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2015 (4) TMI 951 - MADRAS HIGH COURT

2015 (4) TMI 951 - MADRAS HIGH COURT - TMI - Application of Oppression and mismanagement u/s 397,398 & 402 of the Companies Act, 1956 - Shares sold outside India at nominal amount of one pound sterling - Jurisdiction of Company Law Board to test the fairness of the procedure adopted by the Joint Receivers in England for the sale of the shares - Principles of estoppel - Pre-emptive right of purchase of the shares under Articles of Association - Held that:- it is clear that any transfer or even a .....

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rds, if the company, by virtue of the Articles of Association and the power conferred thereunder refuses to register the sale ordered by the Insolvency Court in England, the purchaser cannot do anything except to come to India and seek redressal in the manner provided by the Indian Companies Act.

The Company Law Board had omitted to see that what was challenged by the appellant was not really the procedure adopted by the Insolvency Court in United Kingdom, in bringing the shares to s .....

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ttack on the procedure adopted by the Insolvency Court in United Kingdom. It was an attack on the conduct of a Director, who held a fiduciary relationship and who was bound by the Articles of Association of the Company.

The finding of the Company Law Board that there was acquiescence on the part of the appellant and that the appellant is guilty of laches, does not appear to be correct. In B.L.Sreedhar [2002 (12) TMI 594 - SUPREME COUR], the Supreme Court summarized the doctrine of acq .....

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dent in the first respondent has been sold for just one Pound Sterling, behind the back of the appellant and hence it is not for the respondents to plead estoppel against the appellant.

It is out of the scope of the present petition to find out whether the appellant is guilty of any mismanagement or whether the second respondent has suffered a huge loss or not. The Company Law Board was primarily concerned about the validity of the sale of shares of the third respondent company in the .....

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t, there is a reference to the transfer of two properties. But there is no reference to the share transfer. But in a reply sent by the appellant to the second respondent on 5.1.2007, there is a vague reference to share transfer without any further detail. This statement in the mail dated 5.1.2007, cannot be taken to be conclusive. In any case, there is no equity in favour of the second respondent. He is not a person who has bailed out the third respondent when it was in distress, to claim equity .....

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rporated in India is sold outside India for a consideration of one GBP, shocking the conscious of any court, the same can be rejected as an isolated instance not warranting an action under Sections 397 and 398 of the Companies Act. Therefore, the said argument also deserves to be rejected. - Decided in favour of appellant. - Company Appeal No.3 of 2011 - Dated:- 16-4-2015 - V.Ramasubramanian J For the Appellant : Mr.H.Karthik Seshadri For the Respondents : Mrs.Ambili Menon, Mr.Sanjay Kumar Judgm .....

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e filing of the above appeal are : (i) The appellant herein was carrying on business in partnership and was actually acting as a buying agent of the third respondent. The third respondent is a company incorporated under the laws of England. The first respondent was incorporated in India on 7.8.2002 as a private limited company, with a different name. Thereafter the first respondent company acquired the partnership business of the appellant in November 2002. (ii) The authorised capital of the fir .....

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s of the third respondent company namely HSBC Bank, initiated action against the third respondent in England, which resulted in the appointment of the fourth respondent as Joint Administrative Receivers, on 20.4.2006. The Joint Administrative Receivers sold all the shares held by the third respondent in the first respondent company to the second respondent for just one British Pound Sterling. (v) Upon coming to know of the said act and terming it as an act of oppression and a breach of his pre-e .....

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fer of the Registered Office from Coimbatore to Tirupur was null and void. (vi) It appears that on 04.02.2008, the Company Law Board directed the parties to work out the possibility of a settlement. The appellant sought certain details, before he could initiate the talks of settlement. The Company Law Board passed an order on 28.04.2008, directing the respondents to furnish all details by 07.05.2008 and to list the matter for hearing on 19.06.2008 and 20.06.2008 if there was no settlement. (vii) .....

