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Darius Rutton Kavasmaneck, Mumbai Versus Gharda Chemicals Limited, Keki Hormusji Gharda, Aban Keki Gharda, A.K. Luke, Almitra H. Patel, And D.T. Desai

Membership of the private company exceeded 50 or not - joint share holdings of the members - exclusion of employee quota - Deemed public company - transfer of five shares of the appellant (singly) to the appellant jointly with his children and wife - according to the respondents resulted in the membership of the 1st respondent company exceeding 50 thereby rendering the 1st respondent a public company. - Held that:- In view of the condition imposed in Section 3(1)(iii)(b)(ii), even if the emp .....

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n of fifty members under Section 3(1)(iii)(b) of the Companies Act, 1956. - The submission of the learned senior counsel for the respondent no.1 that such employee quota share does not remain as employee quota or that there is no bar for transfer of such shares by the employees under Article 59 of the Articles of Association, cannot be accepted. - (i) The number of members of the respondent no.1 has not exceeded 50 by virtue of transfer of shares by the appellant (singly) to the appella .....

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/w. Mr.Rohan Kadam, Mr.Amol Baware, Mr.Abhishek Adke, i/b. Legasis Partners JUDGMENT : This appeal is placed on board in view of the Order dated 28th October,2014 passed by the Supreme Court of India in Civil Appeal No.2481 of 2014 allowing the said civil appeal and remanding the company Petition No.24 of 2010 to this court for deciding the factual enquiry 'whether the transfer of five shares from the appellant (singly) to the appellant jointly with his children and wife resulted in the tota .....

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wife of respondent no.2. 4. On 28th April, 1962, Kavasmaneck and Gharda family constituted a firm called M/s.Gharda Chemicals Industries. On 6th March,1967, M/s.Gharda Chemicals Industries is incorporated as a private company by taking over the erstwhile family firm of M/s.Gharda Chemicals Industries. It is the case of the appellant that the understanding was enshrined in the Articles of Association of the respondent no.1 thereby the promoters and the shareholders agreed not to transfer their sh .....

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of 1990, the implementation of the said resolution came to be stayed. In the year 1990, the appellant herein filed a Company Petition No. 77 of 1990 in this court under sections 397 and 398 of the Companies Act, 1956 against the respondent no.1 and others inter alia praying for winding up of respondent no.1, for appointment of a liquidator and for various declarations. 6. It is the case of the appellant that the appellant and other minority shareholders withdrew the said company petition on 8th .....

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is the case of the petitioner that the definition of the private company under section 3(1)(iii) was prospectively amended so as to amend sub-clause (d) of the fourth condition that a private company must include in its articles and that section 43A is stated to be inapplicable after 13th December,2000. 8. It is the case of the petitioner that on 5th May, 2001 a resolution was proposed to amend the articles of respondent no.1 by introducing sub clause (d) of section (3)(iii). The said amendment .....

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restrained Dr.K.H.Gharda from transferring the shares directly or indirectly held by him. 9. On 14th May, 2010, the Company Law Board dismissed the said Company Petition No.132 of 2009 and held that after the amendment to the Companies Act, 1956 in the year 2000, section 43A was inapplicable, the respondent no.1 did not amend its articles in line with the new definition of private company, the respondent no.1 had become a full-fledged public company and thus Article 57 was consequently invalid. .....

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On 1st September, 2010, this court in case of Messer Holding held that the pre-emption agreement was valid even in the case of a public listed company and overruled the judgment delivered by the learned Single Judge of this court in case of Bajaj Auto vs. WMDC. 12. On 16th October,2010, the respondent no.1 company issued a notice for convening for said Extra Ordinary General Meeting on 12th November, 2010 for deleting Article 57 on the ground that it had been held by the Company Law Board to be .....

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th December,2010, the respondent no.1 issued a letter withdrawing a notice dated 16th October, 2010 as the question of the legality of Article 57 was pending in this court in Company Appeal No.24 of 2010. On 14th June, 2011, this court dismissed the said Company Appeal No.24 of 2010 and held that the respondent no.1 had become full-fledged public company after amendment of the Companies Act 1956 in the year 2000 and Article 57 was consequently invalid being violative of the concept of free trans .....

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he said Special Leave Petition came to be converted into Civil Appeal No.2481 of 2014. 16. On 25th April, 2012 the respondent no.1 issued another notice convening Extra Ordinary General Meeting on 22nd May, 2012 for deleting Article 57 on the ground that it had been held invalid/dead wood by the Company Law Board and this court. On 9th May, 2012, the appellant filed a company application bearing no. 73 of 2012 in Company Petition No.87 of 2010 inter alia praying for amendment in Company Petition .....

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Board that she did not propose to move or support the proposed resolution for deletion of Article 57. 18. On 21st May, 2012, the Company Law Board passed an order in the said Company Application No.73 of 2012 permitting the respondent no.1 to hold the Extra Ordinary General Meeting but made it clear that if any resolution is passed by the respondent no.1 in the Extra Ordinary General Meeting, the same shall be kept in abeyance. Insofar as the relief for amendment to the company petition is conc .....

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dated 21st May, 2012. At the same time, the appellant filed company application bearing no. 91 of 2012 inter alia praying for further amendment of Company Petition No.87 of 2010 and to bring on record the challenge to a meeting held on 22nd May, 2012 and for injunction against the respondent no.1 from implementing the purported resolution passed on 22nd May, 2012. 20. On 10th August,2012, the Company Law Board heard Company Application No.73 of 2012 which was for amendment and Company Applicatio .....

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of 2012 and vacated the ad-interim order dated 21st May, 2012. 22. On 27th August, 2012, the appellant filed an appeal bearing (L) No.41 of 2012 inter alia challenging the order dated 13th August,2012 to the extent that it vacated the injunction restraining the respondent no.1 for implementing the resolution dated 22nd May, 2012. By an order dated 30th August,2012, this court in Appeal (L) No.41 of 2012 restrained the respondent no.1 from taking any steps pursuant to its resolution dated 22nd Ma .....

