TMI Blog1999 (4) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 646 of 1998, with Company Application No. 145 of 1998 and Company Petition No. 647 of 1998 with Company Application No. 145 of 1998 were allowed. Company Petition No. 646 of 1998 was filed by the company, viz., Sant Chemicals (P.) Ltd. ( the transferor-company/Sant ) seeking its merger and amalgamation with Aviat Chemicals (P.) Ltd. ( the transferee-company/Aviat ). Aviat had filed Company Petition No. 647 of 1998. A perusal of the order shows that the notice of the Company Petition No. 646 of 1998 was given to the official liquidator and the regional director and notice of the Company Petition No. 647 of 1998 was given to the regional director. The official liquidator had reported that Sant has not conducted the affairs of the company in a manner prejudicial to the interest of its members or to the public interest. Regional director also stated that there is no apparent objection to the proposed amalgamation scheme being sanctioned. This court perused the scheme and observed that the proposed amalgamation of the transferor-company with the transferee-company would result in proper co-ordination and would be more economically viable and efficient. The court also noticed that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ants took a search in the company Registrar s office and were surprised to note that Sant together with Aviat had filed company petitions as noticed above, for passing of the scheme of amalgamation. The Aroras were kept in dark. From the records of this court it appeared that Sant had obtained consent letters from one Mrs. Geeta Tushar Thakkar holding one single share of Sant and Aviat alleging to be the only shareholders of Sant. Thus, fraudulently without the knowledge of the two directors belonging to Aroras obtained direction from this court for dispensing with the meeting of the shareholders. No notice of any meeting was given to the applicants. It is further the case of the applicants that Sant owns an immovable property, i.e., land and building situate on Plot No. D-115 admeasuring about 4,050 sq. mtrs. In the Trans Thana Creek Industrial Area, Village Shievane, Distt. Thana. After the order dated 17-12-1998 was passed, Aviat has taken possession of the property and has commenced construction thereon. Thus, it is pleaded that a fraud has been played on the applicants as well as the court. 5. An affidavit in reply has been filed by a director of Aviat. It is stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t themselves have filed the present application, they have apparently conspired with Aroras for making the applications and raising false and bogus claims. It is, therefore, claimed that the applicants not have come to court with clean hands but with ulterior dishonest and collateral motives. Thus, the application deserves to be dismissed. 6. Aviat further claims to be a bona fide purchaser for value of shares of Sant without notice of any defect of title. It is reiterated that neither the available records of Sant nor the available public records at the office of the ROC contain the name of Aroras as members of Sant or as directors. Thus, Aviat have acquired good title in respect of the shares purchased by Aroras. It is stated that the silence of the Aroras since 1992 indicates that the claim put forward is not bona fide. Aroras did not bother to claim their rights as members on the issuance of public notice advertising the hearing of the company petitions of Aviat and Sant. Company petitions were advertised in September 1998. The Aroras, however, remained completely silent. The two Arora nominees on the board of directors of Sant have not produced anything to show that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be taken in the records of Sant. In none of the available records did the name of any Aroras appear either as members of Sant or directors of Sant. Upon payment of the entire consideration amount, the entire 5,000 equity shares held by Chawlas and constituting the entire shareholding capital of Sant were transferred in favour of Aviat on 31-7-1997. As noticed earlier, one share was transferred in favour of one Mrs. Geeta Thakkar as nominee of Aviat. Necessary forms under section 187C of the Act were filed in that behalf. Name of Aviat was also entered in the register of members of Sant. Consequently, on and from 31-7-1997, Sant became a wholly owned subsidiary of Aviat. Subsequently, Aviat also appointed its nominees as directors of Sant. The object of acquiring the shares of Sant was to avail the benefit of the MIDC plot by Aviat. This was the only available asset of Sant. As the manufacturing unit of Sant had been non-functional, it was agreed to demolish the old structure and a new structure with latest equipment was to be constructed. In any event the existing plant of Sant which was a chemical plant could not be of much use to the proposed business of Aviat of starting a fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplete. A state of the art laboratory and formulation equipment and machinery have already been installed and the formulation unit is now geared up to commence production, inter alia , of multi-vitamin syrups and drops. The amount of approximately Rs. 3 crore have already been spent by Aviat. The manufacturing unit is said to be over 95 per cent complete. On 3-2-1999 the Inspector of Drugs had also inspected the plant for issuing manufacturing licence. Aviat has already employed 34 persons in respect of the manufacturing unit in anticipation of the commencement of the production activity. 