I.A. Ansari, J.
1. The appellant, a private limited company, was, originally, incorporated, under the Companies Act, 1930, and is, therefore, an 'existing company' within the meaning of the provisions of the Companies Act, 1956. The appellant-company is in the business of manufacture and sale of tea and owns a tea estate, which is run under the name and style of Radhabari Tea Estate, situated in the district of Golaghat, Assam (hereinafter referred to as the 'appellant's tea estate'). For the last few years, the appellant's tea estate ran into losses. Consequently, the appellant's tea estate has not been able to make payment of its various dues, such as, electricity dues, creditors' dues, statutory levies as well as demands from the financial institutions. The electricity supply to the said tea estate stands disconnected since the year 2007 and the appellant's-bank has also declared the appellant-company as a non-performing asset and has accordingly initiated proceedings against the appellant-company in the Debts Recovery Tribunal, Guwahati.
2. On the ground that the financial condition of the appellant-company did not make it feasible for the appellant-company to run its business, an extraordinary general meeting of the shareholders of the appellant-company was convened on December 15, 2006. In this extraordinary general meeting, a resolution was adopted that the appellant's tea estate along with its assets and liabilities would be sold so that the dues of the appellant-company could be liquidated. The resolution also empowered the board of directors to negotiate with the highest bidder and sell the shares of the appellant-company without calling for any general meeting of the appellant-company. By another extraordinary general meeting held on March 19, 2007, the shareholders of the appellant-company ratified and confirmed the minutes of the earlier meeting, which had been held on December 15, 2006. The plaintiff, who holds 192 shares of the appellant-company, was also a party to the resolutions dated December 15, 2006 and March 19, 2007.
3. However, while it is the case of the appellant-company that all the shareholders of the company, including the plaintiff, had, in the beneficial as well as public, interest, empowered the board of directors of the appellant-company, by their two resolutions aforementioned, to transfer the shares to any person offering the highest bid so that the liabilities of the appellant-company could be liquidated, the plaintiff-respondent contends that he had objected to the decision to sell the shares to outsiders and had opted to exercise his pre-emptive right to purchase shares at the highest value, which may be offered, in this regard, by any outsider.
4. Notwithstanding the resistance, which the plaintiff claims to have so offered to the sale of shares to outsiders, the fact that the plaintiff had, eventually, become a party to the two resolutions aforementioned is not in dispute. What is in dispute is as to whether the plaintiff had raised his objection to the resolutions, which, according to the plaintiff, were sought to be adopted by the said extraordinary general meeting. Be that as it may, the total paid-up shares of the appellant-company are as many as 23,700 and the appellant holds, admittedly, barely 192 shares.
5. On the strength of the resolutions dated December 15, 2006 and March 19, 2007, adopted by the shareholders as mentioned hereinabove, the board of directors, in its meeting held, on August 14, 2007, resolved, inter alia, to transfer the equity shares of the appellant-company (held by the shareholders) to the prospective buyers offering highest price.
6. While, according to the plaintiff, he had expressed the desire to buy the shares of the other shareholders of the appellant-company at the maximum price, which might be offered by an outsider, and the appellant-company denies the same, the admitted position is this : Based upon the resolutions dated December 15, 2006 and March 19, 2007 of the shareholders and the resolution dated August 14, 2007 of the board of directors, the board could find a purchaser, who was willing to purchase the appellant-company along with all its assets and liabilities. On coming to know of the fact that a purchaser had been found, who was willing to purchase the shares, the plaintiff, vide his communication dated October 26, 2007, informed the managing director that the plaintiff proposed to retain Radhabari Tea Estate and also the appellant-company by having all shares of the company at the same price, which had been offered by the highest bidder, who is an outsider and not a member of the family, inasmuch as he (the plaintiff), being grandson of the person, who had been involved in bringing into existence the appellant-company, intended to retain the company within the family. By his said communication dated October 26, 2007, the plaintiff, thus, sought to exercise his pre-emptive or preferential right of purchase of the shares of the other shareholders and requested the managing director of the appellant-company to place the plaintiff's proposal to the board of directors for final approval.
7. As the plaintiff expressed his desire to purchase the share of the appellant-company, one of the directors (i.e., proforma respondent No. 3 in the present appeal, who was defendant No. 5 in the suit) issued a communication dated November 26, 2007, to the then managing director of the appellant-company with the opinion that the plaintiff be given a chance to purchase all the shares of the appellant-company along with its assets and liabilities. While the plaintiff claims that the managing directors and others, constituting the board of directors, did not pay any heed to the plaintiff's claim to purchase the shares at the rate, which had been offered by an outsider, the appellants claim that acting upon the communication dated November 26, 2007, aforementioned, the plaintiff-respondent was given the offer by the directors of the appellant-company to purchase the shares of the appellant-company along with the assets and liabilities and, for this purpose, the plaintiff on November 27, 2007, was asked to come to the registered office of the appellant-company to discuss the issue of sale of the shares as aforesaid. On the ground that on November 27, 2007, a bandh call had been given in Assam, the plaintiff did not, according to the appellants, attend the meeting. Even the plaintiff-respondent agrees that due to bandh, he could not attend the said meeting. The plaintiff-respondent accordingly, on November 28, 2007, issued a communication informing the managing director that he could not attend the meeting on November 27, 2007, due to bandh call.
8. Notwithstanding, therefore, the plaintiff-respondent's claim that his offer to purchase shares at the same rate, which had been offered by an outsider had not been heeded to by the board of directors, the materials on record, in the face of the communication dated November 27, 2007, aforementioned reveal otherwise. Be that as it may, by his said communication dated November 28, 2007, the plaintiff-respondent also expressed his inability to attend any discussion on the subject on November 29, 2007 and November 30, 2007. This apart, the plaintiff-respondent also communicated vide his letter dated November 28, 2007, aforementioned, that he (plaintiff-respondent) had been informed that the proposed buyer had become non-committal and, hence, the board of directors were to sort out two issues, namely, to ascertain the highest bidder along with other conditions of the transfer of shares and, thereafter, he (plaintiff-respondent) be given an opportunity to retain the shares at the highest bid. The plaintiff-respondent, in his said communication, also made it clear that the plaintiff was not a bidder for the shares of the appellant-company, but was only putting his pre-emptive right of purchase of shares at the price, which might be offered by the highest confirmed bidder from outside the family.
9. The appellants allege that it was due to delaying tactics adopted by the plaintiff-respondent that the highest bidder lost interest and became noncommittal. The appellant-company also alleges that the plaintiff-respondent did not really have any intention to purchase the shares; otherwise, he could have purchased the shares at the rate, which had been offered by the person, who had, as mentioned above, came forward to buy the shares along with all the assets and liabilities of the appellant-company. The plaintiff-respondent, however, denies that it was due to his fault that the highest bidder withdrew yet the fact remains that the plaintiff-respondent was, admittedly, informed about the highest bid, but the plaintiff-respondent had not, promptly and positively, responded to the highest bid, which was available from the bidder, who had come forward to buy the shares.
10. Be that as it may, the appellants' case is that responding to the plaintiff-respondent's communication dated November 28, 2007, the then managing director, again sent a communication dated December 3, 2007, to the plaintiff-respondent requesting the plaintiff-respondent to visit the registered office of the appellant-company to discuss the matter of purchase of shares of the appellant-company by the plaintiff-respondent, but the plaintiff-respondent, during his conversation with the then managing director, informed the latter that he was not interested in purchasing the shares of the appellant-company and its assets and liabilities. It is the further case of the appellant that following the non-committal attitude of the plaintiff and the increasing financial losses being incurred by the appellant-company, the board of directors held on December 14, 2007, a meeting to discuss the conduct of the plaintiff-respondent and it was resolved that the plaintiff-respondent be informed that he had no preemptive right to purchase the shares and, accordingly, on December 15, 2007, the then managing director of the appellant-company informed the plaintiff-respondent that his claim for exercise of pre-emptive right, i.e., preferential right of purchase, was not applicable. The plaintiff-respondent, on receiving the communication dated December 15, 2007, aforementioned did not react. By another communication dated December 9, 2007, the then managing director, requested the plaintiff-respondent and other shareholders to submit their original share certificates for the purpose of transferring the shares. In the said communication, all the share holders, including the plaintiff, were informed that the proposed purchaser had given an estimated consideration as regards the transfer of the shares. The plaintiff-respondent received the said communication on February 9, 2008. Having remained silent for sometime, the plaintiff-respondent on February 23, 2008, issued another communication, whereby he recon firmed that he was ready to offer the highest price along with the terms and conditions offered by the unnamed proposed buyer, which had been enclosed along with the communication dated February 9, 2008. Shortly thereafter, the plaintiff-respondent, on February 29, 2008, without receiving any response to the communication dated February 23, 2008, instituted a suit, namely, title Suit No. 1 of 2008, seeking various declarations and also permanent injunction. In his suit, the plaintiff-respondent impleaded the appellant-company and four of its directors as parties. The shareholders, who are owners of the shares and who are persons, who have the authority to sell or transfer their respective shares in terms of the articles of association of the appellant-company, have not been made parties nor any reliefs has been sought for against the shareholders. The reliefs, which the plaintiff-respondent sought for, in the suit, read as under:
(a) a decree declaring that the plaintiff has the preferential right and/or right of pre-emption to purchase the shares of defendant No. 1 from the selling members;
(b) a decree declaring that the defendants have no right to sell or transfer the shares of defendant No. 1 to any outside third party depriving a willing and desirous shareholder from purchasing the shares from selling members;
(c) a decree declaring that the communication/letter dated February 9, 2008, with annexures therewith, issued by the then managing director of defendant No. 1 addressed to the shareholders, including the plaintiff, is illegal, in-operative, not binding, contrary to the articles of association and without jurisdiction;
(d) a decree of permanent injunction restraining the defendants, their agents, attorneys, assigns and employees from selling, transferring and giving possession of the shares of defendant No. 1 and leasing out the Radhabari Tea Estate to any outside third party;
(e) a decree of permanent injunction restraining the defendants, their agents, attorneys, assigns and employees from delivering possession of the Radhabari Tea Estate to any outside third party in pursuance to any sale, transfer and leasing out transaction completed or to be completed in a surreptitious, fraudulent and concealed manner and behind the back of the plaintiff;
(f) a decree of mandatory injunction directing the defendants to sell and transfer the shares of defendant No. 1 in favour of the plaintiff from the intending selling members and also to deliver possession of the Radhabari Tea Estate unto the plaintiff;
(g) cost of the suit;
(h) any other relief or reliefs to which the plaintiff is entitled to in law and equity.
11. The plaintiff also filed, in the suit, an application under Order XXXIX, Rules 1 and 2 read with Section 151 of the Code of Civil Procedure, 1908, praying, inter alia, for an ad-interim temporary injunction restraining the appellant-company and its directors, their agents, attorneys, assigns and employees from selling, transferring and giving possession of the shares of the appellant-company to any outsider and/or from leasing out Radhabari Tea Estate and delivering possession thereof to any outsider/third party pursuant to any sale, transfer or leasing out transaction, completed or to be completed, in a surreptitious and fraudulent manner behind the back of the plaintiff-respondent. This application gave rise to Misc. (J) Case No. 1 of 2008.
12. The learned Civil Judge, Golaghat, on February 29, 2008, passed in Misc. (J) Case No. 1 of 2008, an ex parte ad interim injunction order, which was impugned, in appeal, before this Court, in F.A.O. No. 7 of 2008. This Court, by order dated February 24, 2009, directed the learned trial court to dispose of the said application for injunction within a period of one month from the date of receipt of the records.
13. Upon hearing learned Counsel for both the parties, the learned trial court passed an order on May 14, 2009, allowing the injunction application, filed by the plaintiff-respondent, thereby restraining the appellants herein, their agents, attorneys, assigns and employees from selling, transferring and giving possession of the shares of the appellant-company to any outsider and/or from leasing out Radhabari Tes Estate and delivering possession thereof to any outsider/third party pursuant to any sale, transfer or lease.
14. Aggrieved by the order of injunction, so passed, the appellants are before this Court.
15. Before I deal with this appeal, on merit, some events, which the appellants have brought on record, as having been taken place subsequent to passing of the impugned order dated May 14, 2009, may be taken note of.
16. Following the impugned order dated May 14, 2009, the proposed buyer of the shares of the appellant-company became disinterested. In the meanwhile, 37 (thirty seven) shareholders of the appellant-company informed the managing director that they wanted to sell their shares at a price not less than Rs. 800 per share and requested the managing director to find suitable shareholder, who was willing to buy their shares at a price not less than Rs. 800 per share, or else they (the said 37 shareholders) sought for authorisation to find an outsider to buy their shares. Pursuant thereto, the board of directors held a meeting on July 1, 2009 and resolved that the managing director be authorised to intimate all the 46 numbers of existing shareholders about the intention of the sale of shares from 37 numbers of shareholders at a value of Rs. 800 per share as per the provisions of Clause 7(c) of the articles of association of the company. In terms of the resolution, so adopted on July 1, 2009, by the board of directors, all the 46 shareholders of the appellant-company were duly informed to intimate their intention to buy the shares in a lot, at the price quoted, within seven days from the date of receipt of the said communication and also to deposit the entire consideration by an account payee cheque in favour of the shareholders within 14 days from the date of receipt of the said communication. In this communication, the appellant-company also made it clear to its shareholders that whoever, amongst the shareholders, proposed to purchase the shares would also have to agree to settle all the liabilities simultaneously.
17. By various communications made by them, as many as 36 (thirty six) shareholders denounced to exercise their pre-emptive right to buy shares in favour of the board of directors and authorised the board of directors to take a decision as regards sale of shares in a manner, which would be beneficial to the company. To the offer, so made by the shareholders as mentioned hereinbefore, the plaintiff-respondent did not, vide his communication dated July 9, 2009, give any positive response or offered to purchase the shares; rather, the plaintiff-respondent threatened that any attempt to sell/transfer the shares or lease Radhabari Tea Estate would amount to contempt of court and the consequences would ensue. The board of directors, having not received any positive response from its shareholders as regards purchase of the shares, passed a resolution to institute appropriate proceedings to get set aside the impugned order dated May 14, 2009, and authorised, in this regard, the managing director of the appellant-company to initiate appropriate steps. Pursuant to this decision, the present appeal under Order XLIII, Rule 1(r) read with Order XLIII. Rule 2 of the Code of Civil Procedure has been preferred. The appellants have also filed an application under Order XLI, Rule 5 read with Section 151 of the Code of Civil Procedure seeking stay of the impugned order dated May 14, 2009, aforementioned.
18. I have heard Dr. A.K. Saraf, learned senior Counsel, appearing on behalf of the appellants and Mr. S. Ali, learned Counsel, appearing for the plaintiff-respondent.
Submissions:
19. Appearing on behalf of the appellants, Dr. A.K. Saraf, learned senior Counsel, submits that in the case at hand, the shares are owned by the shareholders and in their absence, no effective decree for specific performance of contract to sell the shares in preference to an outsider can be passed in the suit and, hence, the shareholders, being necessary parties, the suit was prima facie not maintainable in law in their absence. Injunction could not have, according to Dr. Saraf, been granted in the present case, when the suit was prima facie not maintainable due to the plaintiff's omission to implead the shareholders as parties.
20. Dr. Saraf contends that according to the plaintiff-respondent, the articles of association, in the present case, give a shareholder pre-emptive right to buy shares in preference to an outsider; hence, in the case of the refusal of a shareholder to stick to the condition, so embodied in the articles of association, an aggrieved shareholder, such as, the present petitioner, would have a right to sue for specific performance of the contract and, in such a suit for specific performance, the shareholder, who seeks to sell his share(s) to an outsider, would, naturally, be, submits Dr. Saraf, a necessary party, for, in his absence, no suit for specific performance of contract would lie. Viewed from any angle, therefore, contends Dr. Saraf, the shareholders, in the case at hand, are necessary parties to the suit, when the plaintiff has instituted a suit for specific performance of the contract of sale of shares in exercise of the plaintiff's pre-emptive rights, as available to him, under the articles of association, against the shareholders and the appellant-company.
21. Dr. Saraf submits that in the present suit, since the shareholders are not made parties either in their individual or representative capacity, the suit was not entertainable and in such a suit, no injunction could have been granted in terms of the prayer made by the plaintiff-respondent. Conversely, submits Dr. Saraf, if the decision to sell the shares, in question, is taken to be the decision of the company, the remedy of the aggrieved shareholders, such as, the plaintiff, would lie in applying to the Central Government in terms of the provisions of Section 399 of the Companies Act, 1956, for, the decision to sell shares by majority of the shareholders by allegedly denying the plaintiff's pre-emptive right to purchase shares is, in the light of the pleadings of the plaintiff, an oppressive act and squarely covered by the provisions of Section 397 read with Section 399 of the Companies Act. Viewed from this angle too, contends Dr. Saraf, the suit not being maintainable, the question of granting injunction, as has been done, in the present case, did not really arise.
