1. The petitioners constituting one-tenth of the total number of members of M/s. Balaji Fabricators Pvt. Ltd ("the Company") have filed this petition under Sections 397 and 398 of the Companies Act, 1956 ("the Act") alleging acts of oppression and mismanagement in the affairs of the Company.
2. The alleged acts of oppression and mismanagement relate to the transfer of the entire shareholding of the third respondent in favour of the second respondent in violation of the relevant provisions of the Articles of Association of the Company, sale of the entire land and building of the Company against its interest, improper and irregular conduct of the affairs of the Company resulting in huge losses, default of statutory and other contractual obligations, siphoning of the Company's funds etc by the second respondent. With a view to bringing an end these matters of complaint, the petitioners have sought the following reliefs: (i) to declare that the transfer of shares made by the third respondent in favour of the second respondent is null and void.
(ii) to rectify the register of members of the Company by removing the name of the second respondent; (iii) to supersede the Board of Directors and appoint new members on the Board; (iv) to declare that the appointment of the second respondent as Managing Director is null and void; (v) to appoint a provisional administrator to conduct the affairs of the Company; (vi) to appoint an auditor to investigate into the "conduct of the respondents 1 & 2 and surcharge the second respondent for embezzlement of the Company's funds; (vii) to amend the Articles of Association of the Company, providing, for representation of the petitioners on the Board in proportion to their holding in the Company; and (viii) to set aside sale of lands of the Company in favour of any outsider.
3. While Shri K. Ramasamy, Counsel appearing for the petitioners, while initiating his arguments submitted that the Company was incorporated in the year 1976 by the third respondent and his father, to carry on the business of manufacture of machine tools and precision fabrication components. The first petitioner is wife and the second petitioner, daughter and the second respondent, son of the third respondent, who was the Managing Director ever since incorporation of the Company till 07.12.1998, when the second respondent was appointed as the Managing Director. The third respondent's two sisters are Directors. The Articles of Association contains specific provisions, viz., Articles 9, 10, 11, 12, 13 and 14, which are mandatory, governing transfer of shares by a member to any member or non-member. Accordingly, the transferee must be a desirable person and be selected by Directors of the Company. The transferor has to give notice to the Company specifying the fair value of the shares proposed to be sold, upon which the Company would find out any purchasing member willing to purchase the shares at the Fair value to be fixed by the auditor. If the Company within twenty-eight days finds out any purchasing member from the date of receipt of a transfer notice, must give notice to the proposing transferor and upon payment of the fair value, the proposing transferor is bound to transfer the shares to the purchasing member. According to Shri Ramasamy, the third respondent had transferred his entire shareholding to the second respondent in gross violation of these articles which constitutes oppression, in support of which reliance was placed on the following decisions:- ;M.M. Dua v. Indian Dairy and Allied Services (P) Ltd - (1994) 3 CLJ 529 to show that where there is a pre-emptive provision in the Articles of Association a transfer in violation of such provision constitutes oppression.S. Bhuvaneswari v. ACI (Agro Chemicals Industries) Ltd - 2003 (4) CTC 690, wherein the High Court of Madras confirmed the order of this Board setting aside the transfer of shares and rectifying the register of members, for non-compliance with the procedure contemplated under the Articles in regard to the transfer of shares.
According to the petitioners, they became aware of the impugned transfer from certified copies of Form 32 and annual return for the year ended 30.09.2002, obtained in July 2003. As the transfer impugned in the Company Petition is a continuing wrong, no question of limitation does arise, and drew support from A. Brahmaraj v. Sivakumar Spinning Mills P. Ltd - (1986) 3 CLJ 109 (Mad). Shri Ramasamy pointed out that the Company failed to produce any of the statutory records, particularly the original minutes of the Board Meeting, Register of Transfer and Register of Members to show that the procedure as contemplated under the Articles, to transfer the impugned shares was followed by the Company from the transferor, being the third respondent. No reliance could be placed on the reconstituted registers, as held in Bhajirao G. Ghatke v. Bombay Docking Company P. Ltd (1984) Vol.56 CC 428 (Bom). There is no need to implead the Directors, who are not necessary parties to the present proceedings, especially when the burden is on the respondents to prove that the impugned transfer of shares was in compliance with the relevant provisions of the Articles.
