TMI Blog1988 (8) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... n Bench had ruled that if a person was admittedly treated as a member of the company and 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 in the register of members maintained by the company but also in the statutory returns and other documents maintained and filed by the company, it is not open to the company 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. It was further held by the Division Bench: "( i ) The first part of section 41 deals with the deemed membership and the second part of it deals with persons other than subscribers to the memorandum of the company. ( ii ) The marginal note to section 41(1), viz ., definition of 'member', does not bring out the true scope of section 41(2) of the Act. The marginal note does not, in any way, control the true scope and effect of section 41(2). Neither the marginal note to section 41 nor the headnote to section 41 has any implication or bearing on the interpretation of the word 'member'. The word 'member' under sections 397 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this petition. The petitioner is the son of late His Highness Jaya Chamarajendra Wadiyar who was the erstwhile Maharaja of Mysore (hereinafter referred to as "His Highness"). Late Highness had entered into certain transactions with one A. S. Chamaraju with a view to develop certain immovable properties which belonged to him absolutely. Those properties are the Bangalore palace situate in the heart of Bangalore city with its extensive gardens, vacant lands, other buildings and appurtenances thereto. The idea of late Highness was to develop this property by making it a five star hotel since he found that after the stoppage of the privy purse that was annually due to him, he was not in a position to maintain the royal household and, therefore, with a view to earn a substantial income from the properties in question, he consulted and collaborated with one A. S. Chamaraju for the development of this property. Accordingly, a company by name Sri Venkateswara Real Estate Enterprises (P.) Ltd. was floated by His Highness and Chamaraju and that company is respondent No. 1 in this petition. The memorandum and articles of association of respondent No. 1 company is produced as annexure B in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd. and respondent No. 1 company, and that the articles of the two companies would be got amended by them as per annexures F and G to the agreement and that both the companies would be run on the basis of the articles so amended; that, in the share capitals of the two companies, shares representing 60 per cent, of the authorised capital would be allotted to No. 1 of the first party, i.e. , the petitioner, and/or to his nominee; that the remaining shares representing 40 per cent, of the authorised capital of the said two companies would be allotted to the second party, i.e. , Chamaraju and/or to his nominees. Under clause 9, the parties agreed that: "A sum of Rs. 28,45,000 (rupees twenty-eight lakhs, forty-five thousand only) advanced by Sri A. Chamaraju and a sum of Rs. 3,00,000 (rupees three lakhs) advanced by party No. 4 and a further advance of Rs. 18,56,893.04 (rupees eighteen lakhs fifty-six thousand eight hundred and ninety-three and paise four) by party No. 3 to the late ex-Maharaja of Mysore shall proportionately be adjusted by allotment of the shares agreed to be purchased or subscribed to by the second party in the above-said two companies representing 40 per cent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the said Meenakshi Devi, she transferred 10 shares to her husband, Lakshmikanth Raju Urs, and 10 more shares to the petitioner's wife, Smt. Pramoda Devi. Accordingly, the petitioner's sister, Meenakshi Devi, is holding 980 equity shares in the said company. Further, 1,000 equity shares of the first respondent-company were held at all material times by another sister of the petitioner, Smt. Gayatri Devi, which were transferred to B. K. Ramachandra (her husband) (since deceased). The heirs of the said Gayathri Devi are holding the said 1,000 equity shares. As on the date of filing of this petition, the petitioner, his wife, Pramoda Devi, and the petitioner's relatives were holding 3,220 equity shares in the first respondent-company. So, on the strength of this shareholding, the petitioner avers that he is a person who comes within the scope of section 399 of the Act and, therefore, this petition under sections 397 and 398 is maintainable. In paras 27, 28 and 29 of the petition, he has further averred as follows: "After the agreement of compromise dated 29th January, 1982, was arrived at as hereinbefore stated, there was a change in the constitution of the board of directors of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup and Chamundi Hotel Pvt. Ltd. was given to Chamaraju group. The petitioner says that having regard to the aforesaid, Chamaraju group cannot claim any right or authority in respect of the management of the company or to interfere with the affairs of the company. The said Chamaraju group at present consists of respondents Nos. 2 to 11. Annexed herewith and marked K is the copy of the said letter dated January 13, 1986". Some more facts have been placed by the petitioner in the rejoinder filed by him and they should be noticed. He has averred that the compromise agreements dated March 26, 1978, and January 29, 