22. Dr. Saraf points out that for the purpose of granting injunction, the learned trial court has relied solely on the right of the plaintiff to purchase shares in terms of Sub-clauses (c) and (d) of Clause 7 of the articles of association. Dr. Saraf further points out that even under the articles of association, particularly, Sub-clause (i) of Clause 7, the board of directors has the power to recognise transfer of shares to an outsider if such transfer is in fulfilment of any object considered as charitable or beneficial or for public purpose or warranted under the terms of a trust deed created by the shareholder with any such object. In such circumstances, contends Dr. Saraf, a shareholder's pre-emptive right, in the present case, cannot be said to be absolute and unqualified. This vital aspect, contends Dr. Saraf, has been completely lost sight of by the learned trial court. When a trial court, submits Dr. Saraf, misconstrues a document or a provision of a deed, while reaching a decision, such a decision can be interfered with by the appellate court. In support of this submission, Dr. Saraf places reliance on Ramdev Food Products P. Ltd. v. Arvindbhai Rambhai Patel reported in : [2006] 8 SCC 726.
23. Dr. Saraf submits that the decision to sell shares to an outsider, who would agree to take all the assets and liabilities of the company, was beneficial and in public interest and this decision was a decision of the company, as a whole, inasmuch as the company had run into losses. Dr. Saraf also submits that the statutory dues have not been paid by the company, financial institutions have instituted proceedings for recovery of dues of the appellant-company, there is labour unrest and risk of threat to human life and property if wages and other dues of the labourers are not paid. The liability of the company, points out Dr. Saraf, stood at Rs. 2,31,10,000 lakhs, as on July 1, 2009; whereas, in the month of February 2008, the liability has soared to Rs. 4,15,96,000 lakhs. In such a case, when the board of directors decided to act on the resolution of the shareholders to sell the share of the company to an outsider, who would agree to take all the assets of the appellant-company along with its liabilities, the decision, being in public interest and in tune with the provisions of Sub-clause (i) of Clause (7) of the articles of association, ought to have been allowed to take its course. This aspect too, contends Dr. Saraf, has been lost sight of by the learned trial court.
24. While granting an interim order of injunction, a court is also required to bear in mind, contends Dr. Saraf, the element of public interest, but the trial court, while passing the impugned order, in the present case, does not appear to have taken note of the public interest involved in the decision of the majority of the shareholders. In support of his contention that, while granting an interlocutory order too, such as, an order of injunction, a court is required to keep in view the element of public interest, if any, Dr. Saraf relies on Ramniklal N. Bhutta v. State of Maharashtra reported in : [1997] 1 SCC 134.
25. Dr. Saraf submits that granting of injunction being a discretionary relief, the conduct of a person, who applies for injunction, is a relevant consideration and if the conduct of a person is not appropriate or iniquitous, he cannot seek relief of injunction.
26. In support of his above submission, Dr. Saraf relies on Gujarat Bottling Co. Ltd. v. Coca Cola Co. reported in : [1995] 84 Comp Cas 618 : [1995] 5 SCC 545, and relying upon the decision, in Gujarat Bottling Co. Ltd. (supra), Dr. Saraf points out that according to the articles of association, the shareholder, who is interested in buying a share, which has been offered by another shareholder to be sold to an outsider, has to not only make his offer to purchase the share at the rate at which an outsider is willing to purchase, but shall also deposit the value of the share within a period of 14 days from the date, when the decision of the shareholder to sell the shares to an outsider becomes known to the shareholder, who is interested in making purchase of such a share. In the present case, points out Dr. Saraf, it is the admitted case of the plaintiff that the plaintiff had known all along about the resolutions adopted in the extraordinary general meeting held on December 15, 2006 and March 19, 2007, to which he (the plaintiff) was a party and he (plaintiff), having also come to know that the board of directors had found a purchaser, who was willing to purchase the appellant-company along with its assets and liabilities, sent a communication dated October 26, 2007, expressing his willingness to purchase the shares at the rate at which the shares were offered to be purchased by the outsider. Thus, points out Dr. Saraf, while the plaintiff, having known on October 26, 2007, that a purchaser for shares had already been found, offered to buy the shares, but he did not deposit the requisite money within the prescribed period of 14 days. In such circumstances too, the plaintiff's preemptive rights, if any, stood, according to Dr. Saraf, extinguished, but this aspect too has not been taken note of by the learned trial court. The rights, given under the articles of association, is, according to Dr. Saraf, enforceable at the option of the shareholders and, consequently, the rights, under the articles of association, can be waived by the shareholders unless the provisions, contained in Section 9 of the Companies Act, 1956, show that such waiver is against the provisions contained in the Companies Act. In the present case, nothing has been brought on record to show that the preemptive right of purchase could not have been waived by the shareholders in the interest of the company and in the interest of the public at large. Situated thus, in a case, as the one at hand, contends Dr. Saraf, no injunction ought to have been granted by the learned trial court.
27. Drawing attention of this Court to the impugned order, dated May 14, 2009, Dr. Saraf submits that the learned trial court has assigned no reasons for reaching its conclusion that there is prima facie case in favour of the plaintiff, the balance of convenience is in favour of granting injunction and that refusal to grant injunction would cause irreparable loss inasmuch as the learned trial court, after setting out the facts of the plaintiff's case, has, suddenly, come to the conclusion that there is a prima facie case, the balance of convenience is in favour of the plaintiff and that irreparable loss would be caused if injunction is not granted. An order of injunction, though temporary, which assigns no reason, as in the case at hand, cannot, but be regarded, contends Dr. Saraf, illegal and deserves to be interfered with. An appellate court, points out Dr. Saraf, needs to know the reason for passing an order of injunction and an order of injunction, which assigns no reason whatsoever, cannot be sustained. Reference, in support of his submissions, is made by Dr. Saraf to the case of Star India P. Ltd. v. Siti Cable Network Ltd. reported in : [2003] 117 Comp Cas 146 : [2003] 8 SCC 304.
28. In the case at hand, the learned trial court has merely observed, points out Dr. Saraf, that the suit is not barred inasmuch as Order XXXIX, Rule 5 of the Code lays down that injunction directed to a corporation is binding not only on the corporation, but also on all the members and office bearers of the corporation, whose personal action it seeks to restrain. However, contends Dr. Saraf, the learned trial court has not noticed the fact as to whether an order of injunction can be passed without bringing on record the necessary parties, and, in the case at hand, when the shareholders are owners of the shares, their decision to sell the shares cannot be disturbed without impleading them as necessary parties. The observation, made by the learned trial court, in its order granting injunction that the provisions of Section 397 of the Companies Act are not attracted, is not supported by any reasoning. Such an order, according to Dr. Saraf, has no legal sanction and needs to be interfered within the interest of justice.
29. In the present case, contends Dr. Saraf, no shareholder has an absolute or unqualified right to demand that the shares must be sold to him inasmuch as the board of directors has the discretion to allow transfer of shares in terms of the articles of association and when the provisions of the articles of association are not under challenge, the discretion of the board of directors, to allow transfer of shares to an outsider without the offer of sale of such, shares having made to the other shareholders of the appellant-company, could not nave been taken away as has been done in the present case.
30. Dr. Saraf submits that the development, subsequent to institution of a proceeding, is an aspect, which an appellate court must take into account for the purpose of deciding the maintainability of an order, which may stand impugned before it. In the light of this position of law, this Court may take note of the fact that it has clearly surfaced on record that the shareholders have offered to sell the shares to anyone at a rate of Rs. 800 per share and the fact that such a decision has been taken by the shareholders, other than the plaintiff-respondent, is not in dispute. In such circumstances, contends Dr. Saraf, the omission of the plaintiff-respondent to accept the offer to purchase share at Rs. 800 per share is not to affect the order of injunction inasmuch as the plaintiff-respondent cannot force the shareholders to sell their shares at a rate lower than Rs. 800 per share and if the shareholders receive special price as they are asking for, they would be entitled to sell the shares, but the impugned order of injunction restrains the shareholders from doing so. Hence, in the light of the subsequent decision of the shareholders in the matter, the impugned order of injunction, according to Dr. Saraf, needs to be set aside. In support of his contention that the developments, subsequent to institution of a proceeding should be taken into account by an appellate court, Dr. Saraf refers to Pasupuleti Venkateswarlu v. Motor and General Traders reported in : [1975] 1 SCC 770 and Laxmi and Co. v. Dr. Anant R. Deshpande reported in : [1973] 1 SCC 37.
31. Controverting the submissions made on behalf of the appellant, Mr. M. Ali, learned Counsel for the plaintiff-respondent, submits that when a trial court grants injunction, such exercise of jurisdiction being discretionary the appellate court's power to interfere with such an order of injunction is circumscribed. An appellate court, contends Mr. Ali, should be slow in interfering with an order of injunction. In the present case, the learned trial court, according to Mr. AH, has assigned cogent reasons for coming to the conclusion that the plaintiff has made out a prima facie case for trial, the balance of convenience is in favour of granting injunction and irreparable loss would ensue if injunction is refused. Thus, according to Mr. Ali, all the three golden principles, in respect of granting of injunction, having been well satisfied in the present case, this Court, as an appellate court, may not, in the facts and circumstances of the present case, interfere with the impugned order.
32. In support of his submission that the appellate court's power, against the exercise of discretion of granting injunction by the trial court, is circumscribed and that an appellate court must be slow in interfering with the discretionary exercise of jurisdiction of granting injunction, Mr. Ali places reliance on Wander Ltd. v. Antox India P. Ltd. reported in : [1990] (Supp) SCC 727 and Smt. Kausalya Barua v. Brahmaputra Construction Ltd. reported in : [2005] 2 GLT 190 : AIR 2005 Gau 149.
33. Mr. Ali points out that the articles of association of the present company contain terms and conditions of a contract between the company and the shareholders and also the shareholders inter se. In such circumstances, the terms and conditions, embodied in the articles of association, as regards transfer of the shares, can be, according to Mr. Ali, specifically enforced by an aggrieved shareholder. In the present case, the learned trial court has correctly pointed out, contends Mr. Ali, that under the articles of association, the plaintiff has a pre-emptive right to purchase the shares and, in such circumstances, his right can be specifically enforced. In the context of the facts of the present case, the decision to sell the share has become, according to Mr. Ali, the decision of the company and, in such circumstances, it is only the company, in question, and the members of the board of directors, who are necessary parties to the suit. Consequently, in the present case, the shareholders are, according to Mr. Ali, not necessary parties and the suit is not bad in their absence.
34. It is further contended by Mr. AH that at the time of granting of injunction, a court cannot determine whether the suit is maintainable or not inasmuch as the issue, with regard to maintainability of a suit, can be decided, at the earliest, by way of preliminary issue, when the defendant appears pursuant to the summons issued. In effect what Mr. Ali submits is that at the time of granting injunction, the court is not required to even prima facie determine if the suit, wherein injunction has been sought for, is maintainable or not and/ or whether the court, wherein a prayer for granting injunction has been made, is or is not the competent court to grant such an injunction.
35. In order to sustain his submission that the articles of association are equivalent to the terms and conditions of contract between the company and the shareholders and the shareholders inter se and that the pre-emptive right of a shareholder to purchase shares, in preference to an outsider, can be specifically enforced by an aggrieved shareholder, Mr. Ali refers to Smt. Claude-Lila Parulekar v. Sakal Papers P. Ltd. reported in : [2005] 124 Comp Cas 685 : [2005] 11 SCC 73 and Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad reported in : [2005] 123 Comp Cas 566 : [2005] 11 SCC 314.
36. Reacting to the submissions made on behalf of the plaintiff-respondent, Dr. Saraf submits that there can be little doubt that an appellate court's jurisdiction to interfere in matters of discretionary exercise of jurisdiction, such as injunction, is circumscribed, but there can also be no doubt, points out Dr. Saraf, that when a trial court takes a decision ignoring a relevant fact or a material aspect of law, non-interference would not only be unjustified, but would amount to refusal to exercise jurisdiction by the appellate court. In the present case, submits Dr. Saraf, the learned trial court has not considered at all if the shareholders were necessary parties. If the shareholders were necessary parties in the suit, in their absence the suit was not maintainable and when the suit is not maintainable, even any interlocutory order of injunction cannot, according to Dr. Saraf, be passed. Support for this submission is sought to be derived by Dr. Saraf from the cases of Shiv Kumar Chadha v. Municipal Corporation of Delhi reported in : [1993] 3 SCC 161 and Pranab Kumar Banerjee v. Momin Ali alias Mukib Ali reported in [2006] 2 GLR 26.
37. Dr. Saraf points out that the learned trial court, in the present case, has also brushed aside the fact that the plaintiff has specifically alleged, in his pleadings, that the board of directors has mismanaged the affairs of the company and has caused loss to the company. According to Dr. Saraf, these allegations are tantamount to saying that the plaintiff's voice of protest against the mismanagement of the company and against the extraordinary resolution of the general meeting of the shareholders were ignored and suppressed; hence, the decision of the majority of the shareholders was, according to the plaintiff, in the light of the pleadings of the plaint, harsh and oppressive. The remedy, in such a case, contends Dr. Saraf, lies in not knocking at the doors of the civil court, but in approaching the Central Government in terms of the provisions of Section 399 of the Companies Act, 1956, so as to enforce the plaintiff-respondent's rights, if any, by taking resort to Sections 397 and 398 of the Companies Act, 1956.
38. Dr. Saraf further points out that even the decision, relied upon by Mr. Ali, namely, Sangramsinh P. Gaekwad (supra), clearly holds that the conditions, contained in the articles of association, can be waived or modified by the shareholders. Hence, the shareholders as well as the appellant-company, according to Dr. Saraf, had the right to waive the conditions of the articles of association so long as such waiver was not in contravention of law. In the present case, submits Dr. Saraf, the shareholders and the board of directors decided, in the interest of the company and in the public interest too, to look for a person outside the company, who would be willing to take the assets and liabilities of the appellant-company. Unless such a decision is found or held to be bad in law or against the interest of the appellant-company or against public interest, such a decision, contends Dr. Saraf, ought not to have been interfered with by an order of injunction. According to Dr. Saraf, when maintainability of the suit, in the present case, is a crucial question and the trial court has not determined if the suit is prima facie maintainable in the absence of the shareholders, such a decision can be interfered within appeal.
Questions to be determined:
39. The limited grievance of the plaintiff, as reflected from the plaint and the application seeking injunction, has been that the defendants, in the suit, are trying to sell the shares of the appellant-company to an outsider without giving the plaintiff an opportunity, as warranted, by the articles of association of the appellant-company to purchase the shares of the appellant-company at the highest rate, which may be offered by an outsider. The plaintiff's allegation is that the process initiated by the appellant-company to sell the shares of the appellant-company is in violation of the articles of association, though the articles of association are binding upon the appellant-company, its directors and all the shareholders. In support of his case, the plaintiff relies on Clauses 7(b), 7(c) and 7(d) of the articles of association, which the plaintiff contends confer a pre-emptive right on the plaintiff, as a shareholder, to purchase the shares of the appellant-company. In other words, according to the plaintiff, he, in terms of the articles of association, has, in the facts and attending circumstances of the present case, preferential right of purchase of shares. In the facts and circumstances of the present case, therefore, whether the learned trial court have, legally and justifiably, granted injunction in the manner, as indicated above, by its order dated May 14, 2009? This is the moot question, which this appeal has raised for determination.
40. The answer to the moot question framed above needs to be determined on the basis of the answers to some other relevant questions. Broadly speaking, the questions are: (i) What is the appellate court's power and role in dealing with an order of injunction passed by a trial court? (ii) What do the articles of association of a company mean and what their legal significance is? (iii) When is a suit barred by the Companies Act, 1956? (iv) What is a necessary party? (v) Is the question, as to whether a party is a necessary party to a given suit, a question, which is required to be looked into by a trial court, at the time of considering an application for injunction or not? (vi) Whether it is legally permissible to grant injunction, without impleading a necessary party to a suit, when omission to implead may have a bearing on the rights, if any, of such a party? Whether the court is not required to arrive at a prima facie satisfaction that the suit, wherein any interlocutory order, such as, an order of injunction has been sought for, is or is not maintainable? Is prima facie satisfaction, as regards maintainability of a suit, a factor, which falls outside the purview of the court's power at the time, when the court considers if a relief shall or shall not be granted on an interlocutory application, such as, an application for injunction-
(i) What is the appellate court's power and role in dealing with an order of injunction passed by a trial court
41. While considering the scope of an appellate court's power to interfere with exercise of discretionary jurisdiction of a trial court in matters of injunction, it needs to be borne in mind that an appeal against exercise of discretion is really an appeal in principle. The appellate court will, therefore, not re-assess the materials and seek to reach a conclusion different from the one, which has been reached by the trial court if the conclusion, which the trial court had reached, was a reasonably possible conclusion on the materials on record. Lest exercise of discretion in interlocutory applications, such as, injunction, becomes wild, unwieldy, unpredictable or arbitrary, the courts have evolved certain principles, which govern exercise of such discretionary powers. The principle, that in order to obtain an interlocutory order of injunction, a party must satisfy the court that there is a prima facie case to go in for trial, that the balance of convenience is in favour of granting injunction and that there would be irreparable loss if injunction is not granted are the principles, which have been consistently followed by the courts so that some judicially determinable parameters remain available for the purpose of deciding if discretionary exercise of power of granting injunction has or has not been justifiably granted. The three golden principles, which govern the grant of injunction, are nothing, but conditions, which are required to be satisfied by a party in order to enable it to obtain an interlocutory order of injunction.