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enging the convening of the meeting was rightly allowed. This court dismissed the Appeal (L) No. 45 of 2012 with regard to the implementation of the resolution passed on 22nd May, 2012. This court adverted to the conduct of the Extra Ordinary General Meeting and prima facie found the same to be satisfactory and accordingly upheld the order of the Company Law Board which had vacated the injunction restraining the respondent no.1 from implementing the resolution dated 22nd May, 2012. 24. On 21st J .....

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91 of 2012 in its entirety and held accordingly. 25. In the month of February/March 2013, the appellant herein filed Special Leave Petition No.13640 of 2013 challenging the order dated 20th December,2012 passed by this court. The Supreme Court has granted leave in the said Special Leave Petition. The said Special Leave Petition has been accordingly converted into Civil Appeal No.2488 of 2014. 26. In the month of 2013, the appellant filed Company Appeal No. 31 of 2013 against the order dated 21st .....

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to whether the transfer of five shares of the appellant (singly) to the appellant jointly with his children and wife registered in the total members of respondent no.1 exceeding 50 and the effect thereof on Article 57. The Supreme Court held that though the High Court had noted the submission at paragraph (90), it did not record any finding in this regard. 28. Mr.Samdhani, learned senior counsel for the appellant invited my attention to various statutory provisions of Companies Act, 1956 such as .....

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4 and also to various paragraphs of the order passed by the Supreme Court on 28th October,2014 in Civil Appeal No.2488 of 2014 disposing of the said Civil Appeal No.2488 of 2014. 29. It is submitted by the learned senior counsel that under section 41 of the Companies Act, 1956, any person who agreed to become a member of the company and whose name is entered into the register of the members, shall be a member of the company. He submits that for the purpose of counting 50 members under section 3( .....

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al Lakhani vs. Parke Davis (India) Limited, 2004(1) Bom.C.R.120 and in particular paragraphs 28, 29 and 32. 30. It is submitted that for the purpose of counting 50 members under section 3(1)(iii), A, A1 and A2 will not be counted as three members but only A will be counted as a member. He submits that if the shares of the company are held in the name of (A, A1) (B,B1), (C, C1) and (E employee category), there would be seven members under section 71. However, for the purpose of section 3(1)(iii) .....

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if there be any conflict, decision of the fist named shareholder will prevail over the rest. He submits that by Article 3, the number of members of the respondent no.1 is restricted to 50. By Article 52, the company is prevented from registering any transfer if the number of shareholders exceed by the reason of such transfer 50 and the company is under obligation to maintain the number below 50. It is submitted that respondent no.1 had refused to transfer shares in past on a plea that in its op .....

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sion of the respondent no.1 that such transfer did not exceed the membership above 50. He submits that the respondent no.1 thus cannot be allowed to contend now anything contrary to such transfer effected by respondent no.1 in favour of the appellant and his family members and cannot be allowed to take advantage of its own wrong even if such decision was wrong. 33. Learned senior counsel for the appellant placed reliance on Article 59 (a) and (b) and would submit that under the said Article, the .....

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s shares to the family members, the shares will still remain under the employee quota and such family members must be excluded while counting 50 members of the respondent no.1. He submits that the number of 50 members has thus not crossed through the appellant had transferred twenty five shares each in the joint names of himself respectively with his wife and three children as in each case he was the only member. 34. It is submitted that the number of members shall not be confused with the creat .....

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llant had 7,555 shares of the respondent no.1. As on 31st December,2001, the appellant was shown as members in respect of 7,535 shares and other 20 shares were shown in the name of other family members of the appellant. He submits that some of the employees have transferred some shares to their family members illegally and in violation of Articles of Association of respondent no.1. Even if those members are considered as members, it would not exceed 50. He also invited my attention to the averme .....

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hip of the respondent no.1 does not exceed 50. 37. It is submitted by the learned senior counsel that the Articles of Association of the respondent no.1 which have to be considered as agreement between the parties clearly provides as to whether the employees' shareholders are to be considered as members of respondent no.1 or not. It is submitted that under Article 101 of the Articles of Association of the respondent no.1, the dividend is paid by the respondent no.1 only to the first holder. .....

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rcial Tax Officer, Calcutta & Ors., AIR 1966 SC 12 and in particular paragraph 8, judgment of Supreme Court in case of Haryana State Cooperative Land Development Bank Ltd. vs. Haryana State Cooperative Land Development Banks Employees Union & Anr., (2004) 1 SCC 574 and in particular paragraphs 9 and 10 in support of his submission on the effect of a proviso to the main provision. He submits that the joint shareholding has to be treated as one. It is submitted that if the names of the emp .....

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deprive the company from certain privileges and exemptions which can be enjoyed by a private company. He submits that under section 43 of the Companies Act, 1956 it is not provided that the private limited company shall be ceased to be a private limited or would become public limited company if the membership exceeds 50. 39. It is submitted that fiction is created to deprive a private limited company of certain privileges and exemption without any change in status of the company from private li .....

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er the obligation to do so but for the limited legal fiction. He submits that such fiction has to be construed strictly and cannot be extended by importing another fiction. In support of this submission, learned senior counsel placed reliance on the judgment of Supreme Court in case of Maruti Udyog Ltd. vs. Ram Lal & Ors., (2005) 2 SCC 638 and in particular paragraph 38, the judgment of Supreme Court in case of Mancheri Puthusseri Ahmed & Ors. vs. Kuthiravattam Estate Receiver, (1996) 6 .....

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ic company, the right of pre-emption can still be maintained between the promoters and the shareholders. The Articles of Association constitutes an agreement between the shareholders inter se and as such the right of pre-emption can be continued. He submits that when a fiction is created, the purpose is limited and thus second fiction cannot be created beyond such purpose. He submits that if a particular consequence is provided in the provision for default, no other consequence can be considered .....

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the said order passed by this court in the Company Appeal (L) No.45 of 2012, this court had dismissed the appeal filed by the respondents impugning the amendment allowed by the Company Law Board. No Special Leave Petition came to be filed by the respondents against the said order. He submits that the entire efforts while arguing Company Application No.91 of 2012 was in context of injunction and not relating to the challenge to the resolution passed by the respondent no.1. He submits that no fin .....

