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TMI Blog2019 (8) TMI 221X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act, 2013 (hereinafter referred to as "the Act") alleging oppression and mismanagement at the hands of Respondents No. 2 and 3 being in-charge of the affairs of business operations of Respondent No. 1 as Directors came to be dismissed primarily on the ground that neither did the transfer of shares inter-se the members require prior approval of the Board of Directors nor option of purchase to all existing members prior to effecting of such transfer was required. The impugned order is assailed on the ground that the preemptive right of having notice of proposed transfer of shares incorporated in Article 7 of the 'Articles of Association' (hereinafter referred to as 'AOA') vested in the Shareholders is not diluted by the provision engrafted in Article 8 of 'AOA' which operates in a different field and comes into operation only after exercise or non-exercise of the preemptive right by the shareholders. The impugned order is also assailed on the ground that the preemptive right vested in the existing shareholders does not only serve the purpose of regulating the entry of outsiders in the Company as held by the Tribunal but is also designed to protect the balance of power in close ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up share capital which, by its Articles restricts the right to transfer its shares and limits the number of its members to 200 except in case of one person company. The private company, by its Articles prohibits any invitation to the public to subscribe for any securities of the company which includes shares and debentures. It is well settled by now that the 'Articles of Association' of a private company are in the nature of a contract between such company and its members/ shareholders and also inter-se the members/shareholders. It is not in dispute that in the case in hand 'Articles of Association' of Respondent No. 1 restrict the right to transfer its shares and the controversy dealt with by the Tribunal in terms of the impugned order assailed before this Appellate Tribunal pertains to the true import, scope and interpretation of the relevant Articles dealing with restriction on transfer of shareholding. The relevant of the 'Articles of Association' are reproduced hereunder:- "Article 7. Any member desiring to sell any of his shares must notify in writing to the Board of Directors of the number share, the fair value and the name of the proposed transferee and the Board of Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration to the arguments advanced at the Bar. It appears that identical Articles 7 and 8 fell for consideration of the Hon'ble Karnataka High Court in the Case of "Mukundlal Manchanda Vs. Prakash Roadlines Ltd., reported in 1991 SCC online Kar 131" . Learned Single Judge interpreted the Articles as under:- "4. ....x....x...x....The object of Article 7 is to preserve the shareholding to the members of the family and to the existing shareholders. Suppose, a shareholder wants to sell 3 or 4 shares to another shareholder and all other shareholders offer to purchase the same at the market price, how to effect the transfer by selling the share to other shareholders is not forthcoming in Article 7. The shares cannot be divided in proportion to the shareholding of different shareholders who are willing to purchase the same. Further, what is the purpose of preventing one shareholder form purchasing the share of another is also not clear. The purposes behind Article 7 is clear when it is compared with Article 8. Article 8 states that shares shall not be transferred without the previous sanction of the Directors except when transfer is made by one member to another or to a member's wife or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of directors. This exception to us appears to be logical for the entire object behind articles 7 and 8 being to prevent an outsider purchasing the shares without the existing members exercising their rights, is achieved by making such an exception. It is significant in this connection to mention that article 7 refers only to parties other than existing shareholder. Similarly, the term "transfer" appearing in article 8 appears to us to be a term wide enough to include a transfer by way of sale also. In other words, article 8 would apply even to a situation where the transfer is being made by way of a sale by one member of the company in favour of another member, his spouse or children. In any such situation, the right of pre-emption as envisaged by article 7 would not be applicable for the sale is being made either to an existing member or his legal heir or children." 8. From the aforesaid interpretation of identical Articles 7 and 8, it is abundantly clear that these provisions are intended to block an outsider from purchasing the shares of a private company through the mode of sale or transfer by any other mode and for achieving this objective these Articles envisage that a stra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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