1982, clearly show that he has been dealt with by the respondents as a member of respondent No. 1 company and they have accepted and recognised his full right, title and interest as a member of the company and that he has full right to the shares held by him in the company and on account of such acceptance and recognition by the respondents, they had agreed to transfer all right, title and interest of their group in respondent No. 1 company to his group and himself; that, in pursuance of the agreement entered into on January 29, 1982, respondent No. 1 company was handed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 397 and 398, do not constitute an application under those sections. The petitioner has not furnished material particulars about his vague and unspecific allegations to satisfy the requirements of sections 397 and 398. ( ii )An application made by a person not in possession of the statutory qualifications under section 399 and an application which does not satisfy the requirements of sections 397 and 398 cannot be maintained. ( iii )The name of the petitioner is not shown as a member in the register of the company. Till his name is entered, it cannot be said that he can enjoy powers of a member, and the petition is premature. Persons neither registered as shareholders nor evincing interest to become one, cannot maintain a petition under sections 397 and 398. The petitioner has deliberately avoided referring to this material fact which goes to the root of the matter. Learned counsel for the respondents, Mr. Raghavan, has relied on the averments made by the petitioner in the petition itself to show that the petitioner is not a member of the company. Mr. Raghavan places reliance on para 17 of the company petition in which the petitioner has averred that certain differences and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors held on January 23, 1986, 1,500 equity shares held by the estate of late Shri Chamaraju were transmitted in the names of the persons mentioned in the said resolution and 30 equity shares were allotted to the three directors mentioned in the said resolution so as to enable them to acquire the qualification shares under article 15 of the memorandum and articles of association and Sri A. C. Srinivas Raju was authorised to operate the bank account of the company with Canara Bank. He has also relied on some of the averments made in the rejoinder to which I have already made a brief reference. On these averments made by the petitioner, one thing is clear and it is that the petitioner, by operation of law, claims to be a holder of certain equity shares in respondent No. 1 company. His family members are also holders of certain equity shares. The aggregate holding of the petitioner by operation of law, i.e. , as heir of His Highness, and by inheritance under the will executed by his late mother, is about 1,200 equity shares. On the strength of these holdings, he claims to be a member in terms of section 399 of the Act and accordingly he maintains that he is entitled to file this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report. The Supreme Court, after narrating the relevant facts, raised the following questions: "( i )Whether, by reason of the appointment of the receiver under the Land Revenue Act in respect of the shares of the Polytex Company held by the Cotton Mills Company, the Cotton Mills Company had ceased to have the rights of a member under section 169 of the Act? ( ii )Whether, by the attachment of the shares under section 149 of the Land Revenue Act, the Cotton Mills Company suffered any diminution or curtailment in its rights as a shareholder in respect of the shares so attached? ( iii )Whether, by the pledge of certain shares, the Cotton Mills Company suffered any such diminution or curtailment?" Further, the Supreme Court posed the following additional question for consideration. When does a shareholder cease to be entitled to exercise any of these rights, i.e. , the rights under sections 87, 169, 172, 176, 187 and 188 of the Act? While considering this question, the Supreme Court made certain general observations about the rights of the shareholders. What is the position of the shareholder in a company was considered by the Supreme Court with reference to its earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject is also the same. Buckley on the Companies Acts, 12th edition, page 803, has pointed out that the right of a transferee is only to call upon the company to register his name and no more. No rights arise till such registration takes place.'" The conclusion reached by the Supreme Court in that case is found on page 587. It reads: "An order of attachment cannot, therefore, have the effect of depriving the holder of the shares of his title to the shares. We are of the view that the attachment of the shares in the Polytex Company held by the Cotton Mills Company had not deprived the Cotton Mills Company of its right to vote at the meeting or to issue the notice under section 169 of the Act". In the operative portion of the judgment, the Supreme Court observed (page 589): "It is also significant that the directors of the Polytex Company who knew that a receiver had been appointed in respect of the shares in question, that they had been attached by the Collector, that a part of them had also been pledged in favour of the Government of Uttar Pradesh and that orders had been passed under section 18AA(1)( a ) of