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the preliminary issue of maintainability. The issue of maintainability was raised on the ground that what was under challenge was a transfer of shares that took place under the Insolvency Laws of the United Kingdom and that therefore, the Company Law Board in India would not have jurisdiction to deal with the same. (ix) However, the appellant claims that he argued only the applications for impleading and amendment. (x) Thereafter the Company Law Board took up the main petition for adjudication a .....

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oppel, waiver, latches etc., in seeking enforcement of his pre-emptive rights or not. 5. Towards the end of para 8 of its decision, the Company Law Board held that it had jurisdiction to entertain a dispute regarding the sale in United Kingdom, of the shares of the first respondent held by the third respondent. After holding so, the Company Law Board recorded a finding on facts that the appellant was aware of the appointment of Receiver through Annexures A14, A15 and A16 and that the appellant o .....

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the appellant was guilty of delay and laches and hence lost his rights. 6. Interestingly, the Company Law Board also recorded in para 15 of its order that the appellant could not make out a prima facie case of oppression, other than the violation of pre-emptive rights. On these grounds, the Company Law Board rejected the petition and the appellant is before this Court. 7. Since an appeal under Section 10-F of the Companies Act, 1956 can be maintained only on questions of law, I have to see whet .....

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law? (ii) Whether the Company Law Board was right in holding that the appellant was guilty of acquiescence, waiver and laches? (iii) Whether the Company Law Board was right in throwing out the plea of pre-emptive right of purchase of the shares guaranteed to the appellant under the Articles of Association of the Company? QUESTION NO.(i): 8. It is seen from the order of the Company Law Board that the respondents raised a preliminary objection about the maintainability of the Company Petition on t .....

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a company incorporated in India, held by a company incorporated in United Kingdom would be governed by the Indian Companies Act. After pointing out that the principle of lex situs had to be applied to the shares in question, the Company Law Board held that an Indian Court would have jurisdiction even over foreign companies, if they carry on business within the jurisdiction of the Courts in India. Therefore, the Company Law Board concluded in para 8 that the Bench had jurisdiction to entertain a .....

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rved his rights to initiate suitable legal proceedings in United Kingdom under the Insolvency Laws of United Kingdom. 10. But the Company Law Board failed to look into one important aspect. The shares of the first respondent company held by the third respondent, no doubt constituted a property of the third respondent. But the extent to which the third respondent was entitled to transact upon the said property or deal with the said property, was always subject to the Indian Laws. This can be appr .....

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s. Under Section 36(1) of the Act, the Memorandum and Articles, when registered, shall bind the company and the members thereof to the same extent as if they respectively had been signed by the Company and by each member and contained covenants on its part and his part to observe all the provisions of the Memorandum and of the Articles. 12. Therefore, the third respondent, by virtue of being a shareholder in the first respondent company was bound by the terms and conditions of Memorandum and Art .....

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111 as to when a company can refuse to register the transfer of or the transmission by operation of law, of the right to any shares. There are provisions for maintenance of Register of Members and for filing of Annual Returns, containing the details including the details of the members. 15. Therefore, it is clear that any transfer or even a transmission by law, can take place only in accordance with the procedure prescribed in the Companies Act, 1956. What the Company Law Board has omitted to se .....

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in England, the purchaser cannot do anything except to come to India and seek redressal in the manner provided by the Indian Companies Act. 16. The Company Law Board has omitted to see another important aspect. Since the first respondent is a Private Limited Company, there were no takers for the shares held by the third respondent in the first respondent company, before the Insolvency Court in United Kingdom. Consequently, the the second respondent, who happens to be the Director of the first r .....

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t and kept the appellant away from the whole episode and bought all the shares for a token consideration. Suppose any one other than the second respondent had purchased the shares, they would have faced a formidable task in getting the transfer recognized and registered in India. Therefore, the attack of the appellant was not really to be construed as an attack on the procedure adopted by the Insolvency Court in United Kingdom. It was an attack on the conduct of a Director, who held a fiduciary .....