According to the petitioners, though they are holding more than 10% of the equity capital, they do not have any representation on the Board of the Company. The second respondent, by virtue of his brutal majority, has been taking unilateral decisions, thereby unfairly prejudicing the minority shareholders. There is, therefore, every justification for amending the Articles of Association to provide proportionate representation to the minority shareholders in management of the Company. The second respondent is attempting to sell the land and building belonging to the Company worth more than Rs. 3 crores under the guise of settling the bank liabilities and with the object of siphoning off the sale proceeds. The bank dues, according to Shri Ramasamy could be settled by realising the receivables and investments made by the Company, towards which no steps are being taken by the respondents and for executing the orders worth Rs. 5 crores said to have been procured by the Company. The majority shareholders have been mismanaging the affairs of the Company, which resulted in huge losses, financial crisis and poor performance, as borne out by the communication dated 02.11.2001 of the State Bank of India the Company's banker. The Company is unable to meet the demand of the suppliers, statutory Authorities, the contractual obligations and the bank liabilities. For these reasons, Shri Ramasamy sought for the reliefs claimed in the Company Petition.
4. Shri C. Harikrishnan, Senior Counsel appearing for the respondents 1 & 2 pointed out that the petitioners together holding 21,750 shares of Rs. 10/-each accounting for less than one-tenth of the issued share capital of Rs. 60 lakhs of the Company do not qualify to apply under Sections 397 and 398. The first petitioner is not the legally wedded wife of the third respondent. The third respondent not being either a Director or a shareholder of the Company instigated the petitioners to initiate the present proceedings for unlawful gains. The third respondent was the Managing Director, ever since the date of incorporation of the Company till 7.12.1998, as seen from Form 32 (Annexure R-4), filed with the Registrar of Companies, Chennai. The third respondent had transferred his entire shareholding in favour of the second respondent being the only male member in the family, in order to get him married. The learned Senior Counsel pointed out that the Board of Directors, in exercise of their powers conferred under Article 8, had approved the transfer of the entire shares made by the third respondent in favour of the second respondent, as a desirable person and in the interest of the Company. According to the learned Senior-Counsel, though Articles 8, 9, 10, 11, 12, 13 and 14 prescribe the procedure for transfer of shares of the Company, Article 8 is independent of the other Articles. If any transfer falls within the ambit of Article 8 and the procedure prescribed therein is complied with, as in the present case, the requirements of Articles 9, 10, 11, 12, 13 & 14 do not arise. Moreover, the underlying object of Article 8 is to keep the control of the Company in the hands of desirable persons and to ensure that shares are not transferred to strangers who are unacceptable to them, which was achieved in the instant case by approving the transfer of impugned shares in favour of the second respondent. The learned Senior Counsel placed reliance on V.B. Rangaraj v. V.B. Gopalakrishnan - (1992) 73 C.C 201 for strict interpretation of the restrictive clauses contained in the Articles of Association of a Company and Greenhalgh v. Mallard - All Er 234 to show that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly, and when a restriction is capable of two meanings, the less restrictive interpretation will be adopted by the Court. Applying this principle, the learned Senior Counsel reiterated that Article 8 must be adopted independently; while determining the validity of the impugned shares and not any of the remaining Articles.
Therefore, the transfer of shares of the third respondent in favour of the second respondent in fulfillment of Article 8 cannot amount to an act of oppression. The petitioners have never been taking part in the management and with meagre holding, they are not entitled to stake any claim for proportional representation on the Board. At the relevant point of time when the shareholding of the third respondent was transferred to the second respondent, the third respondent was the Managing Director, while Smt. Sumathi Narayanaswamy and Smt.
Vasanthakumari Vijayan were Directors of the Company, who had approved the transfer, in exercise of their power vested in them. Therefore, these directors are necessary parties to the Company Petition, without which the same is liable to be dismissed for non joinder of necessary parties. The Company has orders worth Rs. 5 crores, which could not be executed for want of adequate working capital. The decline in business over a period of time is on account of lack of finance. The creditors are pressing for settlement of the outstanding loans. These financial constraints can be overcome by sale of the land and building belonging to the Company and thereafter, the Company could function effectively and profitably. The Company has cleared the statutory liabilities and would meet the other financial obligations. Thus, the instant set backs set out in the Company Petition are not due to any mismanagement in the affairs of the Company. The financial problems of the Company are further compounded on account of the diversion of its business in favour of a business rival at the instance of the first petitioner.