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the grounds of appeal filed by the appellant in this court against the said order passed by the Company Law Board. 42. It is submitted by the learned senior counsel that the leave is granted by the Supreme Court against the order passed by this court in Company Appeal (L) No.45 of 2012. Various observations thus made by this court in the said judgment cannot be relied upon by the respondents against the appellant. 43. Mr.Dhond, learned senior counsel for the respondent nos.1 to 3 on the other h .....

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arlier Extra Ordinary General Meeting and the resolution proposed by the board of the respondent no.1. He submits that the said meeting was convened so as to give effect to the amendment of the provisions of the Companies Act, 1956. He placed reliance on section 169 of the Companies Act, 1956. 44. Learned senior counsel for the respondent nos. 1 to 5 invited my attention to the order dated 13th August,2012 passed by the Company Law Board and in particular paragraphs 19 and 20 thereof to show as .....

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uct of the meeting by Dr.K.H.Gharda before the Company Law Board. The Company Law Board had allowed the first amendment sought by the appellant however adjourned the application for second amendment at the request of the appellant. He submits that the appellant had argued the application for amendment to the impugned resolution before the Company Law Board and then took adjournment. Company Law Board had recorded that the argument in Company Application No.73 of 2012 and in Company Application N .....

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ourt in the Special Leave Petition arising out of the said order and judgment delivered by this court and in particular grounds raised in paragraph (s) to (u). 46. Learned senior counsel for the respondent nos. 1 to 5 also invited my attention to various paragraphs of the impugned order passed by the Company Law Aboard in which various orders passed by this court were quoted. It was held by the Company Law Board that the Company Application No.91 of 2012 has been considered and disposed of. It i .....

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of 2012 and would submit that no such ground is raised in the appeal memo that the arguments were advanced by the appellant only in respect of injunction and not the amendment. 47. Mr.Dhond, learned senior counsel for the respondent nos. 1 to 3 submits that Supreme Court while remanding the matter to this court has made it clear that this court has to decide only the question of fact of the membership having exceeded 50. He submits that the Supreme Court has already allowed the civil appeal fil .....

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the proceedings between the parties are also pending before the Company Law Board and thus this court cannot go beyond the mandate of the remand of the Supreme Court. In support of this submission, learned senior counsel invited my attention to some of the paragraphs of the order passed by the Supreme Court and more particularly paragraphs 96, 97 and 98. It is submitted that since the learned Single Judge of this Court in the company appeal had not rendered a finding of fact whether the members .....

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render the consequence of the company ceasing to be private and would become public and/or the appellant being estopped from contending to the contrary. He submits that the consequence of such finding once rendered by this court will automatically follow, as a matter of law. The findings that has to be rendered by this court would be primarily based on question of fact. If this court renders any further finding on the consequence, it would partake of a question of law which is not a subject matt .....

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s that this court as well as Company Law Board has independently rendered a finding that the members had exceeded 50 and the respondent no.1 has become public limited company. He placed reliance on paragraphs 17 and 21 of the order passed by the Company Law Board. It is submitted that the findings rendered by this court in the said judgment are not set aside nor the said judgment of this court is stayed by the Supreme Court while admitting the Special Leave Petition filed by the appellant and co .....

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w Board per-se. It was also not the case of the appellant that the Company Law Board had failed to record their submissions on this point. He invited my attention to the grounds raised in memo of appeal filed before this court and more particularly grounds raised in paragraphs (S) and (DD). It is submitted that even at the time of arguments before the Company Law Board or in the memo of appeal filed before this court, the question whether the membership of the respondent no.1 had exceeded 50 or .....

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at point was never pressed before the learned Judge and it was given up. He submits that the appellant did not make any application before this court alleging that the submissions advanced by the appellant on the question whether the membership of the respondent no.1 had exceeded 50 or not was though raised but was not dealt with by this court in the judgment. 53. It is submitted by the learned senior counsel that if according to the appellant, the alleged concession was not made by the appellan .....

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ded 50. He submits that this court thus cannot take a different view in the matter. He submits that though the ground is raised in the Special Leave Petition filed by the appellant that the finding had been given by this court was without any pleadings or evidence and that the said issue had not raised before the Company Law Board, the same could not have found place in the appeal before this court, the said finding of the High Court is not set aside by the Supreme Court. The Special Leave Petit .....

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es it clear that a private company must limit the number of its members to 50. He submits that under section 3(1)(iii)(b) it is clearly provided that whilst counting towards those numbers, the two distinct classes specified in section 3(iii)(b) (i) and (b)(ii) must be excluded, i.e. (a) persons who are in the employment of the company i.e. employees, (b) persons who having been formerly in the employment of the company, were members of the company while in that employment and have continued to b .....

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Pennington on Company Law. Reliance is placed on section 28(1) of the UK Companies Act, 1948 which defines a private company and would submit that the said definition under the said Act is in parimateria with section 3(iii) of the Companies Act, 1956. He submits that only an actual employee or ex-employee is to be excluded, is implicitly recognized in the said passage of Pennington on Company Law. He submits that the said provision under the Companies Act, 1956 makes it clear that what the sect .....

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excluded is not supported by the said provision under the Companies Act, 1956. There is no such quota in law. He submits that there is no permanent law i.e. an employee quota share remains an employee quota share even when it gets into the hands of someone other than an employee. To convert a share into something akin to a covenant running with the land will be to turn the law on its head. 58. It is submitted by the learned senior counsel that the factum of their predecessors in interest whethe .....

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assist the case of the appellant. There is no bar thereunder to transfer the shares. At most, the company is given an option to give notice if it so chooses, it may choose not to. There is no such things as an employee quota shares. 59. Insofar as the issue of joint membership raised by the appellant is concerned, learned senior counsel for the respondent nos.1 to 3 placed reliance on the proviso to definition of private company under section 3(1)(iii) and would submit that the said proviso reco .....

