G. Venkitapathy vs Prakathi Spinners Private … on 7 February, 2002

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Company Law Board
G. Venkitapathy vs Prakathi Spinners Private … on 7 February, 2002
Bench: S Balasubramanian, K Balu


ORDER

K.K. Balu

1. This is a petition filed under Section 111(4) of the Companies Act, 1956 (“the Act”) against M/s Prakathi Spinners Private Limited (“the Company”) and others for rectification of the register of members of the Company by deleting the name of second and third respondents and annulling the transfer of shares impugned in the petition effected on 6.4.2000 and 17.10.2000.

2. The facts, in brief, as reiterated by Mr. K.S.Ravichandran, Practising Company Secretary and Authorised Representative of the petitioner are that the Company was incorporate in January, 1995 to carry on the business of ginners and spinners. As at 31.3.99, the authorise capital of the Company is Rs. 1 crore divided into 10 lakhs equity shares of Rs. 10/- each. The paid-up capital of the Company is Rs. 95,25,000/- divided into Rs. 9,52,5000/- equity shares of Rs. 10/- each. The petitioner, being the promoter is holding 10,000 shares of the Company and was also a whole-time director attending to the day-to-day affairs and management of the Company. The petitioner was constrained to be away form carrying out the day-to-day affairs of the Company on account of the severe injuries suffered in a road accident in August, 1998. During the absence of the petitioner, one Shri L.Balusamy who died later and the four the respondent were managing the affairs of the Company. In the meanwhile, the fourth respondent had illegally entered into a Memorandum of Understanding (MOU) dated 16.02.2000 with the second respondent for transfer of the control of management of the Company enabling the latter to take control of the Company. The fourth respondent signed the MOU on behalf of the Company as well as other promoter directors and shareholders without any authority. The second and fourth respondents had fabricated a resignation letter dated 22.03.2000 so as to record as though the petitioner had resigned from the Board of the Company. Subsequently, the second respondent had filed form-32 on 18.02.2000 at the office of Registrar of Companies, Tamil Nadu, Coimbatore to the effect that(a) the second respondent was appointed as the Managing Director; (b) 13th respondent as director; and (c) fourth respondent and Dr. G.Kalaiselvi, a promoter director resigned from the Board of the Company with effect form 16.02.2000. Shri Ravichandran pointed out that on 16.2.2000, there was no duly constituted Board, as there was no quorum. The second respondent had also filed form-32 on 5.6.2000 intimating the resignation of the petitioner and 13th respondent with effect from 20.05.2000. The second respondent also managed to register in his name and in the name of third respondent on 6.4.2000 and 17.10.2000, 8,25,000 shares in violation of the provisions of Articles of Association of the Company. Shri Ravichandran pointed out that Articles 15 to 23 and 25 restrict the transfer of shares of the Company and also provide for procedure to be adopted by the seller, Board of Directors and purchaser in the matter of transfer of shares by the shareholders of the Company. According to him, neither the transferors nor the Company complied with the Articles relating to transfer of the shares. He reiterate that no opportunity was given to the existing members to purchase the shares and that right of pre-emption was not exhausted. The transferors did not inform the Board about their intention to sell their shares. The Board had neither given 50 days notice containing the requisite particulars of the shares and the offer price of the sellers or the fair price fixed by the Board. According to the petitioner, there was no meeting of the Board of Directors either on 6.4.2000 or 17.10.2000, being the dated of approval of the impugned shares. As on 6.4.2000 only the petitioner, the second respondent and 13th respondent were directors of the Company. The petitioner did not receive any notice for the Board meeting said to have been held on 6.4.2000. Consequently, there was no duly convened meeting of the Board of Directors on 6.4.2000. As on 17.10.2000, excepting the second respondent, no other person was no the Board of Directors of the Company. As a result registration of the transfer of impugned shares by the Board on 6.4.2000 and 17.10.2000 is illegal and void. In the circumstances, Shri Ravichandran sought for rectification of the register of members of the Company by deletion of the names of respondents 2 & 3 in respect of the shares impugned in the petition. Shri Ravichandran, in support of his legal submissions relied upon the following decisions:-

(i) Stridewell Leathers (P.) Ltd. and Anr. v. Shoe Specialities (P) Ltd. and Ors. – (2001) 44 CLA 264 (CLB).

(ii) Cruickshank Company Ltd. and Anr. v. Stridewell Leather Pvt. Ltd. and Ors. – (1996) 86 CC 439.

(iii) Satyanarayana Rathi v. Annamalaiar Textiles Pvt. Ltd. and Ors. – (1999) 95 CC 386.