5. According to Shri S.P. Muralikrishnan, Counsel appearing for the third respondent, his son being the second respondent had refused to get married until the entire shares of the third respondent got transferred in his favour, compelling the third respondent to effect the impugned transfer, ignoring the procedure contemplated in the Articles of Association of the Company and without receiving any consideration whatsoever. The third respondent had neither informed the Board of Directors nor other shareholders of the impugned transfer in order to avoid any controversy among the shareholders.
6. I have considered the pleadings and arguments of the learned Counsel. The first respondent Company is a closely held Private Limited Company, with the petitioners constituting not less than one-tenth of the total number of its members. Thus, the petitioners do qualify to apply under sections 397 and 398. The relationship of the members, save of the first petitioner which is not germane to the contentious issues before me is not under dispute. The main dispute is as to whether the transfer of shares is in accordance with the Articles of Association of the Company. Shri Ramasamy, the learned Counsel placed reliance on various decisions (supra), wherein the transfers made in violation of the pre-emptive clauses in the Articles of Association have been held to be invalid and as such the learned Counsel seeks that the transfer of the impugned shares, in the present case, must be declared invalid.
The provisions relating to transfer of shares in, the Company are contained in Articles 8 to 14. A sum of these Articles is as under:- Article 8: A share may be transferred by a member to any member or any person selected by the Directors provided such person is desirable one in the interest of the Company and willing to purchase the same at the fair value Article 9: Any person proposing to transfer any share ("proposing transferor") except where transfer is in pursuance of Article 14 hereof, has to give written notice ("Transfer Notice") to the Company, expressing his desire to transfer the same and specifying the fair value thereon and must constitute the Company as agent for sale of the share to any member or any person (purchasing member), who is desirable and willing to purchase the share.
Article 10: If the Company finds a purchasing member, within twenty eight days of the receipt of a transfer notice, it must give notice thereof to the proposing transferor, in which event the proposing transferor is bound to transfer the share in favour of the purchasing member upon payment of the fair value by him. The fair value would be fixed in accordance with Article 11.
Article 12: In the event of the proposing transferor makes default in transferring the share, this Article prescribes the remedial measures as well as safeguards. The plan of action to be adopted by the Company is specified.
Article 13: In the event of the Board does not find any purchasing member within twenty eight days of the receipt transfer notice, the proposing transferor is at liberty to sell the share to any person and at any price.
Article 14: The Directors are entitled to call upon any member or legal heirs or legatee of a deceased member to transfer forthwith all or any of the shares held by such member.
A careful analysis of the Articles suggests that by virtue of Article 8 a share may be transferred by a member to any member or any person, selected by the Directors on the following criteria:- a) that the purchasing member or the person selected must be a desirable person in the interest of the Company; and b) that the purchasing member or the person selected is willing to purchase the share at fair price.
The object of, Article 8 is quite clear: the transferee must be a desirable person and willing to pay the fair price for the share and nothing else. It is evident that when the requirements of Article 8 are duly met, the transfer stands accomplished. It is also evident that there is no further need of following the procedure as contemplated under Articles 9 to 14, provided that the transfer is made in accordance with Article 8. The provisions of Articles 9-14 in my considered view, must come into operation only in the event of any proposing transferor failing to find a purchasing member, as specified in Article 8, but not otherwise. No doubt that the operation of Article 8 must be construed independent of the remaining Articles. I, therefore, find merit in the arguments of Shri C. Harikrishnan, the learned Senior Counsel appearing for the respondents 1 and 2. Having found the independent operation of Article 8, I shall now consider as to whether the impugned transfer was in strict compliance with that Article. At this juncture, the pleading forming part of the reply filed on behalf--of the respondents 1 & 2 assumes importance, relevant portion of which reads as under: "It is submitted that the entire shares held by the 3rd Respondent in the 1st Respondent Company were transferred to the 2nd Respondent on the basis of and under the power conferred on the Board of Directors of the Company in the said Article No. 8 selecting the 2nd Respondent as a desirable person and in the interest of the Company and the Petitioners cannot question such a right of the Board of Directors expressly conferred on them ".
