TMI Blog1991 (11) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... all along had a total shareholding of 50. Before the joint family of the plaintiffs and defendants came to hold all the 50 shares of the company, the family was a minority shareholder holding 13 shares, the rest 37 shares being held by outsiders. In course of time, the family acquired the rest 37 shares and became the sole shareholder of the company. The family consisted of Baluswamy Naidu and Guruviah Naidu who were brothers, and each of the brothers held 25 shares in the company. The plaintiffs and defendants Nos. 1 and 2 and one Selvaraj are the sons of Baluswamy Naidu and defendants Nos. 4 to 6 are the sons of Guruviah Naidu. Baluswamy Naidu died on February 5, 1963, and Guruviah Naidu died on January 10, 1970. The plaintiffs alleged that in 1951 there was an oral agreement between Baluswamy Naidu and Guruviah Naidu that each of the branches of the family would always continue to hold an equal number of shares, viz., 25 and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. Although on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing for defendants Nos. 4 to 6 in C.A. No. 1946 of 1980 contended that the agreement in effect imposed an additional restriction on the right to transfer the shares. The restriction was not envisaged by any of the articles of association. Hence, it was not binding on any shareholder or a vendee of the shares from the shareholders. It was also unenforceable at law and, therefore, not binding on the company. Hence, the sale of the shares by the first defendant to defendants Nos. 4 to 6 was not invalid and the High Court was wrong in directing the. transfer of shares in favour of the plaintiffs. Shri Bhatt appearing for the first defendant (appellant in C.A. No. 1946 of 1980) contended that assuming that the sale of shares by the first defendant to defendants Nos. 4 to 6 was invalid in view of the agreement, the High Court could only have declared that the sale was invalid and it could not have further directed the transfer of shares in favour of the plaintiffs. The first defendant could not be forced to sell the shares to the plaintiffs. Shri Krishnamurthy, on the other hand, contended that ( i ) the shareholders were bound by the agreement of 1951 ; ( ii ) the agreement was en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on its shareholders and that the shares are movable property and their transfer is regulated by the articles of association of the company. Whether under the Companies Act or the Transfer of Property Act, the shares are, therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its articles, if any. a restriction which is not specified in the articles is, therefore, not binding either on the company or on the shareholders. The vendee of the shares cannot be denied registration of the shares purchased by him on a ground other than that stated in the articles. We may refer to certain authorities which reinforce the above proposition. In Shanti Prasad v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 ; [1965] 2 SCR 720, it was also a case of a battle between two groups of shareholders led by P/L as they were named in the decision. In July, 1954, these two groups who held an equal number of shares of the value of Rs. 21 lakhs, out of a total share capital of Rs. 25 lakhs, in the company which was then a private company, entered into an agreement with the appellant who was a third party and certain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer to whom he wills. It is not necessary to seek in the articles for a power to transfer, for the Act (the English Act of 1980) itself gives such a power. It is only necessary to look to the articles to ascertain the restrictions, if any, upon it. Thus a member has a right to transfer his share/shares to another person unless this right is clearly taken away by the articles. In Halsbury's Laws of England, 4th edition, para 359, dealing with "attributes of shares" it is stated that "a share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interests of any member in a company are personal estate transferable in the manner provided by its articles and are not of the nature of real estate". Dealing with "restrictions on transfer of shares" in Pennington's Company Law, 6th edition, at page 753, it is stated that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this restriction, that firstly there is no limitation on the transfer of his shares by a living member either to the existing member or to a new member. The only condition is that when the transfer is made to a new member, it will have to be approved by the majority of the members. The transfer may be to any existing member whether he belongs to one or the other branch of the family and in such case there is no need for consent of the majority of the members. The article in fact envisages the distribution of the shareholding of the deceased member (and not of the living member) equally among the members of both branches of the family and not of any one of the branches only. Even the shares of the deceased member can be transferred to any new member when his heirs/ nominees are net willing to become members. However, this can be done only with the consent of the majority of the members. Hence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the article. Firstly, it imposes a re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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