(iv) Shanta Genevieve Pommeret and Anr. v. Sakal papers Pvt. Ltd. and Ors. – (1990) 69 CC 65.

– to show that the Company Law Board is empowered to order rectification of the register of members of a company, in case shares in a private limited company are not transferred in accordance with the company’s Articles of Association.

(v) M.C. Duraiswami v. Sakthi Sugars Ltd. – (1980) 50 CC 154 – to show that a blanket consent letter cannot be a consent as contemplated by Section 399(3).

(vi) V. Shankar v. South Indian Concerns Ltd.- (1997) Vol. 11 SEBI & Corporate Laws – Reports 105 and

(vii) S.S. Laxminarayanan and Anr v. Mather and Plant India Ltd. and Ors — (1998) 92 CC 109.

-to show that the CLB has to ensure whether transferors who gave letters of offer have applied their mind while giving their consent and that they should also be aware of the allegations made in the offer letters.

(viii) Sikkim Bank Ltd. and Ors. v. R.S. Chowdhury and Ors. — (2000) 102 CC 387 — to show that notice is necessary in case any meeting is adjourned and meeting without any notice for the adjourned meeting is not valid.

(ix) Pushpa Prabudas Vora and Ors v. Voras Exclusive Tools (P) Ltd. and Ors. — (2000) 36 CLA 377 — to show that any meeting of the Board of Directors without adequate notice to all directors would be improper.

(x) Puneet Goel and Ors. v. Khelgaon Resorts Ltd. and Ors. — (2000) 38 CLA 259 (CLB) — to show that a meeting without notice to the directors and without proper quorum is not valid.

(xi) Col. Kuldip Singh Dhillon and Ors. v. Paragaon Utility Financiers P. Ltd. and Ors. — (1988) 64 CC 19 — to show that notice must be sent to all directors for the Board meetings.

(xii) Registrar of Companies, Orissa v. Orissa Paper Products Ltd. and Ors. – (1988) 63 CC 460 — to show that a letter of resignation addressed by a director to a third party has no effect and is not valid.

(xiii) Anand Hemant Patel v. Ornate Club Pvt. Ltd. and Ors. — (2000) 99 CC 318 — to show that the provisions of Section 108 of the Act are to be complied with in case of transfer of shares, without which the transfer is not valid.

3. Shri V. Ramakrishnan, Advocate appearing for the respondents 1 to 3, at the outset has raised the following preliminary objections:-

(a) Section 3(iii)(d) of the Companies Amendment Act, 2001 which has come into effect from 14th December, 2000 prohibits a private company from inviting or accepting deposits from persons other than its members, directors or their relatives. He pointed out that the statute is unambiguous. In the instant case, the Articles of Association of the Company does not contain such a restrictive clause and therefore it is a public company and not a private company. The provisions of Section 111 do not apply to public companies. In this connection, he relied on (i) Shashi Prakash Kemka v. NEPC Micon Ltd. — (1997) 4 Comp LJ 265 (CLB) and (ii) Canara Bank v. Mahanagar Telephone Nigam Ltd. and Ors. — (1998) 93 CC 60 to show that the Company Law Board has no jurisdiction to entertain application filed under Section 111 seeking rectification of register of member on the grounds specified in Section 111(4) in respect of public limited companies. Therefore, the present petition under Section 111(4) is not maintainable under law.

(b) The petitioner has failed to implead 11 out of 18 transferors, who are necessary parties to the petition. The petition is bad for non-joinder of necessary parties and ought to be dismissed.