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st question of law is to be answered in favour of the appellant. QUESTION NO.(ii):- 19. The second question of law is as to whether the Company Law Board was right in holding that the appellant was guilty of acquiescence, waiver and laches. It is contended by the respondents that waiver is a question of fact and that once the Company Law Board has recorded a finding on the question of waiver, it is not possible for this Court to sit on appeal over the said finding of fact, especially in view of .....

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nditions. But waiver must be specifically pleaded and the burden of proof is upon the party pleading the same to show that a waiver actually took place. Waiver should be a voluntary and intentional relinquishment of a known right, as held in Provosh Chandra Dalui v. Biswanath Banerjee [AIR 1989 SC 1834]. But the party to whom waiver is attributed should be aware of the right that he was waiving. 21. As held by the Privy Council in Vellayan Chettiar vs. Government of Province of Madras [AIR 1947 .....

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Resolution dated 18.09.2006. But the meeting of the Board was purportedly held at Leeds in the United Kingdom. According to the appellant, he had no notice of the meeting of the Board, despite the appellant being the Managing Director. Therefore, the appellant contends that the said Board Meeting held on 18.09.2006 and the Resolution passed therein are all void in view of the decision of the Supreme Court in Parameswari Prasad Gupta vs. Union of India [(1973) 2 SC 543]. It is also contended by .....

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ion about the fact that the Articles of Association of a Private Company constitute a contract inter se between the shareholders. Therefore, any transfer of shares should be in accordance with the Articles of Association. As held by the Supreme Court in Smt.Claudie Lila Parulakar vs. Sakal Papers Pvt. Ltd., [AIR 2005 SC 4074], the requirement of the Articles of Association must be complied with, before a valid transfer could be effected. 24. It is also true that a contractual right can always be .....

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olutely no evidence for the Company Law Board to come to the conclusion that the appellant was aware of the intended sale and that he still failed to exercise the right, leading to waiver. 26. As an alternative to the plea of waiver, the respondents pleaded estoppel. According to the respondents, estoppel by conduct is established in this case. In joint Chief Controller of Imports and Exports vs. H.R. Trading Company [(1964) ILR 2 Mad. 224], relied upon by the learned counsel for the respondents .....

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rule of equity intended to operate as a check on the conduct of parties. Therefore, there must be clear evidence to show that there was estoppel by conduct. 28. The finding of the Company Law Board that there was acquiescence on the part of the appellant and that the appellant is guilty of laches, does not appear to be correct. In B.L.Sreedhar vs. K.M.Munireddy [AIR 2003 SC 578], the Supreme Court summarized the doctrine of acquiescence in the following words:- "If a person having right, an .....

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scence, under such circumstances as that assent may be reasonably inferred from it, and is no more than an instance of the law of estoppel by words or conduct."(De Buasche v. Alt.L.R.8 Ch.D.286 (1314). Acquiescence is not a question of fact but of legal inference from facts found (Lata Beni Ram v. Kundan Lall. L.R.261 Ind.Ap.58(1899)". 29. Merely because estoppel was given an elevated status, along with other equitable principles such as election and family settlement, in S.Shanmugam P .....

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d estoppel against the appellant. 30. In Indira Bai vs. Nand Kishore [1990 (4) SCC 668], the Supreme Court held that estoppel is a rule of equity flowing out of fairness striking on behaviour deficient in good faith. Therefore, what is important is that it is a rule of equity and that it must flow out of fairness. I do not know how the respondents can be said to have acted with fairness. In the course of hearing of this appeal, the appellant expressed willingness to purchase the entire sharehold .....

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t set up estoppel against the appellant. 32. Lastly, let me take up the question of laches. I do not know how the plea of laches is set up against the appellant. If we have a look at the sequence of events, it is seen that the fourth respondent was appointed as Administrative Receiver for the third respondent company on 20.04.2006. It appears that paper publications were effected in the Financial Times on 05.05.2006 and 23.05.2006 and the shares were sold on 21.09.2006. 33. The respondents have .....

