TMI Blog2018 (12) TMI 1546X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Appellant Company had sufficient cause to apprehend that Respondents No.10 in these Appeals were acting with a design and the original Petitioners had not purchased the share with bona fide object of investment. Respondent No.10 – Beena George held 2,640 shares of ₹ 100/- each in the Appellant Company but transferred just 25 shares. Appellant submitted that this could not be said to have been done with the bona fide object of trading but is rather attempt at introducing outsiders in the Appellant Company to get control and to create obstruction in the process which had been initiated by the Appellant Company of converting itself back to private limited company from a public limited company. We find the reason recorded by the Company to refuse to record transfers is based on reasonable apprehensions recorded in the letters sent to Petitioner. We do not wish to impose our wisdom on that of the Board of Directors which cannot be said to be arbitrary on lacking in bona fides. The decision was in interest of Company. Going through the reasons recorded by the learned NCLT for allowing the Compny Petition, we do not find that the Impugned Orders are well reasoned. For re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich at the time concerned was deemed public company and which was in the process of conversion into a private company, has had the power to refuse registration of transfer of shares in the Company to outsiders. 7. The Company was initially created as a private company under the name and style of Synthite Industrial Chemicals Private Limited on 23.07.1970. The name was subsequently changed to Synthite Industries Limited on 19.09.2008. The Company became a deemed public company in view of Section 43A(1A) of the Companies Act, 1956 ( old Act , in short), in view of Companies (Amendment) Act, 1988 on 15.06.1988. 8. It is the case of the Appellant that the company passed a unanimous Resolution on 25.09.2015 of the shareholders and decided to convert from public company to a private company. In the Resolution, Article 23A was included in the Articles of Association which restricted the right of transfer of the shares by members to non-members. The Company has stated that earlier when the Company became a deemed public company, it had option under the Companies (Amendment) Act, 2000 as per Sub-Section 2A and 11 to reconvert to private company but preferred to remain deemed public co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the Company becoming deemed public limited company under Section 43A of the old Act. Petition referred to the fact that the authorized share capital was of 25,00,000 equity shares of ₹ 100/- each and the issued subscribed and paid up share capital was 1,05,900 equity shares of ₹ 100/- each. Petitioner claimed that it was transferee of 25 equity shares of ₹ 10/- each from the Respondent No.10. Petitioner claimed that Respondent No.10 had transferred 25 equity shares of ₹ 10/- of the Respondent No.1 Company in favour of the Petitioner on 01.09.2016. Share Transfer Forms had been executed and the Petitioner claimed to have paid ₹ 12,50,000/- as consideration. Petitioner claimed that it lodged the shares with the Company on 01.09.2016 to register the transfer. The Petition referred to the fact of the Company refusing to register the shares vide letter dated 27.10.2016. The petition referred to the reasons set out in the letter for refusal. The Company had refused registration on the basis that it was in violation of its Article 23A. The Petition claimed that Article 3A and 23A were sought to be introduced contingent upon the company becoming a pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company pointed out in its counter in NCLT that shareholding of Mr. C.J. George and his family members in Appellant Company remained the same in the past four decades but the promoters of the Appellant Company who had majority of 64% in Plant Lipids (P) Ltd. had been rendered into a minority of 8% equities. 11. The Appellant in its counter in NCLT dealt with the Company Petition filed and mentioned in para 3(g) as under:- ( g) Adverting to paragraph 4.2, the averments regarding refusal to register the transfer of shares lodged in terms of Article 23A of the Articles of Association of the company is admitted as true and correct. The allegation that the company being a public company cannot and does not have any restriction on the transferability of shares in its Articles of Association is not admitted as true and correct. The refusal to transfer the shares is in terms of an article existing in the Articles of Association of the Company and even assuming without admitting that the company is a public limited company transfer of shares and registration for application for transfer of shares can be refused on justifiable grounds in the interest of the company. The allegation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 900 shares but that the intention of the original Petitioner was to acquire 15,000 shares of the Respondent Company. The Appellant Company thus, defended its decision not to accept transfer of shares to entity inimical to the Company who had clearly shown intention to acquire sizable number of shares of the Appellant Company. 