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Industrial Development Bank of India Ltd. Versus Parmeshwari Fabrics Private Limited and Others

2016 (4) TMI 176 - BOMBAY HIGH COURT

Maintainability of petition before the Company Law Board under Section 111A of the Companies Act 1956 - amalgamation - Held that:- Section 10F of the Act engulfs the requirement of the existence of the question of law arising from the decision of the CLB as an essential pre-condition for the maintainability of the appeal thereunder. Section 10F defines the parameters of inquisition by the appellate forum depending on the nature of the order impugned and the nature of the type of the order under .....

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LB was not an application simplicitor to hold an inquiry as it deems fit to find out whether there has been a contravention of any law for the time being in force and direct any company to rectify its register or record. The question that was required first to be established was whether :-

(a) The respondents 1 to 3 and 8 to 11 had any obligations to the erstwhile UWB ;

(b) Whether the respondents have committed a breach of those obligations ; and if answer to these two iss .....

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3 & 8 to 11 have breached the Articles of Agreement, still in view, that cannot be contravention of any law.In fact, the Company Law Board while signing off, made it clear that dismissal of the petition would not bar the appellant from availing any other remedy as may be available in law. Section 111A(3) does not cover a situation of transfer of shares in violation of a private agreement. - COMPANY APPEAL NO.10 OF 2008 IN CLB/COMPANY PETITION NO.14 OF 2007 - Dated:- 26-2-2016 - K.R.SHRIRAM,J For .....

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ed 30.9.2006 issued by the Government of India, Ministry of Finance, Department of Economic Affairs (Banking Division) under Section 45(7) of the Banking Regulations Act 1949, erstwhile United Western Bank (UWB) amalgamated with the appellant. The scheme of amalgamation came into effect on 3.10.2006. From the prescribed date of the scheme, the properties and assets of the erstwhile UWB got transfered to and became the properties and assets of the appellant. On the same footing, all liabilities, .....

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it came to their notice that the erstwhile UWB had entered into an Articles of Agreement on 26.11.2002 with one Ashish Shivprakash Makharia who represented the other members and associate enterprises of the Makharia group under which the erstwhile UWB had a pre-emption right in respect of transfer of any share held by Makharias in UWB as and when they desired to dispose of any of their investments in the said shares. Such shares were to be offered to the nominees of erstwhile UWB and if they we .....

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es to respondent no.9- L & T Finance Limited and L & T in turn, has on 5.9.2006 transferred 4,50,000 shares to respondent no.7 Kotak Securities Limited. It also came to light, according to the appellant, that the respondent nos. 1, 2 & 3 had also pledged 16,80,000 shares in favour of 5th & 6th respondents and Canara Bank Limited. According to the appellant, these transfers as well as the pledge were in violation of the terms of the articles of agreement and therefore, they filed .....

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maintainability of the petition under Section 111A of the Companies Act, 1956. 2 After hearing the parties, the Company Law Board was pleased to dismiss the petition on the ground that the petition was not maintainable. The appellant has challenged the said order dated 7.2.2008. The short point in this appeal is- whether the petition was maintainable before the Company Law Board under Section 111A of the Companies Act 1956 ? This appeal came to be admitted on 19.9.2008. 3 The sub-sections of sec .....

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res within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the [Tribunal] and it shall direct such company to register the transfer of shares] (3) The [Tribunal] may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the .....

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tory or company to rectify its register or records ] (4) to (7)........... 4 Therefore, this section applies only to a company which is not a private company. In other words, to a public company. Subsection 2 also states that the shares are freely transferable and the companies should register the transfer of all shares and if the company refuses to register the transfer of shares within two months without sufficient cause, the transferee may appeal to the CLB which shall direct such companies t .....

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vention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (SEBI Act) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) or any other law for the time being in force, the CLB may, on an application made by the company, within two months from the date of transfer of any shares held by a depository or from the date on which the instrument of transfer or intimation of the transmission was delivered to the company, as t .....

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of Respondent nos.5 & 6 were in contravention of any law for the time being in force. The CLB held that the petition as filed is basically alleging breaches of the Articles of agreement on the part of the Makharias and in other words, breach of contractual obligations in respect of transfer of shares and that was not a ground specified in section 111A (3) for rectification of register. I agree with the conclusion of the Company Law Board in the impugned order. 6 The counsel for the appellan .....

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n at all to the facts of the present case. In that case the subject matter was under Section 111A(2). The counsel for the appellant in that case had argued that the expression sufficient cause used in Section 111A(2) should be understood only in the light of the three grounds enumerated under sub-section (3) of section 111A of the Act, which authorized the Company Law Board to direct any depository or a company to rectify its registers or records and the company cannot refuse to register the tra .....

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. The court held that the declaration of free transferability contained in sub-section (2) of section 111A of the Companies Act must be understood in the background of pre-existing legal position that the Articles of association of the company could restrict the rights of the shareholders to transfer his shares and all that section 111A declares was that such a right cannot be restricted. Paragraphs- 45, 46, 47, 51 to 54 of the said judgment read as under :- 45 The only question which still rema .....