42. Consequently, in such appeals, while the appellate court will not, ordinarily, substitute its own discretion in place of that of the trial court, yet where discretion is shown to have been exercised arbitrarily, capriciously or by ignoring settled principles of law regulating grant or refusal of interlocutory injunction, the appellate court is bound to interfere, for, non-interference with such exercise of powers by the trial court will, if allowed to remain good on record, cause serious miscarriage of justice. It is also important to bear in mind that the appellate court may not be, normally, justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage, it would have come to a contrary conclusion. While granting injunction, if discretion has been exercised by a trial court reasonably and by adhering to all judicial norms and principles, the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of jurisdiction. When, however, the trial court is found to have exercised its discretion arbitrarily, capriciously or by ignoring the settled principles of law, governing grant or refusal of interlocutory application, the appellate court must step in and correct the wrong. In Wander Ltd. v. Antox India P. Ltd. reported in : [1990] (Supp) SCC 727, the apex court, while dealing with the appellate court's power to interfere with the exercise of jurisdiction by a trial court, observed and held as follows (page 733):
The appeals before the Division Bench were against the exercise of discretion by the single judge. In such appeals, the appellate court will not interfere with the exercise of discretion of the court of the first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by that court was reasonably possible on the material. The appellate court would normally not be justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage it would have come to a contrary conclusion. If the discretion has been exercised by the trial court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may hot justify interference with the trial court's exercise of discretion. After referring to these principles Gajendragadkar J. in Printers (Mysore) P. Ltd. v. Pothan Joseph : [1960] 3 SCR 713 (SCR page 721):
These principles are well established but as has been observed by Viscount Simon in Charles Osenton and Co. v. Jhanaton [1942] AC 130 '...the law as to the reversal by a court of appeal of an order by a judge below in the exercise of his discretion is well established, and any difficulty that arises is due only to the application of the well-settled principles in an individual case'.
The appellate judgment does not seem defer to this principle.
43. Mr. Ali is, therefore, not incorrect in referring to the case of Smt. Kausalya Barua v. Brahmaputra Construction Ltd. reported in : [2005] 2 GLT 190 : AIR 2005 Gauhati 149, wherein the court has held that the power of interference by the appellate court in matters of injunction is circumscribed and that the appellate court would be slow to interfere with the exercise of jurisdiction and would not, normally, be justified in interfering with the exercise of discretion under appeal on the sole ground that if it had considered the matter at the trial stage, it might have come to a contrary conclusion.
44. What is, however, of immense importance to note is that neither the Wander Ltd. (supra) nor Smt. Kausalya Barua (supra) lays down that the appellate court shall not interfere with an interlocutory order of injunction if exercise of jurisdiction by trial court, in the matter of granting or refusing to grant injunction, is against the settled principles, which govern exercise of power of granting injunction on interlocutory applications for injunction.
45. Thus, an appeal against exercise of discretionary jurisdiction is really an appeal in principle and that is why, unlike a regular appeal, in the ordinary sense, where whole evidence on record is examined anew by the appellate court, what is really examined, in an appeal against exercise of discretionary jurisdiction, is the legality and validity of the order and it can be set aside and should be set aside only when there is a patent error on the face of the record or the order is against the established or settled principles of law. If two views are possible and a view, which is reasonable and logical has been adopted by a trial court, the other view, howsoever appealing would not be allowed to be substituted in place of the trial court's views, which are, otherwise, reasonable and logical.
What is a necessary party?
46. It is Order 1 of the Code of Civil Procedure, which deals with parties, in general, as well as necessary parties. In a civil suit or proceeding, the court considers the question of necessary party keeping in view the litigation before it and the litigants available on record. In order to determine if a person is or is not a necessary party, one has to ascertain whether there is a right to obtain relief against such a party and whether it would be possible to pass an effective decree in the absence of such a party. If the answer to these two questions are found in the affirmative, such a party would be treated as a necessary party. This position of law clearly emerges from the case of Deputy Commissioner, Hardoi, In-charge Court of Wards Bharawan Estate v. Rama Krishna Narain : AIR 1953 SC 521, wherein the apex court has observed (page 526): 'The majority judgment was delivered by Pathak J. He enunciated two tests for deciding whether certain person was a necessary party in a proceeding: (1) that there must be a right to some relief against such a party in respect of the matter involved in the proceedings, in question, and (2) it should not be possible to pass an effective decree in the absence of such a party and proceed to observed that the creditors of a landlord who have claimed relief under the Encumbered Estates Act are necessary parties to the proceedings under that Act and that the object of the Act is to compel the landlord to surrender his entire property for the benefit of his creditors and to liquidate the debts of all the creditors in accordance with and to the extent permitted by the Act. There can be no question that these are the true tests for determining whether a person is a necessary party to certain proceedings....
(Here printed in italics)
47. Thus, in Rama Krishna Narain (supra), two tests have really been laid down for determining the question as to who can be regarded as necessary party in a civil suit, the tests being (1) that there must be a right to some relief against such a party in respect of the matter involved in the proceedings, in question, and (2) that it should not be possible to pass an effective decree in the absence of such a party.
48. What follows from the above discussion is that in order to treat a person as a necessary party to a suit, such a person must be one against whom the right to relief can be claimed and in whose absence, it is not possible to pass an effective decree.
Whether maintainability of a suit is an aspect, which needs to be examined by the court, before acceding to a prayer for granting an interlocutory order of injunction and, if so, what can be the extent of such examination? In the absence of a necessary party to a suit, whether interlocutory order of injunction can be passed?
49. It is trite, as already discussed above, a person, seeking an interlocutory order of injunction, must satisfy the court that there is a prima facie case to go in for trial, the balance of convenience is in favour of granting injunction and that refusal to grant injunction would entail irreparable loss.
50. Let me, now, determine as to what the meaning of the expression 'prima facie case' is a prima facie case means that the plaintiff has raised triable issues. The question, therefore, is as to what is the meaning of a triable issue. It needs to be borne in mind that a triable issue does not merely mean an issue raised for adjudication; rather, it would mean an issue, which is raised for adjudication and is also within the competence of the court (where the issue has been raised) to adjudicate upon and decide the issue. As a corollary, when a suit is ex-facie or prima facie not maintainable, triable issue cannot be said to have been arisen. If a person, seeking injunction, fails to show that he has a prima facie case, the court is not required to determine if balance of convenience is in favour of granting injunction or that irreparable loss would or would not be caused if injunction is not granted. To put it little differently, prima facie satisfaction is required to be reached by a court that it has the jurisdiction to try the suit, wherein interlocutory order of injunction is sought for. Unless the court is prima facie satisfied that it has the jurisdiction to try a given suit, it cannot pass an interlocutory order of injunction.
51. The prima facie satisfaction, that a suit is maintainable, is, thus, an aspect, which is different from determination of an issue of maintainability of a suit as a preliminary issue. At the stage of granting ex parte order of injunction, no triable issue is framed. The court has to, nevertheless, satisfy itself, before it grants temporary injunction, that the suit, in the state or manner in which it has been brought before the court, is a suit, which falls within the jurisdiction of the court, (which has been approached) for the purpose of adjudication of the issue. If such a prima facie satisfaction is not reached or could not have been reached, interlocutory order of injunction, in either case, would be an order, which cannot be sustained. In Shiv Kumar Chadha v. Municipal Corporation of Delhi reported in : [1993] 3 SCC 161, the apex court has, in no uncertain words, held that before any order of injunction is passed, the court must be satisfied that strong prima facie case has been made out against the plaintiff including, amongst others, on the question of maintainability of the suit. The relevant observations, made in this regard, in Shiv Kumar Chadha (supra), read (page 175):
30. It need not be said that primary object of filing a suit challenging the validity of the order of demolition is to restrain such demolition with the intervention of the court. In such a suit the plaintiff is more interested in getting an order of interim injunction. It has been pointed out repeatedly that a party is not entitled to an order of injunction as a matter of right or course. Grant of injunction is within the discretion of the court and such discretion is to be exercised in favour of the plaintiff only if it is proved to the satisfaction of the court that unless the defendant is restrained by an order of injunction, an irreparable loss or damage will be caused to the plaintiff during the pendency of the suit. The purpose of temporary injunction is, thus, to maintain the status quo. The court grants such relief according to the legal principles - ex debito justitiae. Before any such order is passed the court must be satisfied that a strong prima facie case has been made out by the plaintiff including on the question of maintainability of the suit and the balance of convenience is in his favour and refusal of injunction would cause irreparable injury to him.
(Here printed in italics)
52. Following the decision, in Shiv Kumar Chadha (supra), a Division Bench of this Court, in Pranab Kumar Banerjee v. Momin Ali alias Mukib Ali reported in [2006] 2 GLR 26, has held that while exercising its discretion on an application made under Order XXXIX, Rules 1 and 2 of the Code of Civil Procedure, the court has to see whether the plaintiff has a strong prima facie case, whether the balance of convenience is in favour of the plaintiff and whether the plaintiff would suffer irreparable loss or injury if the prayer for injunction is disallowed. Having so observed, the Division Bench further observed in Pranab Kumar Banerjee (supra), held the court is also required to see, in such a case, whether the suit is prima facie maintainable or not. The observations, made in this regard in Pranab Kumar Banerjee (supra), read as under:
7. The law relating to grant of temporary injunction under Order 39, Rules 1 and 2 of the CPC is by now settled. The grant of temporary injunction during the pendency of a suit, in exercise of the power conferred by Order 39, Rules 1 and 2 of the CPC is a discretionary relief. While exercising such discretion, the court has to see whether the plaintiff has a strong prima facie case, whether the balance of convenience is in favour of the plaintiff, whether the plaintiff would suffer irreparable loss or injury if the prayer for temporary injunction is disallowed. The court is also required to see whether the suit filed by the plaintiff is prima facie maintainable. The relief by way of temporary injunction is granted to mitigate the risk of injustice to the plaintiff during the pendency of the suit. Such injustice that may be caused to the plaintiff is to be weighed against the corresponding need of the defendant to be protected against the injury resulting from preventing him from exercising his legal rights. Therefore, the court is to weigh the plaintiffs need against the defendant and determine where the balance of convenience lies. It is being an equitable relief it rests on the sound judicial discretion of the court, to be exercised in the backdrop of the facts of each case. While granting or refusing the injunction, the court is also required, to see the conduct of the parties.
53. In fact, even before the decision in Shiv Kumar Chadha (supra), A three-Judge Bench in Municipal Corporation of Delhi v. Suresh Chandra Jaipuria reported in : [1976] 4 SCC 719, had the occasion to consider the question as to whether a court can grant interim injunction, when a prima facie case has not been made out in the sense that the suit is barred in law. The apex court in Suresh Chandra Jaipuria (supra), while abstaining from deciding the question as to whether the suit is or is not barred, pointed out that the question as to whether a suit is or is not barred is a question, which will have a bearing upon the question whether a prima facie case existed for granting any interim injunction or not. The relevant observations, made by the apex court at paragraph 10 reads (page 722):
However, we abstain from deciding the question whether the suit is barred or not on this ground. All we need say is that this consideration also has a bearing upon the question whether a prima facie case exists for the grant of an interim injunction.
54. From the decisions in Suresh Chandra Jaipuria (supra), Shiv Kumar Chadha (supra) and Pranab Kumar Banerjee (supra), it clearly follows, as already indicated above, that unless a court, where an application seeking an interlocutory order of injunction has been made, is satisfied that it has the jurisdiction to try the suit and/or that the suit is maintainable, it cannot grant any interlocutory order of injunction.
55. Viewed in the above perspective, it becomes abundantly clear that in the absence of necessary party, since an effective decree cannot be passed, no question of granting an interlocutory order of injunction arises. In other words, unless necessary party is brought on record or is impleaded in a given suit, no interlocutory order of injunction can, against the interest of such a necessary party, be passed.
56. In the present case, therefore, it was incumbent, on the part of the learned trial court, to reach prima facie satisfaction if the shareholders were or were not necessary parties. Consequently, if the shareholders are, now, prima facie necessary parties to the suit, then, the suit cannot be said to be maintainable and no triable issue can be said to have been raised. Similarly, if the suit is found to be prima facie barred under the law, the court would have had no jurisdiction to try the suit; then, also, in the light of the decisions in Shiv Kumar Chadha (supra) and followed in Pranab Kumar Banerjee (supra), no question of granting any interlocutory order of injunction could have arisen.
57. It is, therefore, necessary, even in the present appeal, that this Court reaches a prima facie satisfaction as to whether the shareholders were or were not necessary parties and/or whether the suit, as presented, was prima facie maintainable or not.
58. Having pointed out above that a court, before it grants injunction, even temporarily, must reach a prima facie satisfaction that the suit, laid before it, is maintainable, it may, now, be noted that there are, broadly speaking, three grounds on which it is, on behalf of the appellants, contended, that the suit, in the form in which it was laid before the court, was even prima facie not maintainable and the learned trial court ought not to have granted injunction. The three grounds are: (i) that the plaintiff, as a shareholder of the appellant-company, alleges oppressiveness and mismanagement in the affairs of the company by the board of directors and when a shareholder makes such an allegation, his remedy lies in making appropriate application under Section 397 and/or 398 of the Companies Act inasmuch as a case, which is covered by the provisions of Sections 397 and 398, falls within the exclusive domain of the Company Law Board, and the court of ordinary civil jurisdiction cannot try such a suit; (ii) even if the civil court had jurisdiction in the present case, the nature of reliefs, which the plaintiffs had sought for, required the shareholders (who had decided to sell their shares), to be necessarily made parties to the suit and, in their absence, neither the suit was maintainable nor the injunction, as sought for, could have been legally granted by the learned trial court; and (iii) and even, on merit, no prima facie case for granting of any injunction could be said to have been made out and, hence, prohibitory injunction, as granted by the impugned order, is not sustainable.
59. As against the submissions noted above, it is contended, on behalf of the plaintiff-respondents, that the suit is maintainable inasmuch as the pre-emptive right, given, under the articles of association, to the plaintiff-respondent, is a contractual right, which can be specifically enforced, and that the shareholders, in such a suit, are not necessary parties. Support for this submission is sought to be derived from the provisions of Order XXXIX, Rule 5 inasmuch as Order XXXIX, Rule 5, as contended on behalf of the plaintiff-respondent, shows that an injunction granted as against the corporation is binding not only on the corporation itself, but also on all the members and office-bearers of the corporation, whose personal action the injunction seeks to restrain. At any rate, in the light of the reliefs, which the plaintiff-respondent has claimed, the shareholders were not necessary parties, the suit is wholly maintainable and, in the facts of the pleaded case of the plaintiff-respondent, it cannot be said that no case for granting of injunction had been made out.
60. In order to resolve the above aspect of the controversy, it is appropriate to clearly understand the functioning of a company under the law.
61. A company, as observed in Life Insurance Corporation of India v. Escorts Ltd. reported in : [1986] 59 Comp Cas 548 : [1986] 1 SCC 264 is in some respects, an institution like a State functioning under its 'basic constitution' consisting of the Companies Act and the memorandum of association. Carrying the analogy of constitutional law a little further, Gower describes 'the members in general meeting' and the directorate as the two primary organs of a company and compares them with the legislative and the executive organs of a Parliamentary democracy, where legislative sovereignty rests with Parliament, while administration is left to the executive Government, subject to a measure of control by Parliament through its power to force a change of Government. Like the Government, the directors will be answerable to 'Parliament' constituted by the general meeting. But in practice (again like the Government), they will exercise as much control over Parliament as that exercises over them. Although it would be constitutionally possible for the company, in general meeting, to exercise all the powers of the company, it clearly would not be practicable (except in the case of one or two-man companies) for day-to-day administration to be undertaken by such a cumbersome piece of machinery. So the modern practice is to confer on the directors the right to exercise all the company's powers except such as the general law expressly provides must be exercised in general meeting. Of course, powers, which are strictly legislative, are not affected by the conferment of powers on the directors as Section 31 of the Companies Act provides that an alteration of an Article would require a special resolution of the company in general meeting. But a perusal of the provisions of the Companies Act itself makes it clear that in many ways, the position of the directorate vis-a-vis the company is more powerful than that of the Government vis-a-vis Parliament. The strict theory of Parliamentary sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the directors with which the members in general meeting cannot interfere. The most they can do is to dismiss the directorate and appoint others in their place, or alter the articles so as to restrict the powers of the directors for the future. Gower himself recognises that the analogy of the Legislature and the executive in relation to the members in general meeting and the directors of a company is an oversimplification and states 'to some extent a more exact analogy would be the division of powers between the Federal, and the State Legislature under a Federal Constitution'. The only effective way the members, in general, meeting can exercise their control over the directorate in a democratic manner is to alter the articles so as to restrict the powers of the directors for the future or to dismiss the directorate and appoint others in their place. The holders of the majority of the stock of a corporation have the power to appoint, by election, directors of their choice and the power to regulate them by a resolution for their removal.