8. The averments made in the affidavit dated 29-1-1999 by the applicants have also been denied. It is stated that the alleged MoU dated 22-12-1992 does not reflect the alleged understanding as stated by the applicants. The alleged agreement is stated to be without consideration and not enforceable. In any event, since the alleged agreement is dated 22-12-1992, any attempt on the part of the applicants to enforce the same is clearly time barred on the date of filing of the present application. It is also denied that pursuant to the MoU any shares were allegedly transferred in favour of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the applicants by not reading the said alleged advertisements. It is denied that Chawlas were 100 per cent members of Sant prior to the agreement dated 22-1-1997 with Aviat. It is denied that Aviat has paid the consideration alleged for the entire 5,000 equity shares or that the entire share capital of Sant has been transferred in favour of Aviat, 2,500 shares are stated to be with the applicants as the applicants have not transferred any of the shares either to Aviat or to any third party. Aviat has not even bothered to see the serial numbers of the share certificates and also of the missing share certificates. It is also denied that all the creditors had given consent for dispensing with the meetings of the members of Sant, since the applicants are 50 per cent shareholders. This consent was fraudulently recorded. With regard to the transfer of shares in favour of Aroras, it is denied that the shares could not have been transferred on 19-9-1992. 10. Aviat has filed a sub-rejoinder in which all the earlier pleadings are reiterated. Both sides have claimed that the inspection of the documents has not been given. 11. Relying on these pleadings, counsel for the parties have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the court on account of fraud and collusion would be entirely vitiated. In support of this proposition, the learned counsel relies on a judgment of the Supreme Court in Smt. Shrisht Dhawan v. Shaw Bros. AIR 1992 SC 1555, para 20. Thereafter, the learned counsel relies on the oft quoted judgment of the Supreme Court in the case of S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853, para 1. In order to establish fraud, the learned counsel relies on the averments made in the original petition filed by Sant. The learned counsel had made particular reference to the averments made in paras 3, 12, 13 and 15. In para 3, Sant had claimed that the company had been carrying on business of manufacturing and processing certain bulk drugs and chemicals with effect from 2-11-1973. The manufacturing plant and factory of the petitioner-company was stated to be situated at Plot No. D-115, MIDC, village Shrivane, PO Nerul, Thane-Belapur Road, New Mumbai, Distt. Thane. In para 12, Sant had stated that the petitioner is a wholly owned subsidiary of the transferee-company (Aviat) and consequently, all the shares of the petitioner-company are owned by the transferee-company. Both the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect state of affairs been brought to the notice of the court, the order of amalgamation would not have been passed. 12.1 He submits that the averments about Chawlas being 100 per cent shareholders of Sant is false on the face of it. The Aroras are 50 per cent shareholders of Sant. The shares were purchased from Chawlas by the Aroras way back in December 1992. The directors were also in equal share. This is evident from the MoU (ex. 1 to the affidavit in support). Under this MoU, all assets were to be sold except the land. Form No. 32 was filed with the ROC. According to the counsel, a perusal of the said form would show that Hardeep Singh Chawla resigned as a director on 22-12-1992. Jagmohan Singh Arora was appointed in place of Hardeep Singh Chawla. Kuljit Singh Arora was newly appointed. Thus, according to the learned counsel, it leaves no manner of doubt that the Aroras were 50 per cent shareholders of Sant. The learned counsel thereafter referred to the share certificates which give distinctive share numbers of the share transferred to the Aroras. Photostat copies of the certificates have been attached as ex. 3 to ex. 33 to the affidavit in support. He submits that the nam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate No. 16 and Share Certificate No. 5 are with the Aroras. Share Certificate No. 16 has now become 75 and share certificate No. 5 has become 74 in the hands of Aviat. If the sum total of the certificates and the distinctive numbers of the shares in the hands of Aroras is taken, it amounts to a total 2,500 equity shares. These very shares are sought to have been transferred to Aroras. He submits that since the entire share capital has been subscribed by 1983, no other share certificates could have been issued to Aroras unless there was a corresponding increase in capital. The share certificates are, therefore, said to be fabricated. The entire share capital having been exhausted by 6-12-1983, there could be no other issue of certificates. He submits that although the share certificates have been issued after 6th December, 1983, the authorised capital is shown as 2.5 lakh. This, according to the counsel, throws suspicion on the authenticity of the said certificates. The capital was admittedly 5 lakh divided into 5,000 equity shares as from 6-12-1983. He submits that the whole case placed before the court for sanction of the amalgamation scheme smacks of fraud and collusion bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the register. Only after a person establishe his right by a company petition for rectification, a member can complain of oppression. He submits that in the affidavit in rejoinder in para 7 the applicants rely on register of members which is ex. 3 to the said affidavit. Now they cannot say that the register does not reflect the correct position. He points out the relevant provisions of the Act to support his submissions. Section 2( 46 ) of the Act defines share to mean a share in the share