The above averments, I find, are not supported by any document. Unless the transfer impugned in the Company Petition was duly approved by its Directors, which must be substantiated by production of the Minutes of the meeting of the Board of Directors, approving such transfer or any other document evidencing the same, the plea that the transfer was in compliance with Article 8 does not merit any consideration. Mere pleadings have no evidenciary value. It is seen from the report dated 22.09.2003 of the Commissioner appointed by this Bench that none of the statutory registers and Books of Account from 01.04.2002 were made available by the Company for his authentication. The second respondent in his letter dated 19.09.2003 addressed to the Commissioner reported that all the Statutory records were misplaced by the previous Accountant. The explanation offered by the second respondent in his affidavit dated 15.03.2004 that the records are not traceable in spite of diligent search and that whereabouts of the said previous Accountant remain unknown are quite bald. It is rather extremely unlikely that the Company would be a helpless spectator without resorting to any concrete action such as criminal complaint in tracing out the whereabouts of the previous Accountant and the statutory records, being the Company's properties, of which the said affidavit is conspicuously silent. The affidavit dated 15.03.2004 does in no way establish due compliance of the requirements of Article 8. The Company has neither produced the instruments of transfer, which after registration ought to be in its custody in terms of Article 16. Against this background the plea of the third respondent, in his counter statement, which reads as under, assumes relevance: "... It is true that the third respondent had transferred the shares of the 1st respondent company to 2nd respondent, under a compulsion.
The 3rd respondent had also not given any notice which was required as per Article 10 of the articles of association of the company before transfer of any shares of the 1st respondent company to any existing shareholder or new member of the company and also not followed the Articles of Association of the Company. The reason was that 2nd respondent was refused to get married until the entire shares of the 3rd respondent get transferred in his name. In order to make the 2nd respondent to get married, the 3rd respondent who is father of the 2nd respondent ignored all procedures, which is specified in the articles of association of the Company to get, valid transfer. Further, the 3rd respondent had not informed the transfer of his shares to the board of directors and other shareholders till date to avoid the controversy among the members.
Further, it is true that at the time of transfer the 2nd respondent was not even a member of the company. However, he holds some share in joint name.
Further, till elate I have not received any consideration for above transfer of shares ".
The above specific plea of the third respondent was not repudiated by Shri Harikrishnan, the learned Senior Counsel, at the time of his oral submissions made before this Bench. .Even if the third respondent had voluntarily transferred the shares, the same is not complete as against the Company till the requirements of Article 8 are complied with and registration of the transfer is effected in the register of members with the approval of the Board of Directors. There is nothing on record to evidence this. I, therefore, do not hesitate to conclude that the respondents 1 and 2 have failed to establish that the procedure as contemplated in Article 8 was followed at the time of transfer of shares in favour of the second respondent and hence the same is liable to be set aside. When the impugned transfer is found to be invalid, the same cannot be validated by drawing support from the annual returns, as made out by the second respondent in his affidavit dated 15.03.2004.
Accordingly, the impugned transfer is set aside. I do not see any basis for the averments made in para 3 at page 3 of the reply filed on behalf of the respondents 1 & 2 to the effect the third respondent instigated the petitioners to file the Company Petition. Consequently the Company is directed to rectify its register of members by substituting the third respondent in the place of the second respondent within 30 days from the date of receipt of the order by the Company, upon which the general body members of the Company is at liberty to elect the Directors as well as the Managing Director in accordance with the relevant provisions of the Articles of Association of the Company. The new Board of Directors so constituted shall exercise all the powers in the conduct of the day to day affairs and business of the Company including the, power of sale of the properties of the Company in accordance with Articles 32-36, till then the interim order passed, in this behalf is made absolute. Towards this end, the Board of Directors will take appropriate steps in settlement of the outstanding statutory, contractual and the bank liabilities, keeping the interest of the, Company as well as its members. Any proposal for proportional representation for the minority shareholders on the Board falls within the purview of the general body of members and the Board of Directors of the Company. The petitioners' claim for the appointment of an auditor to investigate into the conduct of the respondents 1 & 2 and surcharging them not having been substantiated must fail. With these directions, the Company Petition stands disposed of however without any order as to costs.