62. In short, what the Supreme Court in Escorts Ltd. (supra), clearly indicates is that a company functions on the basis of and regulated by the Companies Act and their memorandum of association. Neither the Companies Act can, therefore, be ignored nor can the memorandum of association. What is, however, crucial to bear in mind is that in case of conflict between the provisions of the Companies Act and the memorandum of association or articles of association, it is, as laid down by Section 9 of the Companies Act, the provisions, contained in the Companies Act, which would prevail.
63. It is also clear from the observations, made in Escorts Ltd. (supra), that a company functions in a democratic manner and it is the majority opinion of the shareholders, constituting the company, whose decision is binding on the company and the directors are trustees and their duty, as we would note, is, primarily, to safeguard the interest of the company. As the shareholders cannot deal with the day-to-day functioning of the company, the directors are given the authority to function for and on behalf of the company. The directors are not, however trustees of the shareholders, but, primarily, hold a fiduciary relationship so far as the company, represented by them, is concerned. No wonder, therefore, that the shareholders have, subject to such limitations as may be provided by the articles of association, a right to convene a general meeting and even remove a director and appoint another.
64. The principle, emanating from the above discussion, is that the majority shareholders' views bind the company. This position is well illustrated by the case of Foss v. Harbottle [1843] 2 Hare 461, too, wherein two of the shareholders instituted a proceeding against the directors and some others alleging against the defendants fraudulent and illegal transactions, whereby property of the company was misapplied, alienated and wasted, but at the general meeting, the majority resolved that no action should be taken against the directors. Dissatisfied with the majority decision of their company, two of the minority shareholders initiated legal proceedings against the directors and others to compel them to make good the losses to the company. The court dismissed the action on the ground that, as the acts of the directors were capable of confirmation by the majority of members, the court should not interfere; it was, thus, left to the majority to decide what was for the benefit of the company. This principle has been applied in several later cases see Macdougall v. Gardiner [1875] 1 Ch. D 13, 14.
65. Palmer, in his Company Law, 21st edition (1968), points out that in English company law, while the substantive aspects of the rule of the majority are not neglected, the emphasis is on the procedural character of the rule. The reasoning on which the rule is founded is that in these cases, it is for the company to complain by suing the alleged wrongdoer. The company is, thus, the proper plaintiff and the company is ruled by the majority. The procedural character of the rule, in Foss (supra), was explained by Jenkins L.J. in the Edwards v. Halliwell [1950] 2 All ER 1064, 1066 (CA) thus: 'The rule in Foss v. Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of a company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit qucestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right'. However, as pointed out by Jenkins L.J., in Edwards v. Halliwell reported in [1950] 2 All ER 1064 (CA), the rule propounded, in Foss (supra), is subject to the following exceptions, namely, the majority cannot confirm:
(1) an act, which is ultra vires the company or illegal;
(2) an act, which constitutes a fraud against the minority and the wrongdoers, are themselves in control of the company; or
(3) a resolution, which requires a qualified majority, but has been passed by a simple majority.
66. In other words, the rule in Foss (supra), does not apply to such acts as referred to above inasmuch as the majority cannot sanction those acts. In the light of the subsequent judicial pronouncements, particularly, Edwards v. Halliwell reported in [1950] 2 All ER 1064 (CA), exceptions to the general rule as propounded in Foss (supra), are a resolution, which is ultra vires or illegal or is a fraud on the minority or is not bona fide or for the benefits of the company as a whole or is intended to discriminate between the majority shareholders and the minority shareholders is illegal and can be questioned by a separate action by the aggrieved shareholder. The reason is that if the minority were denied their right, their grievance could never reach the court, because the wrongdoers, being themselves in control, do not allow the company to sue.
67. The question, however, remains as to when a director or a company's act can be regarded as ultra vires. Let me, before proceeding further, point out the development and application of the doctrine of ultra vires in the field of Company Law. An action, taken by the board of directors of a company or the company itself beyond the powers conferred on the company and/or its directors by the memorandum of association of the company, is ultra vires. The legality of such transaction was judged by the doctrine of ultra vires, which was developed in the realm of company law, in the year 1875, in Ashbury Railway Carriage and Iron Co. v. Riche reported in [1875] L.R. 7 HL 653, when, during the course of judgment, it was stated by the learned judge, that when an act is performed or a transaction is carried out, which, though legal in itself, is not authorised by the object clause, in the memorandum of association, such an act is null and void.
68. Professor Gower, in Modern Company Law (Second edition), has observed to the effect that the purpose of the doctrine of ultra vires was to ensure that an investor, in a gold mining company, did not find himself holding shares in a fried fish shop and to give those, who allowed credit to a limited company, some assurance that its assets would not be dissipated as an unauthorised enterprise.
69. The doctrine of ultra vires was, thus, developed as a matter of judicial control and by this doctrine, the courts can control the function of the corporation (see Palmer's Company Law (Second edition)).
70. The scope of the doctrine of ultra vires, which was applied in Ashbury Railway Carriage and Iron Co. (supra), was further strengthened and developed by Lord Selborn in Attorney General v. Great Eastern Railway Co. reported in [1880] 5 AC 473 (HL), wherein he held: 'Whatever may fairly be regarded as incidental or consequential upon those things specified in the memorandum of association as object ought not to be held ultra vires unless expressly prohibited.'
71. The decisions, in Ashbury Railway Carriage and Iron Co. (supra) and Great Eastern Railway Co. (supra), were accepted as the basis of the doctrine of ultra vires by Lord Halsbury in 1902, in London County Council v. Attorney-General reported in [1902] AC 165 (HL), in the following words :
I think now it cannot be doubted that those two cases do constitute the law upon the subject. It is impossible to go behind those two cases: they are now part of the law of this country, and we must acquiesce whether we like them or not.
72. The result of the development of the doctrine of ultra vires, in the field of company law, is that a company is expected to have, as indicated in Palmer's Company Law (20th edition), by Schmith Off C. & Curry T. P. E. (Sweet and Maxwell) the following powers:
(i) Power to do whatever (such things) is necessary to do with a view to the attainment of the objects specified in the memorandum.
(ii) Power to do whatever else (all such other things), which may fairly be regarded as incidental to, and consequential upon, its objects.
(iii) Power to do such other things as are authorised to be done by the Companies Act or by any other statute.
73. Thus, such transactions, which do not fall under any of the three categories mentioned above, are regarded as ultra vires.
74. The doctrine of ultra vires, I may point out, was developed to safeguard essentially the interest of the shareholders. By means of this doctrine, as already indicated above, there is judicial control on the affairs of the company, because the shareholders may not be able to control the affairs of the company inasmuch as the affairs of the company are, ordinarily, carried out by its directors. It is, therefore, said that in theory, the shareholders, scattered over large geographical area, are the masters of the company, but, in actual practice, they have often been only in the position of sleeping partners.
75. The question, now, is what is the remedy under the law for a shareholder, who considers himself aggrieved by the decision of the majority on the ground that it is because of their dominant position that the majority has taken a decision, though it is against the interest of the aggrieved shareholder ?
76. The answer to the question, posed above, can be found in the case of Clemens v. Clemens Bros. Ltd. reported in [1976] 1 All ER 268 (Ch. D), wherein the plaintiff held 45 per cent., and her aunt held 55 per cent., of the issued share capital of a family company. The directors proposed to increase the company's share all of which were to carry voting rights. The directors, other than the aunt, would have received 200 shares each and the balance of 850 shares were to be placed in trust in long service of the employees of the company. The plaintiff's secretary wrote a letter to the plaintiff's aunt pointing out to her that the scheme would reduce the plaintiffs shareholding to less than 25 per cent, and, hence, the plaintiff was opposed to such a scheme. The aunt replied by saying that she was fully aware of the implication of the charges in the company's structure, but intended to support the scheme. Though the plaintiff sought for adjournment, the aunt voted against the adjournment and the proposed resolutions were passed. The plaintiff brought an action, against the company and also against the aunt, seeking a declaration that the resolutions were oppressive of the plaintiff and also seeking to get the resolutions set aside. The defendant contended that, if out of the two shareholders, both honestly held differing opinions, the view of the shareholder, who held majority of the shares, should prevail, and that the shareholders, in the general meeting, were entitled to consider their own interests and to vote in any way, which they honestly believed to be in the interest of the company.
77. In the case of Clemens (supra), the Chancery Division held that the aunt was not entitled, as of right, to exercise her majority votes as an ordinary shareholder in any way she pleased; her right was subject to equitable considerations, which might make it unjust to exercise it in a particular way. Although it could not be disputed that she would like to see the other directors have shares in the company and a trust set up for long service employees, the inference was irresistible that the resolutions had been framed in order to put complete control of the company into the hands of the aunt and her fellow directors so as to deprive the plaintiff of her existing rights as a shareholder with more than 25 per cent, of the votes and to ensure that the plaintiff would never get control of the company. Those considerations, according to the court, were sufficient, in equity, to prevent the aunt using her votes as she had and the resolutions were accordingly set aside by the court. In reaching the said decision, the court applied the dicta of Sir Richard Baggallay, in North-West Transportation Co. Ltd. v. Henry Beatty [1887] 12 AC 589 at 593 (PC), of Lindley M.R., in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch 656 at 671, of Evershed M.R., in Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 All ER 1120 at 1126 (CA), of the Lord President (Lord Cooper) in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66 : [1959] 29 Comp Cas 1 (HL) and of Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 at 500 (HL).
78. The fallout of the decision in the case of Clemens (supra), is this: Even when the act of the majority of the shareholders is perfectly legal, it can nevertheless be interfered with by the court provided that the court finds that exercise of legal right defeats equitable consideration. This principle is based on the reasoning that though it is the majority view, which becomes the decision of the company, the majority cannot take a decision in any manner as they please inasmuch as equity would restrain them from taking a decision or action, which oppresses minority shareholders. The principle, so evolved in the case of Clemens (supra), has been followed in Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1981] 1 Ch. D 257, Estmanco (Kilner House) Ltd. v. Great London Council [1982] 1 All ER 437 : [1982] 1 WLR 2 (Ch. D), Bird Precision Bellows Ltd., In re [1984] 1 Ch. D 419 : [1984] 2 WLR 869 (Ch. D), Smith v. Croft (No. 2) [1987] 3 All ER 909 (Ch. D) : [1988] 1 Ch. D 114 and Leslie John Holt v. Juliet Elizabeth Holt [1990] 1 WLR 1250 (PC). Thus, even a perfectly legal act of the majority may be regarded as oppressive; whereas a perfectly non-oppressive act of the majority may be illegal.
79. Bearing in mind the fact that the decision of the majority shareholders, if regarded as oppressive to the minority, can be interfered with by the court, let me, now, point out the object and scheme of Sections 397 and 398 of the Companies Act, 1956, which, according to the appellants, bar the suit, wherein injunction has been granted. It may be recalled, at this juncture, that the learned trial court has taken the view, albeit tentatively, that Sections 397 and 398 were not applicable to the facts of the present case. Both these Sections have to be, however, read in the light of the provisions of Sections 399, 400, 401, 402 and 403. All these provisions fall under Chapter VI, which go by the heading, 'Prevention of oppression and mismanagement':
397. (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under Sub-section (1), the Company Law Board is of opinion-
(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up;
the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
398. Application to Company Law Board for relief, in cases of mismanagement.- (1) Any members of a company who complain-
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or manager, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;
may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under Sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.
399. Right to apply under Sections 397 and 398.- (1) The following members of a company shall have the right to apply under Section 397 or 398:
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less or any members or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.
(2) For the purposes of Sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(3) Where any members of a company are entitled to make an application in virtue of Sub-section (1), anyone or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board under Section 397 or 398, notwithstanding that the requirements of Clause (a) or Clause (b), as the case may be, of Sub-section (1) are not fulfilled.
(5) The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any casts which the Company Law Board dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.
400. Notice to be given to Central Government of applications under Sections 397 and 398.- The Company Law Board shall give notice of every application made to it under Section 397 or 398 to the Central Government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order under that section.
401. Right of Central Government to apply under Sections 397 and 398.- The Central Government may itself apply to the Tribunal for an order under Section 397 or 398, or cause an application to be made to the Tribunal for such an order by any person authorised by it in this behalf.
402. Powers of Tribunal on application under Section 397 or 398.- Without prejudice to the generality of the powers of the Tribunal under Section 397 or 398, any order under either Section may provide for-
(a) the regulation of the conduct of the company's affairs in future;
(b) the purchase of the shares or interests of any members of the company by other members thereof or by the company;
(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;
(d) the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other, namely:
(i) the managing director,
(ii) any other director,...
(v) the manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in all the circumstances of the case;
(e) the termination, setting aside or modification of any agreement between the company and any person not referred to in Clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;
(f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under Section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;
(g) any other matter for which in the opinion of the Tribunal it is just and equitable that provision should be made.
403. Interim order by Tribunal.- Pending the making by it of a final order under Section 397 or 398, as the case may be, the Tribunal may, on the application of any party to the proceeding, make any interim order, which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to be just and equitable.
80. Before proceeding further, it may be noted that since no Tribunal, as provided in Sections 10FB to 10GF (which was introduced by the Act 11 of 2003 with effect from April 1, 2003), has been constituted, the provisions, contained in Sections 10FB to 10GF, which fall under Part IB and go by the heading 'National Company Law Tribunal', have not come into effect. It also needs to be noted, in this regard, that the word 'Tribunal', which occurred in Sections 397, 398 and 399, were substituted for the word 'Court' by Act 31 of 1988, with effect from May 31, 1991 and the same has, again, been substituted by the Act 11 of 2003 for the expression, 'Company Law Board'. Thus, the Tribunal not having been constituted so far, the term, 'Tribunal', which occur in Sections 397, 398 and 399, has to be read as 'Company Law Board'.
81. From a careful reading of the various statutory provisions, contained above, what transpires is that according to Section 397, the affairs of the company, public or private, must be conducted in a manner, which is not prejudicial to public interest and not oppressive to any of its member or members. Section 398, similarly, indicates that the affairs of every company, public or private, must be conducted in a manner, which is neither prejudicial to public interest nor prejudicial to the interest of the company. If the affairs of the company are being conducted in a manner prejudicial to public interest or, in a manner oppressive to any member or members, an application, under Section 397, may be made to the Company Law Board. Though, in such circumstances, the company may be decided to be wound up, yet, the Company Law Board, if it is of the opinion that winding up the company would be unfair, may pass such order as it thinks fit. Similarly, Section 398 provides that any member of a company can complain that the affairs of the company are being conducted in a manner prejudicial to public interest or, in a manner prejudicial to the interest of the company, and the Company Law Board may, in such a case, instead of winding up the company, make such order as it thinks fit.
82. What is, now, necessary to point out is that each and every member of a company cannot make an application under Section 397 or 398 directly. The conditions of eligibility, to make such an application, have been prescribed in Section 399, which show that the application has to be made, if the company has share capital, by not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant(s) have paid all calls and other sums due on their shares. If the company has no share capital, no application can be made under Section 397 or 398 unless the applicant has the consent of the one-fifth of the total number of its members.
83. Thus, Section 399 reflects that a shareholder cannot make an application under Section 397 or 398 unless he has the support of the specified number of members of the company or unless he holds minimum specified number of shares.
84. Lest a shareholder's grievance remains unheard merely because he is unable to muster the support of the requisite number of members of the company or lacks requisite number of shares, such a shareholder has been vested with the right, under Section 393(4), to apply to the Central Government and the Central Government may, if it considers just and equitable so to do, authorise any member(s) to make application under Section 397 and/or 398. Thus, the restrictions, imposed by Clauses (a) and (b) of Sub-section (1), can be superseded if the Central Government forms the opinion as indicated hereinbefore. Even the Central Government may also, if it so chooses, make application under Section 397 or 398.
85. The remedial scheme, contained in the statutory provisions of Sections 397, 398, 399, 400, 401, 402 and 403, forms a complete code and has to be, therefore, construed as a complete scheme. When carefully analysed, it becomes clear, as already indicated above, that the mechanism of Sections 397 and 398 cannot be resorted to by a shareholder to set at naught the decision of the majority shareholders inasmuch as the majority shareholders' view must, ordinarily, be allowed to prevail unless the decision of the majority (as reflected by Sections 397 and 398), is prejudicial to public interest or interest of the company or oppressive to any member or members.
86. I may pause here to point out the provisions, which we find contained in Chapter VI, are provisions, which were introduced, for the first time, in the Indian Companies Act, 1913, in the form of Section 153-C, Section 153-C being based, in turn, on Section 210 of the English Companies Act, 1948 which had introduced, for the first time, in England, the scheme, which we, now, find incorporated in Sections 397 and 398. The purpose of introducing Section 210, in the English Companies Act, was to provide an alternative remedy to the process of winding up if there was mismanagement of the company or management of the company was carried out in such a manner, which was oppressive to the minority shareholders. Law has always provided for winding up, whenever it was found that it was just and equitable to wind up a company. With the growth of commercial activities and taking into account the interest of the public at large, the law-makers felt that in a given case, though it may be just and equitable to wind up the company, because of the manner in which the affairs of the company were being conducted, it was at times, unfair to wind up the company, particularly, when the company was otherwise solvent. Law-makers, therefore, introduced Section 210 in the English Companies Act, 1948, whereby, as already indicated hereinbefore, an alternative remedy was provided ensuring that when it was not in the interest of the shareholders that the company be wound up and when it would be better if the company be allowed to continue under such direction of the court as the court may consider proper so as to ensure that the affairs of the company are carried out in a manner, which is not prejudicial to the interest of the minority shareholders or prejudicial to the company and, above all, not prejudicial to the interest of the public.