4. Shri Ramakrishnan pointed out that the Company was having huge liabilities in and around the year 2000. At this juncture, the petitioner and other directors approached the second respondent offering to sell the controlling interest in the Company. Accordingly, the second respondent agreed to purchase the shares at a price of Rs. 0.10 per share in view of the negative worth of the Company. The transferors agreeable to sell their shares to the second respondent had sent sale notices in accordance with Article 17 to the Board of Directors of the Company on various dates from 25.11.1999 to 1.12.1999. A Board meeting of the Company was convened on 15.12.1999, wherein notices of the proposed sale by the transferors were given to the members of the Company in tune with Article 18. The notice of proposed sale was also sent to the petitioner. None of the existing members including the petitioners was willing to purchase the shares. Thereafter, the Board of Directors accorded its consent for sale of the shares. After complying with the requirements of Articles 17 and 18, the fourth respondent entered into an MOU with the second respondent for sale of 70 per cent of the shares of the Company. The petitioner joined the MOU as a witness. After the MOU, the second respondent and 13th respondent were appointed as the Additional Directors at a Board meeting held on 16.02.2000, wherein the second respondent was apponted Managing Directors of the Company. Shri Ramakrishnan pointed out that the said Board meeting was presided by the petitioner himself. At the same Board meeting, the fourth respondent and Dr. Kalaiselvi resigned form the Board. The petitioner also participated in this meeting and approved the resolutions passed therein. The relevant form-32 in respect of this appointment and resignations was filed by the petitioner himself on 18.02.2000. At the Board meeting held on 6.4.2000, the Board of Directors approved the transfer of 8,25,500 shares in favour of the respondent 2 & 3. As the second respondent had agreed to clear the liabilities of the Company and also purchased majority of the shares in terms of the MOU, the petitioner resigned from the Board and accordingly addressed a letter of resignation to TIIC, principal creditor of the Company, forwarding a copy of his resignation letter to the Company. The Board of Directors have accepted the petitioner’s resignation at its meeting held on 25.5.2000 and form-32 was also filed with the Registrar of Companies on 5.6.2000. Shri Ramakrishnan further pointed out that a Board meeting held on 17.10.2000 the transfer of 10,000 shares from Mrs. Shanta in favour of the third respondent was approved. The third respondent, is a member of the Company since 6.4.2000 and transfer in favour of the third respondent is a inter-se transfer between the members, in which case the question of compliance with the formalities prescribed under Articles 17 to 22 does not arise. Shri Ramakrishnan has, therefore, riterated that the transfer and approval of the transfers in favour of the respondent 2 & 3 are in compliance with the relevant Articles of Association of the Company. He further pointed out that the petitioner had already filed a civil suit in O.S. No. 1086/2001 on the file of District Munchief, Coimbatore prior to filing of this petition raising identical issues relating to the appointment and continuance of directors and validity of the MOU dated 16.02.2000. The petitioner has suppressed these material facts and approached the CLB not with clean hands. The CLB, therefore, in exercise of its powers being equitable and discretionary, should not grant any relief to the petitioner, in support of which he relied on Suresh Kumar Manchanda v. Prakash Road Lines Ltd. (1996) 87 CC 102. The petitioner is not a transferor, not the transferee of the impugned shares and also not a aggrieved member, in which case the petitioner has no locus standi to seek for rectification of the register of members of the Company. He further submitted that the petitioner cannot allege infirmities on account of the appointment and resignation of directors or constitution of the Board or quorum in the Board meetings in a petition under Section 111. In this connection, he relied on Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. — (1998) 94 CC 310 to show that “if it truly is rectification all matters raised in that connection should be decided by the Court under Section 155 and if it finds adjudication of any matter not falling under it, it may direct a party to get this right adjudicated by the Civil Court”. According to him, even though, there are certain discrepancies in the letters of the transferors, which are not substantial, do not affect the transfer in view of the fact that the transferors are not challenging the transfers effected by them and approved by the Company. He further pointed out that not all the transferors are before the Company Law Board challenging the transfers approved on 6.4.2000 and 17.10.2000. They should necessarily be heard. In this connection, he relied on Muniamma and Ors. v. Arathi Cine Enterprises Pvt. Ltd. — (1993) 77 CC 97 to show that rectification of the register of members of the Company sought for by the petitioners in respect of the persons other that the petitioners as stated in the petition, cannot be granted in this petition. In the circumstances, Shri Ramakrishnan prayed that the petition must be dismissed.

5. Shri B. Senthil Naathan, Counsel appearing for the respondents 4, 5 & 11 supported the respondents 1 to 3 and reiterated that the petition is without any merit and sought for dismissal of the petition.

6. We have considered the pleadings and oral submissions of Counsel.

7. The main issue that arises for our consideration is whether the transfer of impugned shares in favour of respondents 2 and 3 is in accordance and in compliance with the relevant Articles of Association of the Company.

8. Before going into the merits, we shall deal with the preliminary objections raised by Counsel for the respondents.

9. The Company has been incorporated in January, 1995 as a private limited company within the meaning of Section 3(1)(iii) of the Act and accordingly its Articles contain the relevant restrictive clauses as prescribed in that Section. By virtue of the Companies (Amendment) Act, 2000, with effect from 14.12.2000, Section 3(1)(iii)(d) prohibits a private company from inviting or accepting deposits from persons other that its members, directors or relatives. A plain reading of Section 3, in our view shows that a company cannot be incorporated as a private company after the commencement of the Companies (Amendment) Act, 2000 unless its Articles provide for the aforesaid prohibition. However, we find that no provision has been made in this behalf in respect of existing private companies, unlike Sub-sections (3) to (5) for enhancing the paid-up capital. Non-insertion of such a prohibition in its Articles by an existing private company, in our view, shall not ipso facto change its character into a public company. However, such company should not accept deposits from persons other than its members, directors and their relatives. Therfore the arguments of Counsel for the Company must fail.