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the light of the various grounds enumerated under Sub-section (3) of Section 111A of the Act, which authorized the Company Law Board to direct any depository or a company to rectify its registers or records. Learned counsel further argued that in view of the language of Sub-section (2) of Section 111A of the Companies Act which declares that the shares of any company shall be freely transferable, the conclusion such as the one suggested by him is irresistible and the company cannot refuse to re .....

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rce. Obviously, Parliament thought it fit to authorise the Company Law Board to look into the complaints of the acquisition of shares in contravention of law and take appropriate action in that regard as nothing done in contravention of law shall be permitted to subsist. The scope of the power under Sub-section (3) conferred on the Company Law Board is limited only to the acquisition of shares in contravention of law, but violation of statutory law is not the only infirmity in the matter of acqu .....

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cluding those shares, such a contract is enforceable by a grant of specific performance and creates an equitable interest in the shares in favour of the lender. A subsequent equitable mortgagee of the shares, who proposes to deal with the shares in such a way as to cause a breach of that contract will be restrained by injunction if he acquired them with actual knowledge of the contract." 47.1 This position of law stated by Palmer is based on a decision of the Court of Appeal reported in Swi .....

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ed by a prior contract could be injuncted from transferring the shares. It logically follows that the transfer if made and registered even before the aggrieved party could obtain an order of injunction, the transfer could be declared illegal in an appropriate action before a court of law. In which case the company would be bound by such a declaration made by the court, of the illegality arising out of a breach of the contractual obligation and bound to give effect to the decree of the court to r .....

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ction (2) of Section 111A of the Act takes within its sweep not only those contingencies contemplated under Subsection (3) but, there can also be circumstances and reasons other than those contemplated under Sub-section (3) which might require the company to refuse to register the transfer of shares and such a refusal in my view would be refusal for "sufficient cause". 53. Thus in my view, there can be various reasons, though it is not possible to enumerate all of them and it is to be .....

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ifferent situations. Under sub section 2, the situation arises before the shares are transferred and in sub section 3, it is after the shares are transferred. The expression sufficient cause is far wider than the expression in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 or any other law for the time being in force. Obviously, the Parliament thought it .....

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fficient cause , in a given case could also include contravention of some obligations of the transferer or some other obligations attached to this shares, like for example, when certain shares are pledged to a lender or where the transferer has entered into an agreement giving preemptive rights to a third party under an agreement. That is why the expression used under sub section 2 is sufficient cause' whereas the expression used under sub section 3 is specific to mean where after the transf .....

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an agreement enforceable by law. Article 13(3) (a) of the Constitution of India provides that law includes any Ordinance, order, bye-law, rule, regulation, notification, custom or usage having in the territory of India the force of law. Law is the aggregate of legislation, judicial precedent and accepted legal principles. It does not include contract or an agreement enforceable by law. Infact definition of contract itself shows they are two different things. Breach or contravention of an agreeme .....

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rangement entered into by the shareholders of a public company with a 3rd party regarding his own specified shares (either by way of sale, pre-emption or otherwise) do not impinge on free transferability of the shares as contemplated under Section 111A. 10 The counsel also relied on 2010 (5) Bombay C.R.589 Holdings Limited Vs. Shyam Madanmohan Ruia & ors. I am afraid even this judgment is not applicable to the facts and circumstances of the case. There also the issue was of free transferabil .....

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ectors of the company to transfer shares in the name of the transferee subject to the stipulation in section 111A(2) of the Act. The expression freely transferable therein is in the context of the mandate against the Board of Directors to register the transfer of specified shares of the members in the name of the transferee, unless there is sufficient cause for not doing so. The court held that concept of free transferability of the shares of a public company is not affected in any manner if the .....

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of the Supreme Court in 1992(1) SCC 160V.B.Rangaraj Vs. V.B.Gopalakrishnan, as the ratio laid down by the said judgment was not applicable to the present case. In V.B.Rangaraj (supra) the supreme court has held that the shares are freely transferable and the only restriction on the transfer of shares of a company will be as laid down in its Articles, if any. The Apex Court held that the restriction which is not specified in the Articles, therefore, was not binding either on the company or on th .....

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ne reads the petition filed before the CLB in its entirety, the approach of the appellant is that the respondents have breached Articles of Agreement that they had entered into with erstwhile UWB. Under the Banking Regulations Act, the petitioner gets to step into the shoes of erstwhile UWB and gets to enforce the rights that the erstwhile UWB had against those parties. 13 Even assuming the respondent nos.1,2 & 3 have breached the Articles of Agreement, that would, by no stretch of imaginati .....

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the appeal thereunder. Section 10F defines the parameters of inquisition by the appellate forum depending on the nature of the order impugned and the nature of the type of the order under scrutiny. When a question of law is neither raised nor considered by the appellate forum, it would not be a question arising out of its order notwithstanding that it may arise on the findings given. Only a question that has been raised before or decided by the Tribunal that could be held to arise out of this o .....

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