capital of a company. Member is defined in section 2( 27 ) in the negative. This section provides that member does not include a bearer of a share warrant of a company. Section 83 provides that each share in a company having a share capital shall be distinguished by its appropriate number. These are known as the distinctive numbers of the shares. Thus, the distinctive numbers are not to be confused with the number of a share certificate. He reiterates that in the present case the register of members shows that in respect of the same distinctive numbers of the shares which were issued to Aroras, Aviat is shown as member in the register of members. He submits that section 84(1) has to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. At this stage, Mr. Chawla had objected on the ground that the original had not been offered for inspection and that the plea is not taken but Mr. Dwarkadas has pointed out to page 14 of the affidavit in reply where the plea is specifically taken. Mr. Dwarkadas has submitted that the documents are ante-dated. According to him, the transfer form has been created in a back date. This is to get over the difficulty which would arise in view of the fact that the Aroras have not cared to get themselves registered as members. Nothing has been done from 1992 till 1999 when the present application has been filed. He submits that the plea of Arora is patently false. They claim that the shares have been transferred pursuant to the MoU. the shares have actually been transferred on 18-12-1992 and 19-12-1992. The MoU is dated 20-12-1992. Thus, obviously the shares have not been transferred pursuant to the MoU. The persons mentioned in the MoU are not the same as the transferors. He further submits that a reading of the MoU will show that it is a totally incomprehensible document. No consideration is mentioned for the arrangement therein. Yet the Chawlas are to sell all the assets except ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision in the Companies Act, similar to section 31 of the Presidency Towns Insolvency Act. Further, the fact that the transferor bank has been dissolved and struck off the register creates procedural difficulties as to making a defunct company a party to any proceeding and as to service of any notice or process on it. The doctrine of the court s inherent power, like that of public policy, should be sparingly used, for otherwise there is a great risk of all rules of procedure evolved out of the experience and practical wisdom of the past being set at naught by the varying idiosyncrasies and notions of justice of individual judges." Thus, it follows that the remedy of appeal was open to the applicants. The view expressed by Justice Das are in consonance with the provisions of the Act as well as the CPC. It is settled proposition of law that inherent powers of the court have to be used sparingly, with circumspection, in order to prevent miscarriage of justice. These powers are generally not to be used when an adequate remedy is available to the parties. I am in respectful agreement with what has been held by Das, J. of the Calcutta High Court. Apart from the fact that this court is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved : fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence . He submits that the scheme having been sanctioned on the basis of fraud is open to challenge in any proceedings. For this, he relies on S.P. Chengalvaraya Naidu s case ( supra ) wherein Kuldip Singh, J, quoted with approval the observations of COKE, CJ and observed : " Fraud-avoids all judicial acts, ecclesiastical or temporal observed Chief Justice Edward Coke of England about three centuries ago. It is the settled proposition of law that a judgment or decree obtained by playing fraud on the court is a nullity and non est in the eyes of law. Such a judgment/decree by the first court or by the highest court has to be treated as a nullity by every court, whether superior or inferior. It can be challenged in any court even in collateral proceedings." (p. 853) This judgment would be fully applicable in the case of proven fraud. But then the Aroras will have to prove that they were members of Sant. Since admittedly they are not entered on the register of members, a case has been put forward that they are deemed members. Provisions of the Act do not provide for an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, as between two persons claiming title to shares in a company like this, which are registered in the name of a third party, priority of title ( i.e. , equitable title) prevails unless the claimant second in point of time can show that as between himself and the company, before the company received notice of the claim of the first claimant, he, the second claimant, has acquired that full status of a shareholder; or at any rate that all formalities have been complied with, and that nothing more than some purely ministerial act remains to be done by the company, which as between the company and the second claimant the company could not have refused to do forthwith; so that as between himself and the company he may be said to have acquired, in the words of Lord Selborue, a present, absolute, unconditional right to have the transfer registered before the company was informed of the existence of a better title." 