87. A careful study of the scheme and mechanism clearly show, if I may repeat, is that a company shall be, ordinarily, allowed to run according to the decision of the majority of its shareholders and the minority can approach for the remedy of their grievances as provided in Sections 397 and 398 read with Section 399 and, in a given case, even if the minority does not have adequate number of shares or does not have support of adequate number of shareholders, it can apply to the Company Law Board, if authorised by the Central Government, and the Company Law Board may pass such orders as it considers appropriate. In an appropriate case, even the Central Government may make such an application.
88. Apart from the restrictions, which Section 399 imposes on the right of the minority shareholder to make application under Section 397 or 398, what must also be pointed out is that before Sections 397 and 398 underwent amendment by the Act 53 of 1963, with effect from January 1, 1964, an aggrieved member could apply, under Section 397, only if the affairs of the company were being conducted in a manner oppressive to him or other minority shareholders and he could apply, under Section 398, if the affairs of the company were being conducted in a manner, which was prejudicial to the interest of the company. A new element of 'public interest' has been specifically introduced into the scheme of Sections 397 and 398 inasmuch as the expression, 'are being conducted in a manner prejudicial to the public interest', has been introduced into Sections 397 and 398, for the expression, 'are being conducted'. Hence, in the past, a member of a company could have approached the Company Law Board if the affairs of the company were being conducted in a manner oppressive to him and similarly situated other members provided that such member(s) had the requisite qualification to apply by virtue of Section 399. Similarly, an application could have been made under Section 398 if the affairs of the company were being conducted in a manner prejudicial to the interest of the company. By the Act 53 of 1963, a member of a company can, now, also apply to the Company Law Board if the affairs of the company are being conducted in a manner prejudicial to 'public interest' provided he is competent, in terms of the provisions of Section 399, to make such an application. If the Company Law Board finds the complaint to be correct and genuine, it may pass such order as it thinks fit.
89. What is also required to be noted, at this stage, at the cost of repetition, is that unless a member of a company has the support of statutorily specified number of members, or holds specified number of shares, he cannot apply to the Company Law Board under Section 397 or 398 even if the affairs of the company are being conducted in a manner, which is oppressive to him, or in a manner prejudicial to 'public interest' or prejudicial to the interest of the company except when he is, in terms of the provisions of Sub-section (4) of Section 399, authorised by the Central Government. Though the Companies Act, 1956, does not wholly exclude, in express terms, the jurisdiction of the civil court, the civil court cannot ignore the fact that the scheme, embodied in Sections 397, 398 and 399, clearly shows that a member, who does not have the support of specific number of members, or does not hold specific number of shares, cannot challenge the decision of the company. Consequently, majority decisions (as contemplated by Sections 397, 398 and 399), must be, ordinarily, allowed to prevail and the individual disgruntled members cannot be allowed to set at naught the majority decision of the company. This scheme is an accord with the principle, which was propounded in Foss v. Harbottle [1843] 2 Hare 461. Of course, the principle, propounded, in Foss (supra), has to be read subject to the exceptions as indicated in Halliivell's case (supra).
90. The question, now, is as to whether procedural requirement of Sections 399(3) and (4) are to be regarded as mandatory or not. It may be noted that in J.P. Srivastava and Sons P. Ltd. v. Gwalior Sugar Co. Ltd. reported in : [2004] 122 Comp Cas 696 : [2005] 1 SCC 172, the question, as regards mandatory nature of requirements of Sub-section (3) of Section 399, was considered and the apex court held that whether the person, who has applied under Sections 397 and 398, has the support or consent of the requisite number of members, is a question of fact, which can be gathered from the facts and materials on record and the mere fact that consent, in writing, has not been brought on record will not necessarily deviate the application made under Sections 397 and 398.
91. What is, however, of immense importance to note is that J.P. Srivastava (supra) does not take the view that the requirement of Section 399(3) that the shareholder, applying under Section 397 or 398, must have support of requisite number of members or must hold requisite number of shares, is not mandatory. What, in substance, J.P. Srivastava (supra), held was that even if consent, in writing, is not shown, yet when the materials on record disclosed that had such a consent existed, the Company Law Board would have jurisdiction.
92. Logically, therefore, an applicant must have support of requisite number of members or must hold requisite number of shares. The reason is very simple and the reason is that merely because of the fact that a shareholder thinks otherwise than what the majority thinks, he cannot create obstacles in the way of management of the company. Notwithstanding the fact that there is no right to make an application under Section 397 or Section 398 if a shareholder does not have support of requisite number of members or does not hold the requisite number of shares, a shareholder has the right to apply to the Central Government for leave and if authorised by the Central Government such a shareholder can still make an application under Section 397 or 398. This shows that the minority shareholder is not without a remedy. However, the anxiety of the lawmakers is too glaring in the scheme of Part VI and the scheme clearly is that the decision of the majority of the shareholders is not to be disturbed merely because a shareholder does not agree or a shareholder feels dissatisfied. What, eventually, is the concern of the Legislature, as reflected from the provisions of the Companies Act, 1956, is that a company shall, ordinarily, be allowed to function in terms of the decision of the majority of the shareholders and when the affairs of the company are in violation of the law or, amongst others, against public interest, the Board will have the jurisdiction to step in and correct the wrong.
93. The question, now, is as to whether the court of ordinary civil jurisdiction can pass an interim order in the form of injunction if the facts of a case fall within the ambit of Sections 397 and 398, particularly, when Section 403 clearly empowers the Board to pass, under Section 397, any interim order, which it thinks fit for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable.
94. While answering the question posed above, one cannot be unmindful that in Dioarka Prasad Agarwal v. Ramesh Chandra Agarwala reported in : [2003] 117 Comp Cas 206 : [2003] 6 SCC 220, the apex court, having taken note of Sections 9 and 10 of the Companies Act, has held that the jurisdiction of the civil court has not been completely ousted. In fact, the Supreme Court, in Dwarka Prasad Agarwal (supra), observes at paragraph 22, as under (page 213 of 117 Comp Cas):
22. The dispute between the parties was eminently a civil dispute and not a dispute under the provisions of the Companies Act. Section 9 of the Code of Civil Procedure confers jurisdiction upon the civil courts to determine all dispute of civil nature unless the same is barred under a statute either expressly or by necessary implication. Bar of jurisdiction of a civil court is not to be readily inferred. A provision seeking to bar jurisdiction of civil court requires strict interpretation. The court, it is well-settled, would normally lean in favour of construction, which would uphold retention of jurisdiction of the civil court. The burden of proof in this behalf shall be on the party who asserts that the civil court's jurisdiction is ousted see Sahebgouda v. Ogeppa [2003] 3 Supreme 13. Even otherwise, the civil court's jurisdiction is not completely ousted under the Companies Act, 1956.
(emphasis1 supplied)
95. The expression, 'completely', which occurs in the observations 'jurisdiction of the civil court is not completely ousted', made in Dwarka Prasad Agarwal (supra), indicates that in every case, it would be a matter for determination by the court if the provisions, contained in the Companies Act, bar a particular suit brought before the civil court and, in an appropriate case, the civil court may decline to exercise its jurisdiction if it finds that its jurisdiction stands ousted by the Companies Act.
96. The conclusion, reached in Dwarka Prasad Agarwal (supra), that the jurisdiction of the civil court is not 'completely' ousted by the Companies Act, 1956, has been taken note of and impliedly relied upon in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad reported in : [2005] 123 Comp Cas 566 : [2005] 11 SCC 314.
97. What is, however, important to note is that in Sangramsinh P. Gaekwad (supra), while referring to Dwarka Prasad Aganval (supra), the apex court has reiterated that it is, now, well-settled that the jurisdiction of the civil court is not 'completely' ousted by the provisions of the Companies Act, 1956, meaning thereby that ouster of jurisdiction of the civil court is a question for determination in each given case.
98. The question, now, is as to whether the subject-matters of Sections 397 and 398 fall outside the purview of the court of ordinary civil jurisdiction. In other words, the question is this: when the facts of a given case fall within the four corners of Section 397 and/or Section 398, whether the civil court can still exercise jurisdiction under Section 9 of the Code of Civil Procedure even though Sections 397 and 398 give ample powers to the Company Law Board to deal with a given situation?
99. The question, noted above, is best answered by Wills J., in Wolverhamtos New Waterworks Co. v. Hawkesford [1859] 6 CB (NS) 336, in the following words:
One is where there was a liability existing at common law, and that liability is affirmed by a statute, which gives a special and peculiar form of remedy different from the remedy, which existed at common law: there, unless the statute contains words, which expressly or by necessary implication, exclude the common law remedy, the party suing has his election to pursue either that or the statutory remedy. The second class of cases is, where the statute gives the right to sue merely, but provides no particular form of remedy: there, the party can only proceed by action at common law, But there is a third class, viz., where a liability not existing at common taw is created by a statute, which, at the same time, gives a special and particular remedy for enforcing it. The remedy provided by the statute must be followed and it is not competent to the party to pursue the course applicable to cases of the second class.
100. The above dicta of Wills, J., was accepted by the House of Lords, in Neville v. London 'Express' Newspaper Ltd. reported in [1919] AC 368 (HL). Though the dicta of Wills J., in Wolverhamtos New Waterworks Co. (supra), has been modified to some extent in the subsequent decision see Phillips v. Britannia Hygienic Laundry Co. Ltd. [1923] 2 KB 832 (CA), what has, however, remained as authority is the condition, that when a common law remedy is affirmed by a statute and the statute also provides a forum for remedy, the civil court's jurisdiction would not be treated as barred unless the statute, while affirming the common law right, bars, expressly or by necessary implication, the common law remedy or the jurisdiction of the civil court, see Premier Automobiles Ltd. v. Kamlakar Shantaram Wadke reported in : AIR 1975 SC 2238 and Rajasthan Road Transport Corporation v. Bal Mukund Bairwa reported in : [2009] 4 SCC 299.
101. In Secretary of State v. Mask and Co. reported in [1940] 67 IA 222, it has been held by the Judicial Committee of the Privy Council that the ouster of jurisdiction of a civil court is not to be lightly inferred and can only be established if there is an express provision of law or is clearly implied.
102. The dicta of Wills, J., in Wolverhamtos New Waterworks Co. (supra), has been quoted, and relied upon, in Dhulabhai v. State of M.P. : AIR 1969 SC 78. The relevant observations, made by the apex court, in Dhulabhai (supra), are quoted below (page 18):
8. ...jurisdiction of the civil courts is all embracing except to the extent it is excluded by an express provision of law or by clear intendment arising from such law. This is the purport of Section 9 of the Code of Civil Procedure. How Section 9 operates is perhaps best illustrated by referring to the categories of cases, mentioned by Willes, J., in Wolverhamtos New Waterworks Co. v. Hawkesford [1859] 6 CB (NS) 336.
103. From the above observations, made by Wills, J., what, clearly transpires is that if there was a liability existing at common law and that liability is affirmed by a statute and such statute does not, expressly or by necessary implication, exclude the jurisdiction of the ordinary civil court, the affected party can approach the civil court. If, in such a case, a statute, while recognizing or affirming such common law, provides for a special remedy different from the one, which existed at common law, there also, unless the statute contains words, which expressly or by necessary implication, exclude the common law remedy, the affected party has the right to elect his remedy either under the statute or from a civil court. Where, however, the statute gives a right, which did not exist in common law, and provides no particular form of remedy, the affected party can pursue his remedy in the civil court. Most importantly, however, where a liability, not existing at common law, is created by a statute, which provides for, at the same time, a special and particular remedy for enforcing it, the remedy, provided by the statute, must be followed and it is not open to the party to pursue his remedy in the civil court.
104. From the decisions, in Premier Automobiles (supra) and Rajasthan Road Transport (supra), what can be clearly gathered is that when there was a right or liability under the general or common law and such a right has also been affirmed under a statute, the person, who is aggrieved, has the option of either approaching the civil court or pursuing the remedy, which the statute may have provided, but the civil courts' jurisdiction in such a case, would stand ousted if, while creating the right or recognizing the right, a statute also provides for remedy and excludes, expressly or impliedly, the jurisdiction of the civil courts to deal with such matters.
105. Let me, now, ascertain as to how far Sections 397 and 398 oust the jurisdiction of the ordinary civil court in respect of rights, which these statutory provisions have conferred on the shareholders. This requires a clear look into the material aspects of development of the companies, Palmer's Company Law, vol. 1 (25th Edition), traces the history, in this regard, as under:
1.103. In the eighteenth and the beginning of the nineteenth centuries this form of association became increasingly popular, despite the difficulties which the Bubble Act, so long as it was on the statute book, placed in its way. As the Industrial Revolution advanced, business entrepreneurs began again to recognize the advantages derived from co-operation in commercial enterprise, namely the advantage of raising funds for the purposes of large undertakings by means of contributions from a number of small capitalist ready and willing to co-operate, and that of minimizing the risk by spreading the liability. The difficulty was how to secure these advantages. A charter of private Act of Parliament was often too costly or impracticable. Business operators had to devise for themselves a new form of partnership which would possess the advantages as nearly as might be to a chartered corporation, and in particular would have shares of a fixed amount freely transferable by the holders. The outcome of these commercial needs was the unincorporated company, the lineal ancestor of the ordinary company under the Companies Act. The deed of settlement by which such an unincorporated company was formed was made between the various shareholders and the trustee or trustees with whom the shareholders covenanted to observe the provisions of the deed. The deed commonly declared that the several persons for the time being holding shares in the capital of the company should constitute and be a company with a specified name, and with a specified capital, and subject to specified regulations (set out in the deed) until dissolved in a specified manner. The deed usually also made the shares transferable. To secure the continuity of the concern, notwithstanding the death or bankruptcy of members, the management of the enterprise was transferred to a select body of directors, often known as the committee of directors, to the exclusion of the members generally, and the property of the company was vested in all or some directors as trustees.
1.104 What the founders of these associations aimed was, in fact, to make them as nearly as possible a corporation with continuous existence, and with transferable and transmissible stock, but without any individual right in any associate to bind the Other associated members or to deal with the assets of the association. In some case (e.g. the Friendly Societies Act, 1793) they even obtained a private Act of Parliament enabling them to sue and be sued in the name of some specified officer.
Such associations were, in the contemplation of law, nothing but large partnerships with some special features, the members were always held liable for the debts and liabilities to the full extent of their means.
Since 1844 the formation of unincorporated companies, at least of some size, as not possible : the Joint Stock Companies Act of that year and all subsequent Joint Stock Companies Acts and Companies Act prohibited the formation of unregistered companies, associations or partnerships for gain where the members exceeded a certain small number (originally 25 but reduced to 20 in 1856). This prohibition was contained most recently in Section 716(1) of the Companies Act 1985 and (for limited partnerships) Section 4(2) of the Limited Partnerships Act 1907, in each case subject to certain exemptions. This prohibition had been regarded as outdated for some time. The abolition of the maximum number was finally effected from December 20, 2002 by the Regulatory Reform (Removal of the 20 Member Limit in Partnerships etc.) Order 2002 (SI 2002/2003). The order repeals Sections 716 and 717 of the Companies Act 1985 and amends Section 4(2) of the Limited Partnerships Act 1907. The existing exemption orders in favour of certain stated professions are not repealed but fall into disuse.
106. The history of development of companies, as indicated by Palmer, clearly indicates that it is the law of contract, which became the basis of the deed of settlement of companies. The English Companies Act largely regulates, by way of statutory provisions, the contractual rights of the parties. The general law of contract is, thus, the basis of the rights of the parties even in the affairs of the company, though, as we would note shortly, the Companies Act does give to the shareholders some rights, which never existed in common law. Unless, therefore, there is exclusion of jurisdiction of the civil court by words, express or implied, in a given case, a suit will be maintainable for enforcement of such rights of the shareholders, which are contractual in nature. Same situation prevails in India.
107. A narration of the history of the provisions, contained in Sections 397 and 398, clearly shows that no right had existed with a minority shareholder to apply, instead of opting for winding up, for suitable orders as are, now, provided under Sections 397 and 398. To the extent, therefore, that Sections 397 and 398 deal with, civil court's jurisdiction would stand impliedly barred.