the Industries (Development and Regulation) Act, 1951, taki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the permission granted by the Reserve Bank of India cannot be questioned by any company or by the shareholder or by the court. These are the questions which arose for consideration in that case. Some of the observations made by the Supreme Court in that case should be noticed since it is contended by Mr. Raghavan that that case, Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) is an authority on the question of maintainability and he has also read out extensively certain portions of that judgment. At page 573 of the report, the Supreme Court has referred to two principal questions which were argued before it. They are: "Two of the principal questions argued before us were whether the permission contemplated by section 29 was previous permission or whether the permission could be granted ex post facto and whether the purchase of the shares by the foreign investor of Indian nationality/origin in this case involved any contravention of the Foreign Exchange Regulation Act or the Non-Residents' Investment Scheme. To appreciate how the questions arise, it is necessary to state here a few facts". Again, at page 595 of the judgment, the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation) Act, 1956, and the bye-laws of the Stock Exchange. Prayers ( e ), ( f ), ( g ), ( h ), ( i ) again relate to Circular No. 18, dated September 19, 1983, and the letter dated September 19, 1983. Prayer ( j ) is directed towards securing the relevant, documents. Prayer ( k ) is to restrain the first respondent (Union of India) from pressurising the company to register the transfer of shares". At page 610 of the Report, the Supreme Court, after considering extensively the facts of the case, has looked into the statutory provisions and observed as follows: "Before proceeding further, it is just as well to have a clear picture of the nature of the property in shares, the law relating to transfer of property in shares under the law and the effect of the provisions of the Foreign Exchange Regulation Act. For that purpose, it is desirable that we read together all the relevant statutory provisions relating to the acquisition, transfer and registration of shares. Besides referring to the relevant statutory provisions, we will also refer to the leading cases on the topic". Then the Supreme Court dealt with the relevant provisions of the Act at pages 617 and 618 of the report. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court laid down the law on the question relating to maintainability of the petition under sections 397 and 398 of the Act? I am of the view that in both these cases, the question of maintainability under section 399 of the Act did not arise for consideration directly or indirectly. What was considered in those cases was the right of shareholders in general. In the first case, the right of a shareholder vis-a-vis the right of the receiver of these shares. In the second case, what arose for consideration was the right of NRI shareholders in relation to the provisions contained in the Foreign Exchange Regulation Act and the requisite permission that had to be obtained from the Reserve Bank of India for validating the transfer of shares. So, while deciding those cases, certain general observations were made by the Supreme Court as to the nature of the rights of the shareholders. Hence, it cannot be said that these two decisions have laid down the law or at any rate there are any observations in the nature of obiter dicta on the question touching on the maintainability of the petition. It was pointed out by this court to Mr. Raghavan that in both the cases, the Supreme Court did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, any of the following and no others: "( a ) where the secretaries and treasures are a firm: any member of such firm; any partner or relative of any such member; and any other firm in which any such member, partner or relative is a partner; any private company of which the firm first-mentioned, or any such member, partner, relative or other firm is the managing agent, or secretaries and treasurers, or a director, or the manager; and any body corporate at any general meeting of which not less than one-third of the total voting power in regard to any matter may be exercised or controlled by any one or more of the following, namely, the firm first-mentioned, any such member or members, partner or partners, relative or relatives, other firm or firms, and private company or companies; ( b ) where the secretaries and treasurers are a body corporate: ( i ) any subsidiary or holding company of such body corporate; the managing agent or secretaries and treasurers, or a director, the manager or an officer of the body corporate or of any subsidiary or holding company thereof; any partner or relative of any such director or manager; any firm in which su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. But he also can become a member of a company if the conditions in section 115 are satisfied. In my view, the two decisions of the Supreme Court which have not taken into consideration the definition of the word "member" under section 2(27) are not applicable to the facts and circumstances of the case. I have earlier noticed the general rights of a shareholder of a company in Swadeshi Polytex [1985] 58 Comp. Cas. 563 (SC) and Escorts' cases [1986] 59 Comp. Cas. 