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d they and would submit that the same would mean an aggregation of two or more persons. By recognizing the ownership / holding, the proviso draws a distinction between the individual members and joint members viz. members who together hold one common share. He submits that whether the members hold shares in common / jointly they are treated as separate unit which is distinct, separate and independent from, of their constituents i.e. the sums treated as different from its constituent parts. Learn .....

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. He also placed reliance on the judgment of the Punjab & Haryana High Court in case of Jarnail Singh & Anr. vs. Bakshi Singh & Anr. (1959) 30 Company Cases 192. 61. It is submitted by the learned senior counsel that the object of the proviso to the section 3(1)(iii) is only to treat the shares held jointly by two persons as one single member entity / unit, for the sole and exclusive purpose of the definition of a private company. He submits that the contention of the appellant that .....

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to the first holder under the said provision. Learned senior counsel gave an illustration that if the shares are held by four partnerships, who have as their partners A & B, A & C, A & D and A & E, then by reason of the proviso there will be four members, AB, AC, AD and AE and not five members i.e. A, B, C, D and E and even more certainly not one member viz. A. 62. It is submitted by the learned senior counsel that the said fiction is only created for this definition of the priva .....

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respects since his name even otherwise appears in the register of members. He submits that once both principles are applied, there can be no dispute that the membership of the respondent no.1 had consequently exceeded 50. 63. It is submitted that on 30th October, 2001, the appellant had applied to transfer twenty five shares held by him to five shares held jointly each with his wife, his son and two daughters. The said transfer was effected by the respondent no.1 on 31st December, 2001. On 14th .....

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d out by the respondent no.1, four new joint holders entities / units were added to the membership i.e. the appellant and his wife, the appellant and his son, the appellant and his daughter and the appellant and his daughter. He submits that as required by section 3(1)(iii)(b), the current employee and the exemployee have not been counted towards the membership. 65. It is submitted by the learned senior counsel that the appellant has been aware of the fact that the membership of the respondent n .....

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comment on the colour chart submitted by Mr.Samdhani, learned senior counsel for the appellant and more particularly the entry of Mr.Bhanushali who is having Folio No.135 and would submit that the said Mr.Bhanushali was a employee of respondent no.1. He submits that a person who is claiming through an employee is not required to be excluded for the purpose of calculation of membership. The sons of the employee have to be included as member. 67. Insofar as observation made by Supreme Court on in .....

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tion 3(1), (a), (b) and (c). He submits that insertion of clause (d) in section 3(1) is prospective in nature and not retrospective. He submits that paragraphs 96 and 97 of the Supreme Court judgment delivered in Civil Appeal No.2481 of 2014 has to be read with paragraph (90) of the judgment of this court in Civil Appeal No.2481 of 2014. He also invited my attention to various findings recorded at pages 23, 28, 40, 41 and 42 of the impugned order passed by the Company Law Board. Learned senior c .....

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of members is concerned, learned senior counsel for the respondent nos. 1 to 5 fairly admitted that the same was a mistake on the part of the respondent no.1. 69. Learned senior counsel then placed reliance on paragraph 14 of the judgment of the Supreme Court in the Special Leave petition filed by the appellant and would submit that it is already held by the Supreme Court that all requirements of section 3(1)(iii) have to be fulfilled for a company to retain its private character. He submits tha .....

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2012 has not been stayed by the Supreme Court. He submits that there is no final adjudication on the issue of deletion of Article 57 by the Supreme Court. The said Special Leave Petition filed by the appellant, which is now converted into Civil Appeal is still pending. He submits that the fact remains that as on date the condition under section 3(1)(iii)(a) viz. to provide for a restriction on a right to transfer shares, no longer exists. A determination of status must take into account conclud .....

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reliance on the judgment of the Supreme Court in case of Needle Industries (India) Ltd. & Ors. (supra) that the effect of sections 43 and 44 of the Companies Act, 1956 were the same viz. that a company within the scope of either section lost all characteristics of a private company and was a public company. 71. Learned senior counsel for the respondent nos.1 to 3 distinguished the judgment of the Supreme Court in case of Union of India & Ors. vs. West Coast Paper Mills & Anr.(supra) .....

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sion of the Company Law Board in case of Jyotirmoy Ghosh & Anr. vs. A. Tosh & Sons (India) Ltd. & Ors. (supra) on the ground that the findings rendered by the Company Law Board in that matter were given on a limited point of maintainability of a petition under section 399 of the Companies Act. He relied upon paragraphs 8.1 of the said decision in support of his submission. 73. Learned senior counsel distinguished the judgment of this Court in case of Dinesh Lakhani vs. Parke Davis (s .....

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d does not in any way confer a inferior status to the second holder since the law recognizes that the right of voting belongs collectively to all the holders of that particular share. 74. Learned senior counsel for the respondent nos.1 to 3 distinguished the judgment of the Supreme Court in case of Reserve Bank of India vs. Peerless General Finance & Investment Co. Ltd. (supra) on the ground that the same is not relevant. He submits that there is no dispute about the general proposition of l .....

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on of law laid down therein in relation to the interpretation of provisos. He submits that however, the said judgment does not bolster the case of the appellant that shares held jointly by one person in four separate and independent sets is to be counted as one single member. 76. Insofar as the submission of the learned senior counsel for the appellant that section 43 of the Companies Act, 1956 only entails a limited legal fiction that a company loses its privilege and exemptions and that it doe .....

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a) Ltd. & Ors. (supra), the Supreme Court has held that the company loses its private character when its membership exceeds 50. 77. It is submitted by the learned senior counsel that in the decision of the Supreme Court in the civil appeal filed by the appellant by which the Supreme Court has remanded the matter to this Court for limited enquiry has held that where the private company limited becomes a deemed public company under section 43-A, the mere fact that it has become deemed public b .....

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of a private limited because (i) its members exceed 50 and/or (ii) the restriction against free transferability in its Articles (Article 57) is consciously deleted. 78. It is submitted that the argument of the appellant is self-defeating. He submits that if the Supreme Court would have held that the respondent no.1 was a private company, the Supreme Court would not have directed this Court to carry out an empty formality or an exercise of finding out the number of members. He submits that the ou .....