108. Coupled with the above, and as already discussed above, Sections 397 and 398 contain a complete body of the Code as regards enforcement of the rights of the minority shareholder. The special procedure, prescribed by Sections 397 and 398, clearly shows that the legislative intent is to bar the jurisdiction of the civil court in respect of matters, which are covered by Sections 397 and 398 inasmuch as every shareholder shall not be allowed to disturb (as the legislative intent reflects) the affairs of the company unless he either has the support of requisite number of shareholders or holds requisite number of shares. The freedom to, therefore, approach a civil court in respect of matters, which are governed by the statutory provisions of Sections 397 and 398, shall be treated to be barred; otherwise, there is no meaning for the legislature imposing restrictions on a shareholder's right to disturb the working of his company. This will, however, not take away the shareholder's right to approach the civil court for remedy of such grievances, which are contractual in nature. No wonder, therefore, that with regard to even winding up procedure, the Delhi High Court has held, in Maharaja Exports v. Apparels Exports Promotional Council [1986] 60 Comp Cas 353, that in winding up proceeding, the civil court's jurisdiction is impliedly barred. Though the Supreme Court took note of the decision, in Dwarka Prasad (supra), it has not differed from the law laid down in Maharaja Exports (supra). I, therefore, see no reason to take a view different from what was taken by the Delhi High Court in Maharaja Exports (supra) and, on this reasoning, I too hold that when a case falls within the four corners of Section 397 and/or Section 398, the ordinary civil court's jurisdiction would stand barred to deal with such a dispute.
109. What emerges from the above discussion is that a company shall be allowed to function according to the decision of the majority shareholders and a shareholder, who does not agree with the decision of the majority of the shareholders, cannot challenge the decision of the company except when the decision is, as held in Helliwell's case (supra), ultra vires the company or illegal or when the decision constitutes a fraud against the minority and the wrongdoers are themselves in control of the company; or when a resolution, which requires a qualified majority, has been passed by a simple majority. If the decision of the majority does not fall under any of the exceptions as indicated hereinbefore, the remedy of the aggrieved shareholder lies, unless his rights and liabilities are founded on common law, in applying under Section 397 or 398, as the case may be, if he considers such a decision to be oppressive or against the interest of the company or against the interest of the public and, further, if he holds adequate number of shares or has the support of adequate number of shareholders as are statutorily required by Section 399 or else, if he is authorised by the Central Government.
110. What logically follows from the above discussion is that if the grievances of the plaintiff-respondent herein are founded on his rights under the common law, he can file a suit, in the civil court of ordinary jurisdiction, for remedy of his grievances; but if his grievances are founded on statutory rights, which are created, for the first time, under Sections 397 and 398, his remedy will lie in making appropriate application if he has the support of the requisite number of shareholders or if he holds the requisite number of shares and if he has no such qualification, he has to apply to the Central Government and it is only when the Central Government authorises him that he would be able to apply under Section 397 or 398, as the case may be.
111. The question, therefore/is as to whether the plaintiff's suit was prima facie barred by the provisions of Section 397 and/or 398.
112. Before answering the question posed above, let me, for a moment, leave the question without being answered and look into the question as to whether the plaintiff's grievances are founded on common law.
113. In order to resolve the controversy in this appeal, it is appropriate to restate the plaintiff-respondent's case.
114. The sum and substance of the plaintiffs claim is that under the articles of association of the appellant-company, no shareholder can sell his shares outside the company without giving an option to the shareholder, who may be interested in buying the shares, and the directors cannot allow transfer of shares to an outsider without letting the other shareholders exercising their option to buy shares. The plaintiff claims that he opted to purchase shares at the very same price, which had been offered by an outsider, but the directors, by their act and conduct, refused to allow him to buy the shares. The plaintiff has, therefore, instituted the present suit.
115. Let me, first, point out as to what a share is. As observed in Life Insurance Corporation of India v. Escorts Ltd. reported in : [1986] 59 Comp Cas 548 : [1986] 1 SCC 264, Section 2(46) of the Companies Act defines 'shares' as meaning 'share' in the share capital of a company, and includes stock except where a distinction between stocks and shares is express or implied.
116. Section 84 makes a certificate, under the common seal of the company, specifying any shares held by any member prima facie evidence of the title of the members to such shares. Section 87 gives every member of a company, holding any equity share capital therein, a right to vote, in respect of such capital, on every resolution placed before the company, his voting right to be in proportion to his share of the paid-up equity capital of the company. Section 428 defines 'contributor}'' and it includes the holder of any shares, which are fully paid-up. Apart from the rights given to a shareholder to apply for appropriate order(s) under Sections 397 and 398, the shareholder, as a contributory, has also the right to apply for winding up of the company under Section 439. On winding up, Section 475 enables the court to adjust the rights of the contributories amongst themselves and to distribute the surplus among the persons entitled thereto.
117. It may be noted that Section 3(iii) of the Companies Act, 1956, defines private company to mean a company, which, by its articles, restricts the right to transfer its shares, if any, and limits the number of its shares to 50 (excepting employees and ex-employees, who were and are members of the company) and prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company.
118. Section 82 defines the nature of shares and states that the shares or other interests of any member, in a company, shall be movable property transferable in the manner provided by the articles of association of the company. Thus, Section 82 itself recognises share as movable property transferable in the manner as may have been prescribed by the articles of the company.
119. Section 26 of the Act provides that in the case of a private company limited by shares, there shall be registered with the memorandum, articles of association signed by the subscribers of the memorandum prescribing regulations for the company. Section 28 provides that the articles of association of a company, limited by shares, may adopt all or any of the regulations contained in Table A in Schedule I of the Act. Section 31 provides for alteration of the articles by a special resolution of the company. Section 36 states that when the memorandum and articles of association are registered, they bind the company and the members thereof. Section 39 provides for supply of the copies of memorandum and articles of association to a member. Section 40 makes it mandatory to incorporate any changes in the articles of association in every copy of the articles of association.
120. The above statutory provisions, discussed above, clearly show that the articles of association are regulations of the company, which bind the company as well as its shareholders, the shares are movable properties and their transfer is regulated by the articles of association of the company. It needs to be, however, borne in mind that, ordinarily, there can be no restriction on the transfer of shares by a shareholder of a company to any person within or outside his company. Many a times, however, a private company may, in order to maintain close ties of the shareholders of the company, not allow intrusion of an outsider as a shareholder. Such a restriction can be imposed by the articles of association of the company.
121. In Palmer's Company Law, Vol. 1 (25th edition), it has been stated that the articles of a private company often contain restrictions, on the transfer of shares, in order to preserve the private character of the concern. As regards transfer of shares in private company, particularly, pre-emption clauses, Palmer's Company Law, points out, 'A private company is, normally, what the Americans call a 'close corporation'; this means that its members are connected by bonds of kinship, friendship or similar close ties and that the intrusion of a stranger as shareholder would be felt to be undesirable unless his admission is accepted by those for the time being interested in the company. Some private companies are, in fact, so constructed as to amount, in economic terms, to incorporated partnerships with the attendant close connection between the members. For this reason, in private companies, the regulation, dealing with the restriction of the right to transfer shares, even though no longer required by law, remains of particular practical importance'.
122. It has to be further borne in mind that a pre-emptive right to buy shares of his company is granted in favour of a member of a private company under the articles of association so that his right of control is not taken away. Exercise of such pre-emptive rights is, particularly, needed in relation to those private companies, which are essentially incorporated partnerships. (See Gower and Davies' Principles of Modern Company Law, 7th edition, page 635.)
123. The question, therefore, is: whether transfer of a share by a shareholder, in violation of another shareholder's pre-emptive right to buy such share, as provided for in the articles of association, is a valid transaction? The question, so posed, brings me to the case of Hunter v. Hunter reported in [1936] AC 222 : [1937] 7 Comp Cas 36 (HL), wherein the shareholders, in a private company, challenged the transfer of shares by another shareholder to third parties without compliance with the provisions of articles of association. In Hunter (supra), a member could not have transferred, in terms of the articles, his shares until he had given notice to the secretary offering to sell the shares at a price to be fixed by the auditor and until the secretary had offered them to the other members, it was found that in violation of this article, one of the shareholders had sold the shares to nominees of a bank from which that shareholder had obtained loans. The application for rectification of the share register was resisted by the purchaser in whose favour the shares had already been registered with the company. The House of Lords came to the conclusion that the purchase was not in terms of the articles and that the transfer in violation of the articles was inoperative.
124. A similar situation arose in the case of Lyle and Scott Ltd. v. Scott's Trustees reported in [1959] 2 All ER 661 (HL), inasmuch as in Lyle and Scott (supra) too, the articles of association provided for, inter alia, a preemptive right to the existing shareholders to purchase shares. There was no dispute that the Article had been violated. The House of Lords observed:
The purpose of the Article is plain: to prevent sales of shares to strangers so long as other members of the appellant company are willing to buy them at a price prescribed by the Article and this is a perfectly legitimate restriction in a private company.
125. Having examined the provisions, embodied in the Companies Act, 1956, the apex court in V.B. Rangraj v. V.B. Gopalakrishnan reported in : [1992] 73 Comp Cas 201 : [1992] 1 SCC 160, concluded, at paragraph 7, thus (page 205 of 73 Comp Cas): 'These provisions of the Act make it clear that the articles of association are the regulations of the company binding on the company and its shareholders and that the shares are movable property and their transfer is regulated by the articles of association of the company.'
126. Having examined the scheme of the Companies Act, 1956, the apex court has held, in V.B. Rangraj (supra), at paragraph 8, that under the Companies Act or Transfer of Property Act, 1882, the shares are transferable like any other movable property. The apex court points out that the only restriction on the transfer of the shares of a company is as may have been laid down in the articles of association, if any. A restriction, which is not specified in the articles, is, therefore, according to the apex court, in V.B. Rangraj (supra), not binding either on the company or on the shareholders and that the vendee of such shares cannot be denied registration of the shares purchased by him on a ground other than what is stated in the articles of association.
127. In V.B. Rangraj (supra), what fell for determination of the court was when the shareholders, amongst themselves, had entered into an agreement, imposing on themselves restrictions to transfer shares, which were contrary to, and inconsistent with, the articles of association of their company, as regards transfer of share, whether such agreement can prevail upon the articles of association.
128. On finding, in V.B. Rangraj (supra), that the articles of association do not impose any such restrictions, which the shareholders had, by a separate agreement entered into, the apex court took the view that no restriction, on the transfer of shares, can be imposed by private agreement. In other words, no restriction, on the transfer of shares, is permissible except to the extent as the articles of association of the company concerned may have imposed.
129. Referring to certain authorities on the question as to what restrictions can be imposed on a shareholder's right to transfer shares, the apex court, in V.B. Rangraj (supra), further observed:
12. In Chapter 16 of Gore-Browne on Companies (43rd edition) while dealing with transfer of shares it is stated, that subject to certain limited, restrictions imposed by law, a shareholder has prima facie the right to transfer his shares when and to whom he pleases. This freedom to transfer may, however, be significantly curtailed by provisions in the articles. In determining the extent of any restriction on transfer contained in the articles, a strict construction is adopted. The restriction must be set out expressly or must arise by necessary implication and any ambiguous provision is construed in favour of the shareholder wishing to transfer.
13. In Palmer's Company Law (24th edition) dealing with the 'transfer of shares', it is stated at pages 608-609, that it is well settled that unless the articles otherwise provide, the shareholder is a free right to transfer to whom he will, It is not necessary to seek in the articles for a power to transfer, for the Act (the English Act of 1980) itself gives such a power. It is only necessary to look to the articles to ascertain the restrictions, if any, upon it. Thus a member has a right to transfer his share/shares to another person unless this right is clearly taken away by the articles.
14. In Halsbury's Laws of England, 4th edition, paragraph 359 dealing with 'attributes of shares' it is stated that 'a share is a right to a specified amount of the share capital of a company carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles and are not of the nature of real estate'.
15. Dealing with 'restrictions on transfer of shares' in Pennington's Company Law (6th edition) at, page 753, it is stated, that shares are presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the (less restrictive interpretation will be adopted by the court. It is also made clear that these restrictions have to be embodied in the articles of association
130. With regard to the restriction on transfer of shares, Halsbury's Laws of England, (Fourth edition), at paragraph 863, states:
863. Restriction on transfer of shares.- The articles of many companies contain some restrictions on the right of transfer. A restriction on the right to transfer shares is not repugnant to the absolute Ownership of the shares, but is one of the original incidents of the shares attached to them by the contract contained in the articles.
Restrictive provisions are strictly construed because shares, being personal property, are prima facie transferable.
Where the scheme and intent of the restrictions are to accord rights of pre-emption to the other members of the company, if there is no substantial compliance with the procedure laid down, the shareholder denied such rights is entitled to an appropriate injunction to protect his position.
131. Thus, a restriction, on the right to transfer shares, is not repugnant to the absolute, ownership of the shares, but is one of the original incidents of the shares attached to them by the contract contained in the articles. The restrictive provisions, contained in the articles of association of a company, are to be strictly construed, because the shares, being personal property, are prima facie transferable. Unless, therefore, the articles of association, in a given case, impose any restriction on the transfer of shares, there can be no restriction on the transfer of shares. Consequently, when the articles of association do not give any absolute or inflexible pre-emptive right to purchase shares to the shareholders of a company, it becomes the duty of the court to determine if transfer of shares to an outsider is illegal. In other words, the exceptions, to the restrictions in transferring the shares, must be liberally construed.
132. As already pointed out above, in the case of V.B. Rangaraj v. V.B. Gopalakrishnan : [1992] 73 Comp Cas 201 : AIR 1992 SC 453, an agreement was entered into between the members of the family who were the only shareholders of a private company. The agreement was that for all times to come, each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch, sold his shares to members of the second branch. Such sale was challenged in a suit as being void and not binding on the other shareholders. The Supreme Court rejected the challenge holding that the agreement imposed a restriction on shareholders' rights to transfer shares, which was contrary to the articles of association of the company. It was, therefore, held that such a restriction was not binding on the company or its shareholders.
133. The case of V.B. Rangaraj (supra) shows that no restriction on the transfer of shares, contrary to the articles of association, can be imposed on the shareholders or the company itself. Conversely, the restriction, imposed by the articles of association, cannot be violated. Any action, which has been taken by a company or its shareholders, in general, or the directors, which is beyond the powers contained in the memorandum of association or not authorised by the memorandum of association of the company or law, would be nothing but ultra vires unless the action can be regarded, as already discussed above, incidental to, or consequential upon, the powers, which the person, taking the action, otherwise, enjoy. If a decision is ultra vires, such a decision cannot be legally enforced.
134. What is, now, necessary to point out is that Section 10 of the Specific Relief Act, 1963, makes, a contract specifically enforceable if there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done, or when the act agreed to be done, is such that compensation, in money, for its non-performance, would not afford adequate relief. Normally, in the case of a contract to transfer movable property, specific performance is not granted except in circumstances specified in the explanation to Section 10 of the specific Relief Act, 1963. One of the exceptions is where the property is 'of special value or interest to the plaintiff, or consists of goods, which are not easily obtainable in the market'. It has been held, by a long line of authority, that shares, in a private limited company, would come within the, phrase 'not easily obtainable in the market' see Jainarain Ram Lundia v. Surajmull Sagarmull AIR 1949 SC 211.
135 The Privy Council, in Bank of India Ltd. v. Jamsetji A.H. Chinoy AIR 1950 PC 90, held (page 96):
It is also the opinion of the Board that, having regard to the nature of the company and the limited market for its shares, damages would not be an adequate remedy.
136. From the observations made by the Supreme Court, in V.B. Rangaraj v. V.B. Gopalakrishnan : [1992] 73 Comp Cas 201 : AIR 1992 SC 453, it becomes clear that, ordinarily, even in a private company, 'limited by shares, a shareholder shall be free to transfer a share to anyone except as provided in the articles of association. Thus, the right given, under the articles of association of a company, to a shareholder to purchase that share, which another shareholder of the company wishes to sell to an outsider, is nothing but a contract having a right of pre-emption to buy the share and such a right is enforceable under Section 10 of the Specific Relief Act, 1963.
137. Thus, subject to such restrictions as the articles of association may impose, a shareholder, in a private company, may agree to sell his share to a person of its choice. Such an agreement can be specifically enforced. In fact, there is no dispute that the right to specifically enforce a contract flows from common law. Such a right can, therefore, be enforced through the civil court unless the Companies Act can be shown to have, expressly or impliedly, barred, in a given case, the jurisdiction of the civil court to specifically enforce a contract. Viewed thus, it is clear that the pre-emptive right, given to a shareholder, under the articles of association, can be specifically enforced by a civil court unless the Companies Act can be shown to have, in a given case, ousted the jurisdiction of the civil court.
138. It will, therefore, depend on the facts of a given case as to whether a suit for specific performance of contract of pre-emptive right to purchase share can or cannot be specifically enforced, though, ordinarily, it will be difficult to reject the claim of specific performance of contract of such a pre-emptive right unless the case is shown to fall within the four corners of Sections 397 and 398 of the Companies Act, 1956.
139. Even in M.S. Madhusoodhanan v. Kerala Kaumudi P. Ltd. reported in : [2003] 117 Comp Cas 19 : [2004] 9 SCC 204, the apex court has held that the specific performance of a contract for transfers of shares, in a private limited company, could be granted.