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he appellant was informed only on 03.08.2006 that the second respondent was likely to buy out the company and that thereafter a Board Meeting was held on 18.09.2006. The Company Law Board relied upon a mail dated 09.10.2006 sent by the appellant to the Receiver. In the mail, the appellant seems to have protested only about the non-payment of his expenses. Therefore, the Company Law Board came to the conclusion that the appellant did not object to the sale of the shares. 35. But the above conclus .....

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titute acquiescence, estoppel etc. 36. If the time taken by the appellant from August 2006 when the transfer took place, up to March 2007 when he filed the Company Petition, would constitute a delay, defeating the very valuable rights of the appellant, I do not know when the appellant ought to have approached the Company Law Board. 37. The learned counsel for the respondents 3 and 4 relied upon the "maxims of equity" elicited in Snell's Principles of Equity (27th Edn.) which say (1 .....

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ed out to the Receivers that the appellant also had a preemptive right. Therefore, it is not up to the second respondent to set up these pleas against the appellant. 38. The second respondent has filed a counter affidavit. The focus in the counter affidavit is primarily on the extensive investment made by the second respondent in the first respondent company and the amount realizable by him. But unfortunately, one wrong cannot set right another wrong. It is out of the scope of the present petiti .....

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ly in favour of the appellant. QUESTION NO.(iii) 39. The last question of law that arises for consideration is as to whether the Company Law Board was right in throwing out the plea of pre-emptive right of purchase of the shares guaranteed to the appellant under the Articles of Association of the Company. 40. There is no dispute about the fact that Article 7 of the Articles of Association contains a specific provision with regard to transfer of shares and their valuation. Article 8 mandates that .....

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ctor of the company. The copy of the resolution allegedly passed on 18.9.2006, contains a unilateral declaration that the appellant was informed of the intended sale on 3.8.2006 and that he also indicated that it would be in the interest of the overall benefit of the Indian business that the second respondent bought the Indian arm. But such a unilateral statement cannot be accepted. In the mail dated 3.8.2006, sent by the second respondent to the appellant, he had merely indicated that he was li .....

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have still to sort out the contract. Can you please advice me as to what I may need to do to get the share transfers from the Company to me. Also I cannot remember if you were still holding some of the shares as a nominee. No doubt you will need to take some advice but please try to get back to me tomorrow if you can so that I can get the deal done before they forget. I am sure you will have some questions which I will try to answer. Best regards, Chris." It will be clear from the above mai .....

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party and in which details regarding the number of shares sold and the sale consideration were not mentioned, was void and the decisions taken thereon cannot bind the appellant. 42. The contention of the learned counsel for the appellant that the sale of the entire shareholding of the third respondent in the first respondent company cannot be construed strictly as a sale by an Official Assignee in respect of the property of an insolvent, cannot be easily rejected as outlandish. It is seen from t .....

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take note of the Articles of Association. Moreover, the Receivership itself appears to have lasted only till the oversees businesses were sold out. In a mail sent by the second respondent, filed as Ex.A17, he had informed the staff of the third respondent that he had completed an agreement with the fourth respondent to take the UK businesses out of Receivership. Therefore, it appears that the third respondent did not go bankrupt, leading to the court appointing some one like an Official Assignee .....

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pondent had agreed in principle to transfer the Indian operations to the second respondent. But still there is no indication in the said mail that the shares were to be transferred for one British Pound Sterling. 44. Mr.Sanjay Kumar, learned counsel for the respondents 3 and 4 invited my attention to the mails dated 13.9.2006, 2.10.2006, 9.10.2006, 20.10.2006, 28.11.2006, 5.1.2007 and 12.1.2007, to show that the appellant never exhibited any interest in exercising his preemptive right. On the co .....

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re transfer. But in a reply sent by the appellant to the second respondent on 5.1.2007, there is a vague reference to share transfer without any further detail. This statement in the mail dated 5.1.2007, cannot be taken to be conclusive. In any case, there is no equity in favour of the second respondent. He is not a person who has bailed out the third respondent when it was in distress, to claim equity in his favour. He has just paid one GBP for the entire shareholding of the third respondent in .....

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