12. In the Rejoinder filed in NCLT by the original Petitioner - Plant Lipids (P) Ltd., claims made by the Appellant Company were countered and inter alia, it was pleaded as under:- The further allegation that the majority shareholders of the petitioner led by Mr. C.J. George have been continuously impinging upon the business of the Respondent Company and are poaching the key employees and undercutting the prices are not true and are hence denied. These are just frustrations of the 1st Respondent company who finds that a small company has now grown to be one of its biggest competitors. In fact, the 1st Respondent has poached numerous employees from Petitioner Company including senior level Officers like Head of Production, Production Manager etc. who are now heading the production team of the 1st Respondent. M/s. Plant Lipids (P) Ltd. then claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in competing business and the object was to create obstruction to the efforts of the Appellant Company to convert into a private limited company. The learned Counsel referred to Article 23A in the Articles of Association introduced in AGM dated 25.09.2015 which disallowed transfer of shares to non-members without prior Board sanction. The learned Counsel submitted that by the said Resolution in the Articles of Association, Section 3A had been introduced to the effect that the Company shall be private limited company. Vide Article 23A which was introduced, restriction on transfer of shares was provided. The learned Counsel submitted that although Article 3A may require approval of NCLT as it relates to conversion, Article 23A could not be said to be requiring such approval and the Company had immediate right to restrict transfer of shares. It was additionally submitted that irrespective of the arguments that may be submitted by the original Petitioners with regard to Article 23A, restricting Article 24 existed in the Articles of Association at all times which Article reads as under:- 24. The Board of Directors may refuse to register any transfer of share (1) where the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Counsel submitted that the Directors cannot act arbitrarily and capriciously but they have a duty to act as trustees to protect the interest of the Company. It is argued that the latest Judgement of the Hon ble Supreme Court in the matter of Mackintosh Burn Ltd. versus Sarkar and Chowdhury Enterprises Private Limited reported in 2018 5 SCC 575 crystallizes the legal position. Sub-Sections (2) and (4) of Section 58 which deals with refusal of registration and Appeal against refusal in matters like the present one, is relevant and the same reads as under:- Section 58. Refusal of registration and appeal against refusal . ( 1) . ( 2) Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. ( 3) .. ( 4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree transferability of the shares is the essence of the public limited company and the transfer can be refused only on sufficient cause as provided in Section 58(4). It is argued that there can be refusal if there is contravention of any provisions of Securities Contract Regulations Act, 1956 or provisions of SEBI Act or the Companies Act. Being competitor cannot be ground to reject the transfer. Looking to the small number of shares involved, it could not be said that there is attempt to hostile takeover. It is argued that M/s. Aromatic Ingredients (P) Ltd. could not be said to be in competing business also, although M/s. Plant Lipids (P) Ltd. was in same business as the Appellant. It is argued that C.J. George and his family members were already members in the Appellant Company and thus, the original Petitioners being their Companies could not be said to be undesirable persons. The learned Counsel referred to the Judgement in the matter of Bajaj Auto Ltd. versus Company Law Board and Others reported in (1998) 6 SCC 218 where Hon ble Supreme Court dealt with transfer of shares of public limited company, Counsel for original Petitioners referred to para 16 of that Judgeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties were alleging against each other that the other party was poaching employees. However, according to the Counsel, such allegation alone did not mean anything. 21. At the time of arguments, in the ultimate, Counsel for both sides submitted that the NCLT had during the pendency of these Appeals allowed the application of the Appellant Company to convert into a private limited company. It was also stated on behalf of the Respondent No.1 that Appeal against such Order has been filed. 