140. I may, in this regard, refer to the observations made by the apex court in M.S. Madhusoodhanan v. Kerala Kaumudi P. Ltd. reported in : [2003] 117 Comp Cas 19 : [2004] 9 SCC 204, which read as under (page 62 of 117 Comp Cas):
141. Subject to this restriction, a holder of shares in a private company may agree to sell his shares to a person of his choice. Such agreements are specifically enforceable under Section 10 of the Specific Relief Act, 1963, which corresponds to Section 12 of the Specific Relief Act, 1877. The Section provides that specific performance of such contracts may be enforced when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done; or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. In the case of a contract to transfer movable property, normally specific performance is not granted except in circumstances specified in the Explanation to Section 10. One of the exceptions is where the property is 'of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market'. It has been held by a long line of authority that shares in a private limited company would come within the phrase 'not easily obtainable in the market' see: Jainarain Ram Lundia v. Surajmull Sagarmull : AIR 1949 FC 211, 218. The Privy Council in the Bank of India Ltd. v. J.A.H. Chinoy AIR 1950 PC 90, paragraph 21, said:
It is also the opinion of the Board that, having regard to the nature of the company and the limited market for its shares, damages would not be an adequate remedy.
The specific performance of a contract for transfers of shares in a private limited company could be granted.
141. I may also point out that there is an inherent distinction between issue of new shares in a company and sale of share by a shareholder to another, for, it is the company, which issues and allots new shares and not the shareholders; whereas the decision to sell shares is, ordinarily, the decision of the shareholder and it is a private arrangement unless the company becomes a party to such a decision.
142. Referring to the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. : [1965] 35 Comp Cas 351 : AIR 1965 SC 1535, which deal with the question of enforcement of an agreement relating to issue of new shares, the apex court, in M.S. Madhnsoodhanan (supra), observed (page 62 of 117 Comp Cas): '...Therefore, while it is imperative that the company should be a party to any agreement relating to the allotment of new shares, before such an agreement can be enforced, it is not necessary for the company to be a party in any agreement relating to the transfers of issued shares for such agreement to be specifically enforced between the parties to the transfer.'
(Here printed in italics).
143. Thus, to an agreement for specific performance of transfer of issued share, the company is, ordinarily, not a necessary party, for, the company would come into picture only when the question of recognising the transfer of share would arise. In a given case, a company has, in the light of Section 111, freedom to, if so authorised by the articles of association, refuse transfer of shares. Thus, an agreement between two shareholders or between a shareholder or outsider to transfer share is enforceable against the one, who is a party to such an agreement, and such an agreement would not be binding on the company unless, the company is also a party to such an agreement. If the articles of association of a company give pre-emptive right to a shareholder, it becomes a contract not only between the shareholder and the company, but also the shareholders inter se. In a suit for specific performance of such a contract, not only the shareholder, against whom pre-emptive right is sought to be exercised, but even the company would be necessary parties.
144. What logically follows from the above discussion is that when there is a contract for sale of shares between two shareholders of the same company or between a shareholder and an outsider, the shareholder or the outsider, whoever was to purchase share, may institute a suit for specific performance of contract against the shareholder, who was to sell share. To such a suit, the company is not, unless the company was also a party to the agreement, a necessary party. Extended logically, what it means is that the shareholder, who was to sell share, is, at any rate, necessary party to such a suit for specific performance of contract. No wonder, therefore, that Halsbnry's Laws of England (fourth edition), at paragraph 378, states:
378. Contract between members inter se.- While the articles regulate the rights of the members inter se, the older authorities support the view that they do not constitute a contract between the members inter se, but only a contract between the company and its members. Therefore, the rights and liabilities of members as members, under the articles, may be enforced by or against the members only through the company. However, more recent authorities support the direct enforcement by members of rights as members conferred by the articles.
Rayfiehi v. Hands [1960] Ch 1 : 2 All ER 194, Hurst v. Crampton Bros (Coopers) Ltd. [2002] EWHC 1375 (Ch) : [2003] 1 BCLC 304 (transfer of shares by member in breach of pre-emption requirements in articles defeasible at the suit of another member.)
145. From what the Halsbury's Laws of England states, it is clear that in order to institute a suit for enforcement of a contractual obligation of the right of pre-emption, as regards purchase of share, it is not necessary to make a company a party to the suit, but the shareholder, against whom the pre-emptive right is sought to be exercised, is a necessary party.
146. However, if the right of pre-emption arises out of the articles of association the company would necessarily be treated as a party to the agreement inasmuch as the articles of association bind the company and not only regulates company's relationship with the shareholders, but also relationship of the shareholders inter se. In a suit, therefore, arising out of a right of pre-emption, given by the articles of association, both the shareholder, whose share is sought to be purchased by the plaintiff, as well as the company would be necessary parties.
147. It is, now, imperative to note that Section 108(1) prohibits a company from registering a transfer of shares in a company unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee has been delivered to the company along with the certificate relating to the shares. Section 108(1A)(a) provides for the presentation of the instrument of transfer, in the prescribed form, to the prescribed authority for the purpose of having duly stamped on it the date of such presentation. Section 108(1A)(b) provides for the delivery, of the duly stamped instrument to the company within, generally, two months from the date of such presentation. Section 110 provides for application for transfer of shares. Section 111(1) preserves the power of the company under its articles to refuse to register the transfer of any shares of the company and Section 111(3) provides for an appeal to the Central Government against such refusal to register. Section 206 obliges a company not to pay the dividend in respect of any share except to the registered holder of such share or to his order or to his bankers or where a share warrant has been issued, in respect of the share, to the bearer of such warrant or to his banker.
148. Let me pause, at this stage, to consider the question as to what will happen if transfer of share by one shareholder to another or by a shareholder to an outsider is refused to be recognised by the directors in exercise of their powers under Section 111 of the Companies Act, 1956. It may be noted, in this regard, that the directors do not have any inherent power or right to refuse to recognise transfer of shares unless the articles of association so indicate see Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar reported in : [1989] (2) Supp SCC 656 : [1990] 67 Comp Cas 518.
149. With regard to the above the apex court has clarified the position of law in Bajaj Auto Ltd. v. N.K. Firodia : [1971] 41 Comp Cas 1 : AIR 1971 SC 321, by pointing out that even if the articles of association of a company provide that the directors might, in their absolute and uncontrolled discretion, decline to register any transfer of share, such discretion does not mean a bare affirmation or negation of a proposal and that such discretion has to be exercised bona fide on just and proper consideration of the proposal in the facts and circumstances of the case and in the general interest of the company and its shareholders, particularly, because the directors hold a fiduciary position towards the company as well as its shareholders and, consequently, such discretion cannot be exercised arbitrarily. Taking note of the decision of the case of Bajaj Auto Ltd. (supra), the apex court in Escorts Ltd. (supra), observed as under (page 617 of 59 Comp Cas):
83. Earlier we mentioned that Section 111 of the Companies Act preserves the power of the company under its articles to refuse to register the transfer of any shares of the company. The nature and extent of the power of the company to refuse to register the transfer of shares has been explained by this Court in Bajaj Auto Ltd. v. N.K. Firodia : [1971] 41 Comp Cas 1 : AIR 1971 SC 321. It was said that 'even if the articles of the company provided that the directors might at their absolute and uncontrolled discretion decline to register any transfer of shares, such discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal, in the facts and circumstances of the case. In the exercise of that discretion, the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive'. Where the articles permitted the directors to decline to register the transfer of shares without assigning reasons, the court would not necessarily draw adverse inference against the directors but will assume that they acted reasonably and bona fide. Where the directors gave reasons the court would consider whether the reasons were legitimate and whether the directors proceeded on a right or wrong principle. If the articles permitted the directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If they failed to disclose that reason, adverse presumption could be drawn against them.
150. Broadly in tune with the above position of law, as I have already pointed out, can also safely hold that notwithstanding the pre-emptive right, which a shareholder may have under the articles of association and can specifically enforce such preemptive right to buy shares, the shareholders' freedom to sell shares to an outsider, or the board of directors' power to allow such transfer of share to an outsider, must be liberally construed; whereas restrictions on such a freedom, imposed by the articles of association, have to be strictly construed. Consequently, the right to specifically enforce the preemptive right to buy shares has to be strictly, and not liberally, construed.
151. In Manilal Brijlal Shad v. Gordon Spinning and . AIR 1916 Bom 147, the purchaser of a share, in an auction sale, held by the court, sought to get his transfer of share registered by the company, whose share he had purchased. The director refused to register the share. The purchaser brought a suit for enforcement of his right to get the share registered on the ground that he, having purchased the share, in an auction sale held by the court, had become a shareholder of the company, whose share he had purchased, and the company must register his name as the holder of the share. A Division Bench of the Bombay High Court held that the purchase, though made in a court sale, cannot override that part of the memorandum of association, which vests the director with the discretion to refuse to admit any undesirable candidate. A Division Bench of the Bombay High Court held that the court did not have any right over the share more than what the shareholder had; consequently, the court too could not have given the purchaser a right, which even the court did not have. The court also held that the purchase of share would be subject to the same limitations, as were there when the original owner held the share, that the compulsory character of the sale cannot prejudice the rights of the company and cannot alter the position of the purchaser. The relevant observations made in Manilal Brijlal (supra), read as under:
1. For the purposes of this argument, we must, of course, assume that the directors would be within their powers in refusing to register the present appellant if he were a private purchaser, and not a court purchaser. Upon that assumption, I can see no reason why the directors' powers should be curtailed merely because the appellant purchased at a court sale. For whether the sale is made by a private individual or by a court, it seems to me clear that the thing sold and transferred from the seller to the buyer is merely the property in the share plus a limited, not an absolute, right to have the transfer registered. But the appellant here contends, and must contend, that when he purchased, over and above the share, the absolute right of forcing the directors to register his name. But that is a right, which ex hypothesi the court never had to sell. I infer that the appellant never bought it. This conclusion seems to me to be reinforced by the consideration to which the learned judge has referred, the consideration, namely, that upon the case for the appellant nothing would be easier than to override that part of the memorandum of association which invests the directors with a discretion to refuse to admit undesirable candidates. For if the appellant is right, then a person whose professed object might be to wreck or damage the company could nevertheless oust the director's discretion, and compel them to register him, by the simple process of purchasing through the court after a collusive decree. On these grounds, I am of opinion, that notwithstanding that the appellant's purchase was made through the court, the directors' powers, under the memorandum of association, for refusing to accept the appellant as a shareholder, are unaffected.
2. The issue in this case raises two questions, one of law, and the other of fact. The question of law is whether the purchaser of certain shares of a limited company at a court-sale in execution of a decree against the shareholder is entitled as of right to have the shares transferred by the company to his name. It is contended on behalf of the appellant that the company has no discretion in the matter and has no power to refuse to transfer the shares to the name of the auction-purchaser. It is common ground that a private purchaser from a shareholder must submit his application for transfer to the company and the application is liable to be dealt with by the directors as provided by Articles 22 and 23 of the articles of association of the company in question. But it is argued that the auction-purchaser in virtue of purchase at a court-sale has a much higher right in this respect than a private purchaser. On principle, I am quite unable to see how the purchaser at a court sale can have any higher right. He purchases the property subject to the same limitations to which the original owner could sell privately. The intervention of the court, and the compulsory character of the sale, cannot prejudice the rights of the company and cannot alter the position of the purchaser in any way on this point. There is nothing in the provisions of the Companies Act and the Civil Procedure Code to support the argument that the company is deprived of its usual powers, and relieved of its corresponding obligations, to deal with a transfer application, when the transfer is sought in virtue of a court-sale.
3. I am, therefore, of the opinion that the purchaser at a court-sale is not entitled, as of right, to have his name entered in the register of the company as a shareholder. He is subject to the same rules on this point as a private purchaser undoubtedly is.
152. From what have been observed in Manilal Brijlal (supra), it logically follows that the auction purchaser of the share had only equitable right on the said share; whereas the original owner of the share still remained the legal owner. The principle enunciated in Manilal Brijlal's case (supra), has been followed by a Division Bench of the Madras High Court in T. Nagabhushanam v. S. Ramachandra Rao reported in AIR 1923 Mad 241. This view was, however, deviated by another Division Bench of the Madras High Court in T.A.K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. AIR 1928 Mad 571, wherein the regulatory nature of the Companies Act vis-a-vis common law, was pointed out and held that the general right to institute a suit cannot be considered to be taken away merely because of some statutory provisions. The view of the Madras High Court as expressed in T.A.K. Mohideen Pichai Taraganar (supra), has, however, not been agreed to in its later decision in Avanthi Explosives P. Ltd. v. Principal Subordinate Judge, Tirupathi reported in : [1987] 62 Comp Cas 301 (AP). Thus, the law, laid down in Manilal Brijlal (supra), is still adhered to by the Madras High Court.
153. What emerges from the above discussion is this: when right to sell shares has to be liberally construed, a restriction on such a right has to be strictly construed. Consequently, the directors may, in a given case, not be incorrect in allowing transfer of share to an outsider by rejecting the preemptive right of another shareholder to buy such share if such a decision is not contrary to the conditions embodied in the articles of association or if such a decision of the directors subserves the public interest, for even a private company, in the light of the provisions of Sections 397 and 398, is required to adhere to the requirements of public interest irrespective of the fact as to whether the articles of association specifically mention or not the freedom to allow sale of shares to an outsider as an act, which can be done in the public interest by the board of directors.
154. In R. Mathalone v. Bombay Life Assurance Co. Ltd. : AIR 1953 SC 385 : [1954] 24 Comp Cas 1, the question of relationship between the transferor and transferee of shares before registration of the transfer in the books of the company, came to be considered. The Supreme Court held that on the transfer of shares, the transferee becomes the owner of the beneficial interest. Though the legal title remained with the transferor, the relationship of trustee and 'cestui que trust' was established and the transferor was bound to comply with all the reasonable directions that the transferee might give and that he became a trustee of the dividends as also a trustee of the right to vote. The relationship of trustee and cestui que trust arose by reason of the circumstance that till the name of the transferee was brought on the register of the shareholders in order to bring about a fair dealing between the transferor and the transferee, equity clothed the transferor with the status of a constructive trustee and this obliged him to transfer all the benefits of property rights annexed to the sold shades of the cestui que trust.
155. It bears, repetition that the liability to specifically perform a contract was a liability under the common law. In such circumstances, a shareholder will have the right to seek remedy of the enforcement of his pre-emptive right to buy shares by taking resort to the civil court, unless the Companies Act can be shown to have, in a given case, excluded, expressly or impliedly, in this regard, the jurisdiction of the civil court. Unless, therefore, the appellants can show that in the facts and circumstances of the present case, specifically enforceable pre-emptive right, if any, of the plaintiff-respondent cannot be enforced by the civil court, the inference would be that such a pre-emptive right of the plaintiff could have been enforced and can be enforced by the civil court.
156. It may, however, be noted that transfer of share, in violation of the provisions, contained in articles of association, would not per se be void ab initio; rather, such transfer would be voidable at the option of the aggrieved shareholder in the sense that the aggrieved shareholder may waive his pre-emptive right and not seek to enforce it. That such a right can be waived or modified is recognised at paragraph 171 of Sangramsinh P. Gaekwad's case (supra). Thus, a transfer of share, which may be in violation of the articles of association, would not be void ab initio, but only voidable.
157. What follows from the above discussion, in the light of the decision in Sangramsinh P. Gaekwad (supra), is that the pre-emptive right can be waived or modified. Thus, transfer of shares by a shareholder to an outsider, in denial of the pre-emptive right of any other shareholder to buy such share, is not void ab initio; rather, such a violation would make the transaction voidable and can be interfered with by the court at the option of the aggrieved shareholder. If an individual shareholder can have the right to waive his pre-emptive right to buy shares, it logically and as a corollary, follows that the shareholders, in general too, can take a collective decision to sell shares outside the company. Such a decision cannot be said to be ultra vires, for, when the shareholders can waive their right to buy shares, the logical effect would be that such a decision is within the competence of the company and such a decision cannot be said to be ultra vires. When a decision is not ultra vires or mala fide or fraudulent, the decision cannot be interfered with unless the decision is, as embodied in Sections 397 and 398, against the interest of the company, or against public interest, or oppressive to minority shareholders. Since the decision of a company has to rest on the views of the majority, the minority, even if aggrieved, cannot question it, for, minority shareholders too, being shareholders, cannot question the decision of the company except when the decision is said to be against the company or against public interest or oppressive to the minority shareholder. However, in such a case of disagreement by the minority, the remedy lies, unless can be shown otherwise, under Sections 397 and 398 of the Companies Act, 1956 and not in the civil court.
