TMI Blog2015 (7) TMI 1246X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing such transfer is admittedly attended by the transferees as members of the first Respondent company in the presence of Appellant No.3, who attended as a proxy of the late Shankarrao (who continued to hold 135 shares after the transfer). The conclusion of the CLB in the backdrop of these facts that the issue concerning the transfer of 536 shares being made fraudulently, that is to say, by forging the signatures or overwriting the transfer forms, etc., could not be adjudicated upon by the CLB, cannot be termed as an impossible or perverse conclusion. Article 11 provides for the right of preemption of existing shareholders of the company in the case of a proposed transfer of shares. It is submitted that the transfer of 536 shares of the late Shankarrao was in contravention of this provision. Article 11 takes effect in a case which is not otherwise provided for under the Articles. It opens with the words "Except as herein provided". Article 10, which immediately precedes this Article, provides that notwithstanding the restrictions contained in the Articles, shares may be transfered by a member to another member or a person in any of the enumerated relationships with the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DGEMENT- ( 1. ) The appeal challenges an order passed by Company Law Board ('CLB') rejecting a petition of the Appellants under Sections 397 and 398 of the Companies Act, 1956 ('the Act'). ( 2. ) The Appellants between them claim to hold about 46.71% share of the first Respondent company. The first Respondent company is claimed to be in the nature of a quasipartnership. The grievance of the Appellants in the petition is this: The predecessor of Appellant Nos.3 to 7, late Shankarrao Mahadeo Bidkar, was a member of the first Respondent company during his lifetime, holding 671 shares in the company, and also the Chairman of its Board of Directors. The late Shankarrao Bidkar was ill since December 2002 and could not effectively contribute to the business activities of the company and as a result, Appellant No.3 was appointed as a director on or about 15 June 2003. Shankarrao expired on 20 January 2005. After the death of Shankarrao, when his legal heirs started making inquiries about the shares held by their father, they came to learn through a copy of an annual report for the year 20032004 that the Board of Directors had transferred 536 out of 671 shares held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or appointment of Respondent Nos.5 and 6 as directors. ( 3. ) The CLB, in the impugned order, rejected the Appellants' contention insofar as the application for rectification of the register of members was concerned. The CLB noted that there was no application made for rectification of register under Section 111 of the Act and the provisions of Sections 397 and 398 of the Act were not attracted for this purpose. The CLB was of the view that the issue of transfer of 536 shares of late Shankarrao being fraudulent and obtained by forged documents could not be adjudicated upon by the CLB. The CLB also found that the Appellants had failed to make out a case of harsh, burdensome and wrongful conduct on the part of the Respondents and mere procedural defects / irregularities in the transfer of shares could not be held oppressive to the Appellants. The CLB also found no merit in the alleged procedural defects and irregularities pointed out in the holding of AGMs as well as appointment of directors. The CLB rejected the Appellants' allegations that the funds of the first Respondent company were being mismanaged. The CLB, accordingly, found that none of the prayers in the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 25 March 2003 duly recorded in the Minute Book maintained by the first Respondent company accepting such transfer and providing for its registration; the transfer is recorded in the original share certificates; the Annual Report of the first Respondent company of the year 20032004 reflects this transfer and shows the names of all the transferees; and finally, the AGM of the first Respondent company immediately following such transfer is admittedly attended by the transferees as members of the first Respondent company in the presence of Appellant No.3, who attended as a proxy of the late Shankarrao (who continued to hold 135 shares after the transfer). The conclusion of the CLB in the backdrop of these facts that the issue concerning the transfer of 536 shares being made fraudulently, that is to say, by forging the signatures or overwriting the transfer forms, etc., could not be adjudicated upon by the CLB, cannot be termed as an impossible or perverse conclusion. ( 6. ) Learned Counsel for the Appellants submitted that the registration of the subject transfer of shares was in contravention of Section 108 of the Act. This was a petition under Section 397 of the Act alleging act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the first Respondent company. Article 11 provides for the right of preemption of existing shareholders of the company in the case of a proposed transfer of shares. It is submitted that the transfer of 536 shares of the late Shankarrao was in contravention of this provision. Article 11 takes effect in a case which is not otherwise provided for under the Articles. It opens with the words Except as herein provided . Article 10, which immediately precedes this Article, provides that notwithstanding the restrictions contained in the Articles, shares may be transfered by a member to another member or a person in any of the enumerated relationships with the transferor member. It is an admitted position that the transferees of these 536 shares are brothers of the late Shankarrao and fall within this clause. Learned Counsel for the Appellants relied on the judgments in the case of John Tinson and Co. Pvt. Ltd. vs. Surjeet Malhan, 1997 AIR(SC) 1411 and Bhubaneshwar Singh vs. Kanthal India Ltd., 1986 59 CompCas 46 in support of his case that transfers of shares in contravention of the Articles of Association are invalid. There is no quarrel with the proposition. What is in dispute here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a quasipartnership. As against this, the Respondents, in their reply, dispute these averments. It is submitted by the Respondents that at the very first board meeting held three days after the incorporation of Respondent No.1, i.e. on 1 March 1975, two additional shareholders were admitted and they were allotted two shares (one each) out of the total five shares then issued and allotted. It is submitted that admission of these two members was itself a step in the direction that the promoters/subscribers did not consider Respondent No.1 to be a quasipartnership. Thereafter, there were several fresh allotments of shares as well as changes in the composition of the board of directors. The Respondents have submitted the particulars of these allotments and changes. There is no serious controversy between the parties on these facts. Thus, the emerging scenario is that immediately after incorporation of the first Respondent company, two new members, who had nothing to do with the erstwhile partnership of Sanjay Founders, were admitted to the membership of the company. The two, thus, held 40% shares in the first Respondent company. So also, four more members were added on 29 June 1978. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dispute that Respondent No.1 is a quasipartnership ...... by the sentence The Respondent No.1 company is undoubtedly a quasipartnership....... The conclusion of the CLB, thus, in respect of the quasipartnership nature of the company does not bear scrutiny and cannot be sustained. The conclusion is clearly contrary to the record of the case and is arrived at by completely disregarding the admitted record of the case. ( 11. ) The directions concerning maintenance of adequate representation of the Appellants on the board of directors are also based on the extent of shareholding of the Appellants in the first Respondent company. Even this aspect of the matter exhibits a complete nonapplication of mind and untenable approach on the part of the CLB. As in the case of the finding of a quasipartnership, so in the case of the extent of shareholding, the original order passed by the CLB observed that the Appellants (i.e. Petitioners before the CLB) held over 46% shares of the Respondent company and that it was on the basis of such shareholding that they were to be given adequate representation on the board of directors of Respondent No.1, but in the corrected order as of 15 November ..... X X X X Extracts X X X X X X X X Extracts X X X X
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