10. The other preliminary objection whether the transferors are necessary parties to the petition will depend upon our findings on the merits of the petition which will be dealt appropriately elsewhere.

11. The Articles 15 to 23 and 25 will assume relevance to decide the contentious issue whether the transfer of impugned shares is in compliance with these Articles.

Articles 15 provides that the shares should not be transferred to a person who is not a member of the Company, unless an opportunity is first given to the existing members to purchase the shares except where the transferee is a relative of the transferor specified in the Article.

Article 16 provides that shares should not be transferred unless right of pre-emption is exhausted. Article 17 provides that the persons proposing to transfer the shares should inform the Board about their intention to sell the shares, upon which the Board of Directions should give 50 days notice containing particulars regarding shares offered for sale and the offer price of the seller or the fair price fixed by the Board.

Article 18 provides that the Board will find a purchaser among the existing shareholders within 50 days of the sale notice and if any existing shareholder is willing to purchase the shares at the sale price offered by the seller or at the fair price fixed by the Board. The purchase will be completed within 14 days thereafter.

The other Articles, namely, Article 19, 20, 21, 23 and 25 are not relevant for the purposes of this petition. Now, we shall proceed to see whether the transfer of impugned shares in favour of the respondents 2 and 3 has been in compliance with Articles of Association of the Company. It is observed that 18 transferors have intimated the Board separately in writing on various dates from 15.11.99 to 11.12.99 (pager 1 to 18 of typed set of documents of respondents) about their intention to sell the shares a aggregating 8,25,500 at Rs. 0.10 per share. Copies of the letters of these transferors have been produced before us, the fact of which is not in dispute. However, the petitioner have challenged the validity of such letters taking into account the facts that the letters are similarly worded and that the transferors have not applied their mind while sending the letters offering to sell the shares in favour of the Company. This plea of the petitioner is without substantive in view of the fact that none of the transferors before us has challenged the validity of such letters. It is observed from the minutes of the Board of Directors of the Company held on 15.12.1999 (page 20 of typed set of documents of respondents)that the letters received form 18 shareholders desiring to sell the impugned shares were considered and after detailed discussion fixed their rate at Rs. 0.10 per share and that resolved to send a communication to all the members of the Company informing them about the intention of the 18 shareholders to sell their shares and to find out any member is interested in acquiring the shares at the rate of Rs. 0.10 per share. Thereafter, the Company, by its letter dated 5.2.2000 (page 19 of typed set of documents of respondents), advised the transferors that none of the other existing members is willing to purchase the impugned shares and therefore advised the transferors to sell the shares to any person of their choice within three months from 5.2.2000. The transferors were also advised to send the share certificates along with the transfer forms duly signed by the parties to enable the Board to give effect to the transfer of shares. This letter is also not challenged by the petitioner. It is also observed from the minutes of the meeting of the Board of Directors held on 6.4.2000 (page 26 of typed set of documents of respondents) that the Board of Directors approved the transfer of 8,25,500 shares in favour of the respondents 3 & 4. It is, therefore, beyond doubt that the relevant provisions of Articles have been duly complied with in transfer of the impugned shares in favour of the respondents. The minutes of the meeting of the Board of Directors held on 17.10.2000 (page 36 of typed set of document of respondents) show that the Board of Directors approved the transfer of 10,000 shares effected by Mrs. Shantha in favour of third respondent. Admittedly, the third respondent is a member of the Company and the transfer is between two members, the requirement of fulfilment of Articles 17 & 18 does not arise. We are therefore of the view that transfer of impugned shares in favour of the respondents has been in accordance with Articles of the Company and accordingly uphold the transfer of impugned shares in favour of the respondents. The other issues regarding manipulation of resignation letter of the petitioner, appointment and resignation of directors of the Company and the validity of MOU dated 16.02.2000 are not relevant and cannot be adjudicated in Section 111 proceedings. The case laws cited by Counsel for the petitioner are also not relevant in the fact and circumstances of the case. As we have upheld the transfer of impugned shares in favour of the respondent, the plea of non-joinder of the transferors does not arise.

12. With the above directions, we dispose of the petition, without any order as to cost.

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