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e Petition arising out of the order and judgment of this court in Company Appeal (L) No.45 of 2012. He submits that after introduction of section 44A of the Companies Act, 1956 there are only two types of companies i.e. private company or public limited company. The deemed fiction which was provided in the Companies Act, 1956 has been deleted. He submits that the finding of the Company Law Board that the members of respondent no.1 exceeded 50 is totally perverse. The pleadings filed by the appel .....

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made in the company petition filed by the appellant and also in the appeal memo filed by the appellant before this court in Appeal (L) No.45 of 2012. He submits that whenever the number of members exceeded 50, respondent no.1 was declining transfer of shares. Learned senior counsel placed reliance on the judgment of Supreme Court in case of Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd. & Others (1987) 1 SCC 424 and in particular paragraph 33 and would submit tha .....

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of members crossing 50 was not argued before the learned Single Judge of this court and accordingly no discussion is found in the judgment and order dated 14th June, 2011. He submits that this question was once again raised by the respondent nos.1 to 5 before the Supreme Court and it was effectively denied by the appellant. He invited my attention to pages 509 and 523 of the counter affidavit dated 23rd August, 2011 filed by the respondents and pages 553, 554, 555 and 569 of the rejoinder dated .....

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n this issue, the respondents for the first time placed the material vide their affidavit dated 12th February, 2015 which was responded by the appellant by filing his reply dated 28th February, 2015. 84. Insofar as submission of the learned senior counsel that the issue as to whether members exceeded 50 or not has been already dealt with by this court in the judgment dated 20th December,2012 in Company Appeal (L) No.45 of 2012 is concerned, it is submitted by Mr.Samdhani, learned senior counsel .....

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l placed reliance on the judgment of Supreme Court in case of Kunhayammed vs. State of Kerala, (2000) 6 SCC 359 and in case of Union of India vs. West Coast Paper Mills, (2004) 2 SCC 747. 85. Learned senior counsel for the appellant invited my attention to the grounds 5(AA)(ii),(iii) and (v) in the Special Leave Petition and would submit that the findings in the judgment and order dated 20th December,2012 is specifically challenged by the appellant before the Supreme Court not only on the ground .....

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has crossed 50 and to pass appropriate order thereof. He submits that if the arguments of the respondents are accepted, there was no reason for the Supreme Court to remand the matter to decide the issue of number of the members of respondent no.1. 86. Insofar as submission of Mr.Dhond, learned senior counsel for the respondent nos. 1 to 5 that for the purpose of section 3(1)(iii), joint shareholders are to be treated as one unit and consequently AB, AC and AD are to be treated as three members i .....

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15, 20, 52, 59(a) and (b), 101 and 193 clearly suggests that in case of joint members, the company will recognize only the first member. He submits that when AB is to be treated as one member that one member is 'A'. Similarly in case of AC , the one member is 'A' and so also the AD , the one member will be 'A'. consequently for the purposes of section 3(1)(iii), each of the alleged three units are actually 'A' and they must be counted as one member. 87. It is sub .....

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word of a statute can be construed in isolation. Learned senior counsel gave an illustration i.e. if Mr.'A' is a shareholder in Tata Motors Ltd. and holds 100 shares, he is ineligible to file a petition under section 397 as he would not constitute 10% of the paid up capital. However, if Mr.'A' splits from his single holding to joint holding with 100 individuals, so that his 100 shares are splits into 100 units, i.e. Mr.'A' jointly with B1, B2, B3, …....... B100. &# .....

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Ltd., (2016) 198 Comp. Cas 510 holding in support of the submission that such joint membership cannot be counted as different members and must be counted as one. He submits that twenty five shares in each were transferred individually by the appellant jointly with his wife and three children. The number of members for the purpose of section 3(1)(iii) will not exceed 50 as the appellant continues to remain first name member. He submits that in any event if the joint members are not to be conside .....

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re before the Punjab High Court was totally different. 90. Insofar as judgment of this court in case of Narandas Munmohandas Ramji (supra) relied upon by the respondents is concerned, learned senior counsel for the appellant distinguished the said judgment on the ground that the issue before this court in the said judgment was totally different. There was no issue regarding the manner of counting 50 members but on the contrary the issue was whether the joint shareholder could be held liable on t .....

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5 that employee shares are persons specific and could not be considered in a generic sense and that the reference to Article 59(b) was of no consequence is concerned, it is submitted that the submission of the appellant was that on a fair and purposeful reading of section 3(1)(iii) for the purpose of counting 50 members, the shares held by the employees of the company both past and present are to be excluded. In this case, the respondent no.1 has specifically created an employee quota where the .....

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hares also are subject to the obligation of Article 59(b) and must necessarily be excluded from the counting of 50 members. He submits that the Commentary of Penningon's on Company Law is not relevant and would not assist the case of the respondents. 92. Insofar as submission of the learned senior counsel for the respondents that the consequence of exceeding 50 members is beyond the scope of remand is concerned, learned senior counsel for the appellant submits that the Supreme Court has rema .....

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nsider the effect thereof i.e. whether the respondent no.1 can only lose its privilege and exemption or the right of preemption will not be rendered illegal or invalid. He submits that the Supreme Court has already disposed of the civil appeal filed by the appellant and thus the consequence and effect of the number of exceeding 50 or not will have to be considered by this court. 93. Insofar as submission of the learned senior counsel for the respondent nos. 1 to 5 that section 43 of the Companie .....

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existed. He submits that the issue in the present case is not the effect of the deletion of the Article 57 but the effect of number of members exceeding 50. When the Company Law Board had decided the matter on 14th May, 2010, Article 57 was existing. On the date when the High Court in appeal decided the matter on 20th December,2012, Article 57 was existing. On the date when the Supreme Court passed an order of remand on 28th October,2014, Article 57 has been deleted. 94. It is submitted that th .....