22. We have gone through the record including the Impugned Order and heard Counsel for both sides. In the matter of Bajaj Auto Limited referred above, the Appellants therein were existing shareholder of Bajaj Tempo Limited which was public limited company. Bajaj Auto Limited purchased 50 shares of Bajaj Tempo Limited and Bajaj Auto Holdings Limited purchased 13,150 shares of the said Company. The transfer was rejected by the Board of Directors of Bajaj Tempo Limited giving reasons. The Hon ble Supreme Court in the facts of that matter observed (in para 16) that there was nothing placed on the record (in that matter) which can possibly persuade anyone to come to the conclusion, that the intenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently M/s. Plant Lipids (P) Ltd. was incorporated. There are particulars as to the manner in which C.J. George (Respondent No.10 - CA 98 of 2018) grew in the Company - M/s. Plant Lipids (P) Ltd. and the Company later on started competing in the same business as that of the Appellant Company. The Appellant has filed list of shareholdings in the Appellant Company of different persons. It is argued by the learned Counsel for the Appellant that C.J. George along with his family members as a group is already holding 12.69% shares in the Appellant Company. The argument is that in 1993, there was a cessation of Directorship in these cross-Companies and from 1993, C.J. George and group did not have directorship in the Appellant Company although they held shares. 24.1 The counter of Appellant (Annexure A-14 Page 144) filed in NCLT in para 2 has made various grievances against Mr. C.J. George and his group and, inter alia, alleged that Mr. C.J. George was continuously impinging upon the Appellant Company s business secrets, poaching key employees, etc. We have already reproduced the Rejoinder para - 2 which shows admission of M/s. Plant Lipids (P) Ltd. being competitor. M/s. Pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers after the employment ceased. ( c) prohibits any invitation to the public to subscribe for any securities of the Company. For the above purpose, where two or more persons hold one or more shares of the Company jointly, they shall be treated as a single member 23A. Any member desiring to sell any of his/her share must notify the Board of Directors the number of shares, market price and the name of the proposed transferee. No transfer of shares shall be made or registered without the previous sanction of the Board of Directors, except when the transfer is made by any member of the Company to another member or to transferor member s spouse or child or children or his/her heirs and the Directors may decline to give such sanction without assigning any reason, subject to the provisions of Companies Act. RESOLVED FURTHER THAT the Board of Directors be and is hereby authorised to undertake all such acts, deeds, matters and things which may be required to give effect to this resolution. Mr. Paolo George proposed the resolution as Special Resolution which was seconded by Mrs. Mini Varghese. The Resolution was put to vote on a show of hands and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anaging Director. It is apparent that this Mr. C.J. George acting as Managing Director in both the Companies was behind both the Companies resolving to invest to the extent of 15,000 shares of the Appellant Company to buy the same from open market or off market. The learned Counsel for the Appellant has rightly submitted that such Resolutions passed by these Companies where Mr. C.J. George was having control, was clearly with an object of creating difficulties in the Appellant Company which is competing Company so as to interfere with the management. There is substance in the argument that the transfer of 25 and 10 shares in these Appeals is not the basis on which the intention to take hostile control of the Appellant Company should be inferred; but it is these Resolutions which are material and show the object of destabilizing the management of the Appellant Company by introducing outsiders in the Company where C.J. George is having control. We find substance in the argument of the Counsel for Appellant that if the present 25 and 10 shares as transferred are accepted, more transfers would flow in as appearing from Resolutions of Petitioner Companies. Document at Page 118 shows t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. John George Nechupadom to invest in the equity share capital of the Company and acquire upto 15000 shares. It is apparent the intention of both the competitor companies is to gradually increase their stake in the company aimed at hostile takeover. Therefore, it is felt that it is not in the interests of the Company to admit M/s Plant Lipids Private Limited as member of the Company. The instrument of transfer, along with share certificates, is returned herewith. 29. There is similar refusal in the matter of Aromatic Ingredients (P) Ltd. also. Thus, the Board of Directors of the Appellant informed the original Petitioners the Articles of Association on which they wanted to rely and that both the Companies had the object of acquiring 15,000 shares and that the intention was to gradually increase the stakes in the Appellant Company aimed at hostile takeover. The learned Counsel for the Appellant has rightly submitted that when the Appellant Company has issued share capital of 1,05,900 shares of ₹ 100/- each, the Companies Resolution passed by these 2 Companies each relating to acquiring 15,000 shares makes the object clear and the Board of Directors specific ..... X X X X Extracts X X X X X X X X Extracts X X X X
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