in the annual general meeting of shareholders and who have also been issued share scrips by the company pursuant to a valid resolution ? Whether such allotments made to the shareholders are void or voidable, all because they have not applied in writing for allotment of shares as provided under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... returns, certificates and statements referred to in sections 159, 160 and 161 shall be prima facie evidence of any matters directed or authorised to be inserted therein by the Act. As noticed earlier, exhibits P-13 to P-16, P-23, P-26, P-17 and P-5 were all documents maintained by the company under the various provisions of the Act. They contain the names of the petitioners in one way or the other as members of the company and, therefore, the entry of their names as shareholders shall be prima facie evidence of their membership of the company. One more document which requires to be noticed is the report of the Registrar of Companies, exhibit P-71. This report of the Assistant Registrar of Companies indicates that petitioners Nos. 1 and 2 were directors of respondent No. 1 company at the relevant time and this report was made under section 209A of the Act. In the face of these provisions and the other provisions of the Act in regard to the membership of petitioner No. 1 in respondent No. 1 company, could it be said that merely because petitioner No. 1 had not complied with the requirement of section 41(2) of the Act, his membership should be treated as null and void and, therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the House no doubt in consultation with the draftsman. So, side notes cannot be said to be enacted in the same sense as the long title or any part of the body of the Act." Sometimes, a marginal note will in any case be inaccurate, and it will then be "on its own merits and of no assistance whatever" Likewise, the headings prefixed to sections or sets of sections in some modern statutes are regarded as preambles to those sections. They cannot control the plain words of the statute, but they may explain ambiguous words, a rule which, whatever the assistance which it may render in construction, cannot stand logically with the exclusion of marginal notes, for headings like marginal notes are, as Avory J., pointed out in R v. Hare [1934] 1 KB 354, "not voted on or passed by Parliament, but are inserted after the Bill has become law" If this canon of interpretation is kept in view, in our opinion, the maginal note to section 41(1), viz ., definition of "member", does not bring out the true scope of section 41(2) of the Act. It appears to us that the marginal note does not in any way control the true scope and effect of section 41(2). The Legislature obviously would not have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, an agreement to become a member alone does not create the status of membership; it is a condition precedent to the acquisition of such status that the shareholder's name should be entered on the register. Conversely, the company is not entitled to place a person's name on the register without his having agreed to become a member; a person improperly registered without his assent is not bound thereby and may have his name removed from the register. The agreement to take shares in the case of allotment and of transfer. A person desirous of acquiring shares may express his agreement to do so in one of two forms. He may apply to the company for shares and may have them allotted to him, or he may have the shares transferred to him in pursuance of a contract of sale or other transaction. There is no difference, as Chilly / said in Nicol's case [1885] 29 Ch.D. 421, between a contract to take shares and any other contract. A formal contract is not necessary. If, in substance, an agreement is made, the form is not material." (underlined by us) If this commentary is read as a whole, the emphasis is that there should be consent of the member before he is registered as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prospectus is issued by the company, otherwise than on a rights issue, the prospectus is not an offer it is merely an invitation to the public to make offers. An offer is made by the applicant in sending a form of application for shares to the company and it is accepted by the allotment of shares to the applicant. Under normal articles, the power to allot shares is vested in the board of directors." In all these commentaries, the uniform view taken that the allotment of shares is a matter of contract between the parties and that contract could either be express or implied and if a person is treated as a shareholder of the company either by entering his name in the register of members or treating him as a member by any subsequent conduct, his right of membership cannot be questioned by the company on the ground that he has not complied with section 41(2) of the Act. The view that we have taken on the interpretation of section 41(2) finds support from the observations made by Cross on Statutory Interpretation at page 50. The learned author has quoted the following observations of Lord Denning in Engineering Industry Training Board v. Samuel Talbot (Engineers) Ltd. [1969] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is is what is called the authorised capital of the company. Then the company proceeds to issue the shares depending on the condition of the market. That only means inviting applications for these shares. When the applications are received, it accepts them and this is what is generally called allotment. No doubt there may be an allottment of shares without an application but no instance exists where that word is used to describe a transaction whereby one becomes a shareholder otherwise than by appropriation to him of a share out of the previously unappropriated share capital." These observations will go to show that if a shareholder who claims relief under sections 397 and 398 of the Act satisfies the company court that he is a shareholder of a company by virtue of allotment of shares in his favour which is evidenced not only by the register of members maintained by the company but also by the statutory returns and documents maintained and filed by the company, it is not open to the contesting respondents to contend that for the purpose of sections 397 and 398 of the Act, a shareholder must comply with the condition precedent stipulated in section 41(2) of the Act. For these rea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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