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d 50 when Article 57 was existing. 95. Insofar as judgment of Supreme Court in case of Ram Parshotam Mittal and another (supra) relied upon by the learned senior counsel for the respondent nos. 1 to 5 is concerned, learned senior counsel for the appellant distinguished the said judgment on the ground that admittedly in that case, the company had passed a special resolution on converting itself into a public company and also filing the statement in lieu of prospectus. Supreme court has also clari .....

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e ground that in this case Supreme Court has expressly and categorically considered the status of the respondent no.1 and has held that it would continue to operate as Hybrid Company. 97. It is submitted that the transfer of twenty five shares by the appellant from the single name to himself jointly with his wife and children on 31st December,2001 did not result in the membership of the respondent no.1 exceeding 50 and even if it exceeded 50, it did not render the respondent no.1 a public compan .....

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the judgment of Supreme Court in case of Union of India vs. West Coast Paper Mills (supra) and in particular paragraphs 11, 14 and 41. 99. Insofar as interpretation of proviso to section 2(1)(iii) of the Companies Act, 1956 as sought to be interpreted by the respondent nos. 1 to 5 is concerned, it is submitted that the term 'unless the context otherwise requires' referred in section 3(1) itself suggests that in case of joint shareholding, the same has to be counted as one member. In this .....

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d to vote for the same shares at the same time. He submits that in this case all the notices sent by the respondent no.1 were sent to the first shareholder and not to the joint shareholders. 100. It is submitted by the learned senior counsel for the appellant that the Supreme Court has already held that the respondent no.1 is not a public company but a deemed public company. The deemed public company can have such an article prescribing right of pre-emption with restriction of transferability. H .....

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d the matter back to the High Court after giving findings on the other issues in favour of the appellant. 101. It is submitted that since the civil appeal filed by the appellant has been allowed and if this court takes a view on remand that the members have not exceeded 50, the appeal filed by the appellant under section 10F before this court has to be allowed. In his alternate submission, he submits that if this court comes to the conclusion that the members of the respondent no.1 have exceeded .....

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a hybrid company and thus section 44 of the Companies Act, 1956 does not apply. He submits that no statement in line of prospectus is filed by the respondent no.1 under section 44 of the Companies Act, 1956. 102. Learned senior counsel distinguished the judgment of Supreme Court in case of Ram Parshotam Mittal and another (supra) on the ground that the said judgment does not lay down the proposition of law as sought to be canvassed by the respondent nos. 1 to 5 and thus cannot be treated as bind .....

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thus deserves to be allowed and interim injunction granted by the Supreme Court be continued. 104. Mr.Dhond, learned senior counsel for the respondent nos. 1 to 5 submits that insofar as scope of remand by the Supreme Court of this court is concerned, the court has to decide the issue based on the condition prevailing today and not when the Company Law Board as well as this court had passed the order. He submits that the Supreme Court though has allowed the civil appeal filed by the appellant, S .....

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s that in the facts of this case, the number of members have already exceeded 50. REASONS AND CONCLUSIONS 106. Supreme Court passed an order dated 28th October, 2014 in Civil Appeal No.2481 of 2014 filed by the appellant herein holding that the only other submission of the respondents which is required to be dealt with is regarding transfer of five shares of the appellant which, according to the respondents resulted in the membership of the 1st respondent company exceeding 50 thereby rendering t .....

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dents and to take appropriate decision. 107. This court has to thus consider whether the transfer of twenty five shares of the appellant resulted into membership of the 1st respondent company exceeding 50 thereby rendering the 1st respondent a public company. Learned senior counsel appearing for the appellant and the respondent no.1 addressed this court on this issue and several other issues. 108. I shall now decide the issue as to whether the membership of the respondent no.1 had exceeded 50 by .....

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ares and other 20 shares were shown in the name of the other family members of the appellant. On 14th January,2002, the respondent no.1 transferred those 25 shares in the name of the appellant and his family members. It is the case of the respondent no.1 that the said company created a separate folio in the share register and in the register of members. 110. The name of the appellant was first in all those shares though the second name on the share certificate issued by the respondent no.1 was o .....

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and on its registration, shall be entered as members in its register of members. Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. Section 3(1)(iii) of the Companies Act, 1956 defines private company which means a company which is a paid up capital of ₹ 1 lakh of such high paid up capital as may be and as its Article (a) restrict the right to transfer its share if any, and (b) li .....

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is the case of the appellant that thus for the purpose of counting 50 members under section 313 of the Companies Act, 1956, the employees' shareholders are to be excluded and joint shareholders are to be treated as single. Learned senior counsel for the appellant tendered a chart showing number of members including the existing and retired employees who were the shareholders of the respondent no.1 and some of the employees having transferred their shares and the transferee having been consi .....

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d by the respondent no.1 company to their family members partly or fully upon their retirement or during the course of their employment. 113. The appellant also placed reliance on Articles 3, 15, 20, 52, 57, 59(a) and (b), 101 and 193 of the Articles of Association of the respondent no.1 in support of his submission. It is the case of the appellant that for the purpose of counting 50 members under section 3(1)(iii) of the Companies Act, 1956, the employee shareholders are to be excluded and join .....

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e number of members of the company not including (1) persons in the employment of the company , (2) persons who having been formerly in the employment of the company, were members of the company while in employment and have continued to be members after the employment ceased, shall not exceed at any time fifty, provided that where two, or more persons hold one or more shares in the company jointly they shall for the purpose of this definition, be treated as a single member. 115. Article 15 makes .....

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s recognized by the company as having any title to or interest in the shares and the directors may require such proof to be given of the death as they shall think fit. 116. Article 17 provides that the company is not bound to recognize any interest in shares other than the death of the registered holders. Article 20 provides for a right of the member to one certificate for all the shares registered in his name subject to the proviso mentioned in the said Article. 117. Article 52 of the Articles .....

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an employee of the company, such transfer or allotment shall only be passed or made on the condition that the transferee or allottee at any time after he ceases to be in the employment of the company shall be bound upon the request in relation to such shares. In the case of transfer, such condition must be embodied in the transfer and the certificate relating to every share which is transferred or allotted subject to such a condition shall bear a memorandum referring thereto. 118. It further pr .....