17.3 This position is further clarified by the Supreme Court in the case of Howrah Trading Co. Ltd. v. CIT AIR 1959 SC 775. The Supreme Court held thus : " 5. It was contended in the High Court that inasmuch as section 16(2) referred to an assessee , the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus, they can make no claim against Sant. In the case of Balkrishan Gupta v. Swadeshi Polytex Ltd. AIR 1985 SC 520, the Supreme Court has held : " 15. It is clear from the relevant provisions of the Act which are referred to hereafter that a member can participate and exercise his vote at the meeting of a company in accordance with the Act and the articles of association of the company. Section 41 of the Act defines the expression member of a company. The subscribers of the memorandum of association of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members. A subscriber of the memorandum is liable as the holder of shares which he has undertaken to subscribe for. Any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. In his case the two conditions, namely that there is an agreement to become a member and that his name is entered in the register of members of the company are cumulative. Both the conditions have to be satisfied to enable him to exercise the rights of a member. . . . (p. 52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same position is reiterated by a Division Bench of this court. In this case a petition under sections 397 and 398 was filed against the company. The petitioners were transferors of shares whose names continued in the register of members and the transferees presented the petition on their behalf as their duly constituted power of attorney agents. After the petition was admitted, the company took out a Judge s Summons praying that the order admitting the petition be revoked as it was not maintainable. It was held that the transferors as constructive trustees of the transferees were competent to file the petition. Therein it was urged that the transferors could not be considered as members of the company for the purpose of sections 397 and 398 of the Act inasmuch as they had sold their shares and as such, they did not have the necessary interest to maintain the petition. This contention was rejected by the learned Single Judge. On appeal, the Division Bench formulated the question for consideration thus : "The basic question that requires determination is whether a member of a company who has transferred his shareholding to another person but whose name continues to be on the regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only person, therefore, who is entitled to exercise these rights and privileges or discharge these obligations is the transferor. The transferee is an outsider as far as the company is concerned and his only right is to have the transfer registered and thus to get himself accepted as a member and shareholder of the company. . . . (p. 840)" The Aroras, having failed to get themselves on the register of members, cannot claim any right on the basis of the share certificates held by them. 19. Mr. Chagla had submitted that the Aroras had paid the consideration. They had forwarded the completed transfer forms to the company (Sant). Thereafter there was no further act to be performed by the Aroras. They had stepped into the shoes of the Chawlas with regard to 2,500 shares. They could presume that they were members of Sant. They, in fact, acted on that assumption. In any event, they would be deemed to be members. The provisions of sections 41 and 2( 27 ) cannot be so strictly construed as to defeat the claim of bona fide purchasers of shares, only on the technical ground that the company has failed to register the transferees as members. Thus, the Aroras were entitled to notice b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the legal heirs had no locus standi to maintain the application under sections 397 and 398. It was further submitted that right under sections 397 and 398 are statutory rights and must be strictly construed in terms of the statutory. The right, it was submitted, was given to any member of a company and it should not be enlarged to include any one who may be entitled to become a member. The Supreme Court considered the special provisions contained in section 109 together with articles 25 to 28 which deal with transmission of shares on the death of a member in juxtaposition with the para materia provisions in the English Companies Act. It was held that the reasoning of the English Courts, on the para materia provisions of the English Act, would be a valuable guide. The Supreme Court approved the observations of Pennycuick, J. in the case of Jermyn Street Turkish Baths Ltd., In re [1971] 3 All ER 184. In that case it was contended that the petitioners were not members of the company and hence, had no locus standi to present the petition bearing in mind that a petition under section 210 of the English Companies Act could only be presented by a member of the company. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e name of Aroras is not mentioned in the register of members nor in the office of ROC. No resolution of the board of directors of Sant appears to have been passed by which the transfer in favour of the applicants were approved. Even the shares have been transferred on 19-12-1992, whereas the MoU is dated 22-12-1992. Yet it is the pleaded case of Aroras that the shares were transferred in pursuance of the MoU. There is no direct evidence of any consideration having been passed. Thus, it would be difficult to hold that even if the shares had been transferred to Aroras, they will become members of Sant without being registered in the register of members. There are no Board resolutions about appointment of Chawals to the board of directors also nor were the Chawlas elected as directors. Even the official liquidator in his report filed before the court stated that prior to July 1997 only the Chawlas were members/directors of Sant. The Aroras do not figure anywhere as directors. There is another significant reason to indicate that the application is not bona fide. The Aroras claim to be members of the company from 1992 onwards. Yet no steps have been taken to even take a cursory inspec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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