548 (SC). But a better authority for the exposition of the law on the nature of the rights of shareholders is found in the decision of the Supreme Court in Vasudev Ramchandra Shelat v. Pranlal Jaya-nand Thakar [1975] 45 Comp. Cas. 43 . The facts of that case have a close bearing on the facts of this case. In that case (headnote): "B had executed a registered gift deed purporting to transfer certain shares held by her in different companies to her brother, V. The deed was signed by the donor as 'the giver' as well as by the donee as 'the acceptor' of the gift and was attested by six witnesses. In it, the donor specified and gave particulars of the shares meant to be gifted and undertook to get the name of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of property in general. It deals with transfers of shares only because they give certain rights to the legally recognised shareholders and impose some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share held but also to participate in certain proceedings relating to the company concerned. It is for this purpose that section 34 of the Companies Act, 1913, enables the making of 'an application for the registration of the transfer of shares in a company . . . either by the transferor or the transferee'. A share certificate is a prima facie evidence, under section 29 of the Act, of the title to a share. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for 'registration' of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of company law, has to be provided, as indicated by section 28, by the articles of the company, and, in the absence of such specific provisions on the subject, the regulations contained in Table 'A' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e compromise agreement made in the year 1978 and the compromise agreement entered into in the year 1982, the petitioner's right as shareholder of respondent No. 1 company was unequivocally admitted and the parties have also acted on the basis that he is a shareholder of the company. It may be for reasons best known to him that he did not get on the register of members. That may go against him for the rectification of the register of the company in appropriate proceedings. I understand that in the connected Company Petition No. 32 of 1987, such a question is pending. But, on that point, Mr. Raghavan relied on the decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp. Cas. 151 . That was a case where the question of maintainability did arise for consideration. The Gujarat High Court observed thus (at page 158): "Now, section 399(1) provides that members, set out in clauses ( a ) and ( b ) of sub-section (1) thereof, alone have a right to apply under sections 397 and 398. Apart from the qualifying number for eligibility to maintain a petition, those who invoke the court's jurisdiction, must indisputably be members of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction on the ground of mere technicality. Till the year 1986, i.e. , till the matter was taken to this court in this petition, there was no shred of doubt on the rights of the petitioner to represent his interests as a shareholder in respondent No. 1 company. It was contended that in a number of meetings he has signed the proceedings of the said meetings and even the balance-sheet prepared by respondent No. 1 company right from the year 1971 to 1986 does not show any indication that the petitioner had been excluded from the membership of the company either on the ground that he has not inherited the shares or otherwise. In the circumstances, I am of the view that the decision of the Division Bench in Balaji Textile Mills [1988] ILR 1988 Kar 1213; [1989] 66 Comp. Cas. 654 , is applicable, on the undisputed material on record. Before closing, one point arises for consideration and that is whether the decisions of the Supreme Court in Escorts [1986] 59 Comp. Cas. 548 and Swadeshi Polytex [1985] 58 Comp. Cas. 563 should be treated as binding precedents. The question what a binding precedent is has been dealt with in the decision in A. Aziz v. Managing Director, KSRTC [198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Companies Acts, volume I, it is observed thus: "The company's affairs are being conducted in a manner oppressive to some part of the members including, except where the Department of Trade is the petitioner, the petitioner himself. For the purpose of a petition under this section, 'member' includes the personal representatives of a deceased member. It is to be noted that, although the cross-heading preceding the section is 'minorities', the section itself does not require that the oppressed members should be the minority. Members with a minority beneficial interest may, by having voting control, be able to oppress those with the majority beneficial interest". In a case reported in [1970] 1 WLR 1194 the Chancery Division of the High Court of Judicature in U. K. in In re, Jermyn Street Turkish Baths Ltd. (Pennycuick J.) dealing with cases of oppression under the English Companies Act observed (at page 1205): "Counsel for the respondents contended that the petitioners are not members of the company and have no locus standi to present this petition, bearing in mind that the petition under section 210 of the Act of 1948 can only be presented by a member of the company. I hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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