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hich are against the interest of the company, he shall be bound upon the request of the company to serve the company with a transfer notice in relation to such shares and to transfer the shares to another member of the company. 119. Article 101 provides that if there are joint registered holders of any shares, any one of such persons may vote at any meeting either personally or by proxy in respect of such share as if he were solely entitled thereto and if more than one of such joint holders be p .....

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espect of the joint holding and every cheque or warrant so sent shall be made payable to the order of the person to whom it is sent or to his bankers. 121. It is not in dispute that the respondent no.1 had issued certain number of shares to the employees of the respondent no.1 subject to the provisions of law as well as Articles of Association of the respondent no.1. 122. Section 36 of the Companies Act, 1956 provides that subject to the provisions of the said Act, the memorandum and articles sh .....

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s, shall be a member of the company. 123. A perusal of Section 3(1)(iii) which defines private company clearly indicates that the company would be a private company which by its articles, restricts the right to transfer its shares, if any and limits the number of its members to fifty. It further provides that such number of members fifty does not include (i) persons who are in the employment of the company, and (ii) persons who, having been formerly in the employment of the company, were members .....

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members of the respondent no.1 exceeded fifty or not under Section 3(1)(iii) of the Companies Act, 1956. This Court also has to consider as to whether while computing the number of members of the respondent no.1, joint share holdings of the members and the share holdings of the employees of the respondent no.1 or transfer of shares by those employees in favour of their family members or otherwise will have to be excluded under Section 3(1)(iii)(b) of the Companies Act, 1956 read with proviso to .....

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sue required to be decided in view of the order of remand by the Supreme Court, this Court did not go into the issue as to whether the said Article 57 was in force when transfer of 25 shares by the appellant in favour of himself and his family members was effected by the respondent no.1 or that the same stood deleted subsequently or the effect of such subsequent deletion on transfer already effected in favour of the appellant and his family members. 126. A perusal of the record clearly indicates .....

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egorically while computing the number of members fifty as restricted under Section 3(1)(iii)(b). In my view, any such transfer made by such employee share holder in favour of his wife or children would not make his wife or children as a member to be included within the number of fifty members and such member, if any, would be continued to be excluded for the purpose of computation of fifty members under Section 3(1)(iii)(b) of the Companies Act, 1956. 127. I am thus not inclined to accept the su .....

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ovide any separate or additional membership to such transferee of shares through such an employee. 128. In my view, the argument of the learned senior counsel for the respondent no.1 that the said provision of Section 3(1)(iii)(b) of the Companies Act, 1956 clearly indicates that it is personality-centricor pre-centric i.e. on the holder of the share and not share centric without merit. It would amount to granting permission to such an employee to transfer his share holdings to his family member .....

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validly transferred. In my view, Mr.Samdhani, learned senior counsel for the appellant is thus right in his submission that all such employee share holders of the respondent no.1 who were transferred the shares under a specific quota i.e. employee quota share or any transferee of shares claiming through such employee were transferred during the course of their employment or otherwise will have to be excluded for the purpose of computation of number of members as fifty. 130. I am not inclined to .....

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y under Section 3(1)(iii) is limited to the purposes of definition of private company under Section 3(1)(iii) alone or that the other provisions of the Companies Act, 1956 or Articles of Association cannot be referred to for construing the said provision. 131. In so far as the submission of the learned senior counsel for the respondent no.1 that a fiction is created under Section 3(1)(iii) of the Companies Act, 1956 which is only restricted to the private company for limited purposes is concerne .....

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spondent no.1 having created or recognized separate folio in respect of new joint shareholding units/entities upon transfer of 25 shares of the appellant in favour of himself and his family members in five parts and by virtue thereof, the membership had exceeded to 54. 132. In my view, Mr.Samdhani, learned senior counsel for the appellant has rightly given an illustration that if an existing member transferred his shares in favour of himself being the first holder in his own favour jointly with .....

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. In my view, Mr. Samdhani, learned senior counsel for the appellant has rightly placed reliance on Section 399(2) of the Companies Act, 1956 for interpreting the term unless the context otherwise requires referred in Section 3(1) of the Companies Act, 1956 in support of his submission that the said provision itself suggests that in case of joint shareholding, the same has to be treated as share holder. It is not in dispute that the name of the appellant was admittedly first shareholder in all f .....

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share is concerned, in my view, this submission of the learned senior counsel is contrary to the plain reading of proviso to Section 3(1)(iii)(b). In my view, on the contrary, the said proviso makes it clear that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of the definition of private company be treated as a single member. In my view, the name of the appellant being the first in all the shares which were transferred in favour of himself an .....

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Article 3 of the Articles of Association also clearly provides that the number of members of the company shall not exceed at any time at fifty. It further provides that where two or more persons hold one or more shares in the company jointly, they shall for the purpose of computation of private company, be treated as a single member. The exclusion provided in the Article 3 is identical to the exclusion provided in Section 3(1)(iii)(b). 137. It is not in dispute that in past, the respondent no.1 .....

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ead with proviso and various Articles of Association referred to aforesaid and the other documents referred to aforesaid clearly indicates that the respondent no.1 has considered the joint shareholding of the appellant with his family members as separate members and has also considered employees who are allotted shares by the respondent no.1 who have transferred those shares in the name of their family members which shares were allotted to those employees because of their employment with the res .....

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nt Bank Ltd. vs. Haryana State Cooperative Land Development Banks Employees Union & Anr.(supra) would assist the case of the appellant in interpretation of Section 3(1)(iii)(b) as sought to be interpreted by the appellant in support of his submission that the joint shareholdings has to be treated as one. 139. In so far as the judgment of this Court in the case of Narandas Munmohandas Ramji vs. Indian Manufacturing Co. Ltd.(supra) relied upon by the learned senior counsel for the respondent n .....

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Manufacturing Co. Ltd.(supra) has been already referred by the Division Bench of this Court in the case of Dinesh Vrajlal Lakhani vs. Parke Davis (India) Limited (supra) which judgment of the Division Bench would assist the case of the appellant. 140. In so far as the judgment of the Punjab High Court in case of Jarnail Singh and another (supra) relied upon by the learned senior counsel for the respondent no.1 is concerned, there was no issue before the Punjab High Court that the number of membe .....

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ant had taken inspection of the records of the respondent no.1 is concerned, I am inclined to accept the submission of the learned senior counsel for the appellant that if the number of members of the company would have exceeded fifty upon transfer of 25 shares of the appellant in his name jointly with his family members, the respondent no.1 would not have transferred those shares as refused in past. 142. In my view, the judgment of the Supreme Court in the case of Reserve Bank of India vs. Peer .....

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ed as provided under Section 43A of the Companies Act, 1956 and in such event, the respondent no.1 would only lose its certain privileges and exemptions is concerned, in my view, since this Court is of the view that the number of members of the respondent no.1 had not exceeded fifty, this Court need not decide the consequences upon the membership of exceeding 50 provided under Section 43A of the Companies Act, 1956. Be that as it may, since the remand by the Supreme Court is limited and more par .....

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indicates that the Supreme Court has held as under in the said judgment :- a) Parliament always recognized the possibility of a private company which becomes a public company by virtue of operation of section 43A once again reverting back to its status of a private company. b) The concept of Hybrid companies is not altogether abolished. Atleast insofar as the companies falling under section 43A(1C) are concerned, which were in existence on 13th December,2000 would continue as a Hybrid under sec .....

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ation, company only ceased to be entitled to a privileges and exemptions conferred on a private company by or under the Act and the Act shall apply to the company as if it were not a private company by virtue of the operation of section 43 which only creates a legal fiction. Section 43 does not declare that such companies do become public companies unlike Section 43A. On the other hand the proviso to section 43 enables the Central Government to condone the lapse of such private companies. (e) Pa .....

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a private company chooses not to incorporate as stipulation but fails to comply with the same, it would attract the consequences mentioned in section 43 which consequences are also avoidable under the proviso to section 43. (g) Even during the period when section 43A operated, the Parliament never thought of curtailing the collective right of the members of the private companies to have restriction on the rights of the individual shareholder to freely transfer shares. (h) To believe that such re .....

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company to impose restrictions on the rights of the individual shareholders to have unfettered right of transfer of their shares. Such a restriction constitutes a restriction on the fundamental rights under Article 19(1) (c), requires a more express legal authority and cannot be brought in by inference. (j) If a private company choose to make provisions in their Articles of Association to give effect to the mandate of section 3(1)(iii)(d), they become private companies w.e.f. such date they make .....

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dent company to amend its Articles of Association to give effect to clause (d) of section 3(1)(iii) does not effect the operation of its Article 57. 145. Insofar as the submission of the learned counsel for the respondent that even if this court comes to the conclusion that the membership of the respondent no.1 company would not exceed 50 or does not exceed 50, this court cannot decide consequences of such findings as may be rendered by this court is concerned, learned senior counsel for the app .....

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n the parties that the members of the respondent no.1 had exceeded 50 and such findings also having been rendered by this court in order and judgment in Company Appeal (L) No.41 of 2012 as well the Company Law Board including the findings that the respondent no.1 has become a public limited company, those findings are binding on this court and cannot be allowed to be argued once again in this proceedings is concerned, learned senior counsel for both the parties invited my attention to various pa .....

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pany Law Board on 28th December,2009 denied that the respondent no.1 had more than 50 members. It was contended by the appellant before the Company Law Board in the said affidavit that if in breach of the provisions of law, a private company exceed statutory limit for 50 members or exceed the deposit than the company will be in breach of the provisions of law. In such a event, the company will cease to enjoy the exemptions and privileges of a private company but that does not mean that the compa .....

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The appellant in its rejoinder dated 28th March,2010 before the Company Law Board once again denied that the membership of the respondent no.1 had exceeded 50. The appellant also contended that Article 57 of the Articles of Association was binding. It was averred in the said affidavit that the transfer that were applied by the appellant that were not transferred to the outsiders but were transferred within the scope of Article 57. It is the case of the appellant that the issue whether the number .....

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appellant in the Special Leave Petition that there were no pleadings on that issue and there was certainly no arguments nor any admission. The respondent no.1 denied this contention of the appellant by filing affidavit in reply dated 23rd August,2011. The respondent no.1 had contended in affidavit in reply that as a result of the transfer of twenty five shares held by the appellant by the respondent no.1 on 31st December,2001, the number of members of respondent no.1 became 54. The appellant ha .....

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e. The said transfer neither created any new shareholder/member nor did it seek to induct an outsider not permissible in Article 57. The appellant also contended that it was the duty and responsibility of the respondent no.1 to ensure that as a result of any transfer, the number of member did not exceed 50. Even in past, the 1st respondent had refused to entertain the application on the ground that the number of members was likely to exceed the maximum permissible number of 50. 151. It is thus c .....

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appellant having been transferred by the appellant in favour of himself and his other family members. 152. Be that as it may, there is no dispute that the Supreme Court in the order of remand dated 28th October,2014 has directed this court to render a finding as to whether by virtue of transfer of five shares of the appellant, it had resulted into the membership of the respondent no.1 company exceeding 50 thereby rendering the 1st respondent as a public company in view of the fact that this cour .....

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d exceeded 50 and accordingly the respondent no.1 company had become a public company, this court cannot render a fresh finding on the issue whether membership of the respondent no.1 company had exceeded 50 or not. The respondent no.1 did not apply for any clarification from the Supreme Court on this issue. The directions issued by the Supreme Court are binding on this Court. 153. It is not in dispute that the judgment and order dated 20th December,2012 rendered by this court in Company Appeal ( .....

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granting leave and the Special Leave Petition filed by the appellant having been converted into the Civil Appeal No.2481 of 2014, the findings contain in the decision dated 20th December,2012 cannot be looked into by this Court is concerned, in my view none of these judgments referred to and relied upon by the learned senior counsel for the appellant would assist the case of appellant. The findings if any, rendered in the said decision dated 20th December,2012 are admittedly not set aside by th .....

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