158. What crystallises from the above discussion is this: if the decision to sell shares, in the present case, is taken to be decision of the individual shareholders, the shareholders, who have taken such a decision, are necessary parties, if the present suit can be treated to be a suit for specific performance of contract, for, the shareholders are, as correctly pointed out by Dr. Saraf, the owners of shares and it is they, who have to be compelled to sell shares, particularly, when I notice that the plaintiff considers himself not bound by the resolution adopted in the extraordinary general meeting of the appellant-company. This apart, in the present case, if the right to obtain relief of specific performance of contract of pre-emptive right of a shareholder exists, such a right exists against the shareholder, who seeks to sell his share, and no effective decree, in such a suit, can be passed in the absence of the shareholder, who seeks to sell his share, inasmuch as the shareholder, being owner of the shares, has to execute necessary documents for transfer of shares. In the light of the respective cases of the parties, particularly, in the light of the pleaded case of the plaintiff-respondent, whether the shareholders were necessary parties to the present suit is a question, which I would answer a little later. For the moment, suffice it to point out that if the decision of the shareholders, in the present case, is taken to be the decision of the appellant-company and if this decision can be treated to be a decision taken in public interest as envisaged in Sections 397 and 398 of the Companies Act, 1956, particularly, when the decision, so taken, by the shareholders has been acted upon by the board of directors, then, the decision to sell the shares of the appellant-company cannot be said to be in violation or contravention of the provisions of Sections 397 and 398. The plaintiff is as much bound by this decision as any other shareholder, for, such a decision is not per se ultra vires inasmuch as the shareholders have, as already indicated above, inherent right to waive their pre-emptive right to buy shares and the pre-emptive right is enforceable only at the option of the person, who may have such pre-emptive right. Thus, the shareholder's decision to sell their shares, which forms the subject-matter of the suit, is prima facie a valid decision and such a decision is binding on the appellant-company and also on all its shareholders including the plaintiff-respondent. If a minority shareholder, such as, the plaintiff-respondent, feels that the decision, so taken, is oppressive or not in public interest, his remedy lies in invoking the provisions of Sections 397 and 398 and the present suit would be prima facie barred. I may hasten to add that it has not been the case of the plaintiff-respondent that the decision to sell shares to an outsider is not in public interest.
159. In short, the present suit cannot prima facie be held to be maintainable and no injunction, as reflected by the impugned order, could have been granted unless the plaintiff-respondent can show that he is prima facie entitled to the reliefs, which he had sought for in his plaint. This apart, as I would be showing in the succeeding paragraphs of this judgment, the plaintiff-respondent's right, if any, to buy shares, in the present case is a qualified and conditional right and if his right to buy share is conditional and qualified, whether a suit of the present nature would, at all, lie? This is the question, which, now, we face.
160. For the purpose of answering the question posed above, let me, now, turn to the merit of the plaintiff's application seeking injunction.
161. While considering the above aspect of the case, it needs to be recalled, as already indicated above, that the articles of association are regulations of the company and bind the company as well as its shareholders. In effect, the conditions, embodied in the articles of association, determine the terms of contract between the company and the shareholders as well as the shareholders inter se. I have also pointed out that in the light of the provisions of Section 9 of the Companies Act, 1956, when there is a conflict between the conditions imposed by the articles of association and the statutory provisions of the said Act, the statutory provisions would prevail. I have further pointed out that with the amendments, which Sections 397 and 398 of the Companies Act, 1956, have undergone, it clearly follows that the affairs of every company, public or private, must not be carried out in a manner, which is prejudicial to 'public interest'. In substance, therefore, adherence to the needs of 'public interest' has to be read in the body of every articles of association of a company. Consequently, if 'public interest' requires transfer of shares of a private company, such a transfer, even if not provided in the articles of association of a company, has got to be read into the articles of association. In short, thus, 'public interest' can be a ground for transfer of shares even in a private company.
162. Bearing in mind the position of law as indicated above, when I turn to the articles of association of the appellant-company, what attracts the eyes is that, the articles of association do not impose any absolute restrictions on the transfer of shares to an outsider by shareholders of the appellant-company. This inference is borne out of a reading of the provisions made in the articles of the appellant-company. The relevant provisions read:
7(b). A shareholder may at any time transfer a share to his or her father, mother, wife or husband, children, grandchildren or any male agnatic relation within three degrees or daughter-in-law, sister, sister's son or to anyone of the existing shareholders of the company without previous sanction of the directors, provided that the transferee is not an insolvent or otherwise incapable of discharging his or her obligations as a shareholder.
(c) In case a shareholder desires to transfer his/her share or shares to a person other than the persons mentioned in the last proceeding clause, he/she (hereinafter called the selling member) shall give a notice of his/her intention in writing to the managing director of the company specifying the number of shares he/she proposes to transfer and the value he/she puts on each share. Upon receipt of such notice, the directors shall, within 2 months from the receipt of such notice, find a purchaser from among the shareholders for the share notified for sale, at a price not less than the value of the share so put and as soon as they are able to secure a desirable purchaser at the price, they shall notify the fact to the selling member, who shall be bound, upon payment of the price within 14 days of the date of the notice issued by the directors to the selling member to transfer the share to such purchaser, and complete the transaction.
(d) If the directors fail to find a purchaser within two months, the selling member shall be competent to transfer the share to any one at his opinion at any price within a period of four months from the date of the notice of sale; provided that before such transfer is effected, the selling member shall intimate the price so obtained to the managing director who shall circulate the said price to all shareholders and if within 14 days of the date of the circular letter, any shareholder is willing to offer the said price, and deposits the amount with the managing director in the office, the selling member, on receipt of intimation from the managing director to that effect shall transfer the share in favour of such shareholder only and not to the outsider :
(i) Notwithstanding anything contained in these articles, the board of directors may at its discretion recognise a transfer of share(s) by a member to any person if such transfer is in fulfilment of any object considered as charitable or beneficial or for any public purpose or warranted under any terms of a trust deed created by a shareholder with any such object.
163. A conjoint reading of the above Clauses of the articles of association go to show that a shareholder, as per Clause 7(b), can, at any point of time, transfer a share to his or her father, mother, wife or husband, children, grand children or any male agnatic relation within three degrees or daughter in law, sister, sister's son or to any one of the existing shareholder of the company without previous sanction of the directors. However, Clause 7(c) and 7(d) impose restriction upon a shareholder's right to sell/transfer his/her share to an outsider without following the procedure prescribed by Sub-clauses (c) and (d) of Clause 7 of the articles of association.
164. The scheme of restriction, as conceived by Sub-clauses (c) and (d), aforementioned, is this: A shareholder, who is desirous of transferring his shares to a person other than those, who are mentioned in Clause 7(b) aforementioned, is required to give a notice, in writing, to the managing director of the appellant-company specifying the number of shares he or she proposes to transfer and the value he or she puts on his or her share. Upon receipt of the notice, the director shall, within two months from the date of receipt of such notice, find the purchaser from amongst the shareholders for the share notified for sale, at a price not less than the value of the share so put, and as soon as they are able to secure a desirable purchaser at the price, as assessed by the shareholder, who desires to sell share, the directors shall notify the fact to the selling member, who shall be bound, upon payment of the price within 14 days of the date of the notice, issued by the directors, to the selling member, to transfer the share to such purchaser, and complete the transaction. If, however, the director fails to find a purchaser within the period of two months aforementioned, the selling member shall be competent to transfer the share to any one at his opinion at any price within a period of four months from the date of the notice of sale; provided that before such transfer is effected, the selling member shall intimate the price, so obtained, to the managing director, who shall circulate the said price to all shareholders and, if within 14 days of the date of the circular/letter, any shareholder is willing to offer the said price, and deposits the amount with the managing director in the office, the selling member, on receipt of intimation from the managing director to that effect, shall transfer the share in favour of such shareholder only and not to the outsider.
165. What is, now, of paramount importance to note is that Sub-clause (i) of Clause (7) gives an overriding power to the board of directors to recognise, at its discretion, a transfer of share(s) to anyone by a member to any person if such transfer is in fulfilment of any object considered as 'charitable or beneficial or for any public purpose or warranted under any terms of a trust deed created by a shareholder with any such object'.
166. Thus, notwithstanding the fact that Sub-clause (d) of Clause (7) gives pre-emptive right to the shareholders of the appellant-company to purchase shares offered for sale by another shareholder of their company, the board of directors may, subject to the conditions, which have been specified in Sub-clause (i) of Clause (7), recognise such a transfer of shares by any member to any outsider.
167. It could not be disputed, on behalf of the respondent, that Sub-clause (i) of Clause (7) contains non-obstante clause, which is overriding in nature. If read carefully, what becomes transparent, from the provisions embodied in Sub-clause (i), is that the pre-emptive right of the shareholders, under the articles of association of the appellant-company, becomes exercisable only when transfer or sale of shares by a member or members of the appellant-company to an outsider does not fall under the explanations given in Sub-clause (i) or when, even if the conditions specified in Sub-clause (i) are satisfied, the board of directors do not, in exercise of their discretion, allow sale or transfer of share to an outsider without first giving an option to the shareholders, in general of the appellant-company, to purchase the share offered for sale by one or more of the shareholders. In other words, the pre-emptive right of the shareholders, under the scheme of the articles of association of the appellant-company, comes into existence only when the conditions, as specified in Sub-clause (i) are not satisfied or even when such conditions are satisfied, the board of directors decide, in their discretion, to give an option to the shareholders of the appellant-company to exercise their right of pre-emption.
168. What is curious to note is that in the plaint and in the application for injunction, the respondent relied upon Sub-clauses (b), (c) and (d) of Clause (7) of the articles of association of the appellant-company, but has not referred to Sub-clause (i) of Clause (7).
169. What is all the more curious to note is that it is not even contended that the board of directors have decided to act upon the decision of the shareholders as expressed by them in the extraordinary general meeting of the appellant-company mala fide or only to defeat the purported pre-emptive right of the appellant to purchase shares.
170. Coupled with the above, the learned trial court, as the impugned order reveals, did not take notice of the existence of Sub-clause (i) of Clause (7) of the articles. In fact, whether existence of Sub-clause (i) was ignored or escaped complete attention of the learned trial court is not very clear. The fact, however, remains that the learned trial court has not made even an incidental reference to Sub-clause (i).
171. Let me, therefore, determine as to when the discretion given to the board of directors under Sub-clause (i) is exercisable?
172. Under Sub-clause (i), transfer to an outsider, in denial of the pre-emptive right, is allowed only when transfer is in fulfilment of any object, which can be considered as 'charitable or beneficial or for any public purpose or warranted under any terms created by a shareholder with any such object'. Thus, the object has to be charitable, beneficial or for in any public purpose or a purpose akin to public purpose. There can be no doubt that merely for the benefit of an individual shareholder, Sub-clause (i) of Clause (7) cannot be resorted to.
173. While interpreting the word 'beneficial', which occurs in Sub-clause (i) of Clause (7) of the articles of association, the court has to bear in mind that the word 'beneficial' occurs between the words 'charitable' and 'public purpose'. The expression beneficial, which occurs in the memorandum of association, as aforesaid, has to be interpreted bearing in mind the concept of ejusdem generis.
174. It may be pointed out that ejusdem generis is a Latin expression, which means 'of the same kind'. In Parakh Foods Ltd. v. State of Andhra Pradesh reported in : [2008] 4 SCC 584, the apex court illustrated the doctrine of ejusdem generis by saying that (page 587): '...ejusdem generis is a Latin expression which means 'of the same kind', for example, where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed. In other words, it means words of similar class. According to Black's Law Dictionary (8th edition, 2004), the principle of ejusdem generis is where general words follow an enumeration of persons or things, by words construed in their widest extent, but are to be held as applying only to persons or things of the same kind or class as those specifically mentioned. It is a canon of statutory construction that where general words follow the enumeration of particular classes of things, the general words will be construed as applying only to things of the same general class as those enumerated.'
175. The Privy Council in Bisheswar v. Parath Nath reported in : AIR 1934 PC 213, had the occasion to interpret the words 'or for any other reason', occurring in Order 47, Rule 1 of the Code of Civil Procedure, 1908 and prescribed the ground upon which an application for review can be made. Interpreting what the words 'any other sufficient reason', mean the Privy Council pointed out that the words must be taken as meaning 'a reason sufficient on grounds at least analogous to those specified immediately previously'. Thus, the expression, ejusdem generis, as observed by the Supreme Court in Siddheshwari Cotton Mills P. Ltd. v. Union of India : AIR 1989 SC 1019, signifies a principle of construction, whereby words in a statute, which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus, describing terms are followed by wider or residuary or sweeping up words, then, the verbal context and the linguistic implications of the preceding words limit the scope of such words. Observed Lord Campbell in R. v. Edmundson [1959] 28 LJMC 213: 'I accede to the principle laid down in all the cases which have been cited, that, where there are general words following particular and specific words, the general words must be confined to things of the same kind as those specified' (see Craigs on Statute Law - 7th. edition, 2002).
176. If the expression, 'charitable or beneficial or for any public purpose or a purpose akin to public purpose or any such object', is analysed bearing in mind the doctrine of ejusdem generis, it is difficult to construe that beneficial purpose would include beneficial to the transferor. However, beneficial purpose would, undoubtedly, include beneficial for the public at large or when such transfer is in public interest.
177. The word 'beneficial', in the context of the words, which appear in Sub-clause (i) of Clause (7), leaves no room for doubt that beneficial would be tantamount to public interest. This apart, I have already pointed out above, that in the light of the amendments introduced in Sections 397 and 398, whereby it has been made possible for the court to interfere in the affairs of the company if the affairs of the company are being conducted in the manner prejudicial to public interest, the court is bound to read into every memorandum of association, the requirement of the company, public or private, to adhere to interest of the public. Viewed thus, it is clear that while considering the right to sell shares or restrictions on the right to sell shares, the court has to bear in mind that whichever interpretation advances the cause of 'public interest' is the interpretation, which the court shall, in tune with the legislative intent, adopt. The legislative mechanism, provided in Sections 397 and 399, would stand defeated if the court, while interpreting Sub-clause (i) of Clause (7) of the articles of association of the appellant-company, ignores the requirement of public interest.
178. The dispute, which the plaintiff has raised in the present case, is, according to the plaintiff, a private dispute; whereas the developed concept of public interest being an integral part of the affairs of every company, public or private, the court cannot ignore the requirement of public interest, while considering the question as to whether the plaintiff had been able to make out a prima facie case for the purpose of entitling him to obtain injunction as has been sought for by him.
179. Beneficial for the public cannot be said to be different from, inconsistent with or contrary to, public interest. Though the decision to sell shares to an outsider is, primarily, in the interest of the shareholders and the officers and members of the appellant-company, the fact remains that a tea estate, unlike other industries, provides employment not only to the individual workers, but employment is almost hereditary in nature inasmuch as it is the legal representative of a labour, who, ordinarily, succeeds and takes over the job as a legal representative of a retired or deceased labour. Whole of the family, in one way or other of a labour, survives on the employment in the tea estate itself. Thus, the situation of the labourers, in a tea estate, is substantially different from other industries, where employment is not at all hereditary in nature; whereas in the tea estate, the employment is almost hereditary in nature as far as labourers, working in the tea estates, are concerned.
180. As rightly pointed out by Dr. Saraf, learned senior Counsel, appearing for the appellant, that in a case of present nature, the element of public interest is a factor, which ought to have been kept in view by the learned trial court at the time of considering the application for injunction. The observations made by the apex court in Ramniklal N. Bhutta v. State of Maharashtra reported in : [1997] 1 SCC 134, cannot be said to be misplaced. The relevant observations made in Ramniklal N. Bhutta (supra), at paragraph 10, read as under (page 140):
10. Before parting with this case, we think it necessary to make a few observations relevant to land acquisition proceedings. Our country is now launched upon an ambitious programme of all-round economic advancement to make our economy competitive in the world market. We are anxious to attract foreign direct investment to the maximum extent. We propose to compete with China economically. We wish to attain the pace of progress achieved by some of the Asian countries, referred to as 'Asian tigers', e.g., South Korea, Taiwan and Singapore. It is, however, recognised on all hands that the infrastructure necessary for sustaining such a pace of progress is woefully lacking in our country. The means of transportation, power and communications are in dire need of substantial improvement, expansion and modernisation. These things very often call for acquisition of land and that too without any delay, It is, however, natural that in most of these cases, the persons affected challenge the acquisition proceedings in courts. These challenges are generally, in the shape of writ petitions filed in High Courts. Invariably, stay of acquisition is asked for and in some cases, orders by way of stay or injunction are also made. Whatever may have been the practices in the past, a time has come where the courts should keep the larger public interest in mind while exercising their power of granting stay/injunction. The power under Article 226 is discretionary. It will be exercised only in furtherance of interests of justice and not merely oh the making out of a legal point. And in the matter of land acquisition for public purposes, the interests of justice and the public interest coalesce. They are very often one and the same. Even in a civil suit, granting of injunction or other similar orders, more particularly of an interlocutory nature, is equally discretionary. The courts have to weigh the public interest vis-a-vis the private interest while exercising the power under Article 226 - indeed any of their discretionary powers. It may even be open to the High Court to direct, in case it finds finally that the acquisition was vitiated on account of non-compliance with some legal requirement that the persons interested shall also be entitled to a particular amount of damages to be awarded as a lump-sum or calculated at a certain percentage of compensation payable. There are many ways of affording appropriate relief and redressing a wrong; quashing the acquisition proceedings is not the only mode of redress. To wit, it is ultimately a matter of balancing the competing interests. Beyond this, it is neither possible nor advisable to say. We hope and trust that these considerations will be duly borne in mind by the courts while dealing with challenges to acquisition proceedings.
181. In the present case, there is no denial of the fact that the appellant-company has sustained huge loss and the losses are mounting by leaps and bounds. Recovery proceeding for realisation of debts of the appellant-company have already been initiated. There is labour unrest as wages and other statutory dues have not been made available to the labourers. In such circumstances, deaths, arising out of starvation of the labourers of the appellant-company, cannot be ruled out. The labour unrest threatens lives of the shareholders and office-bearers and employees of the appellant-company. In such circumstances, when the shareholders took a decision, in their meeting, as mentioned above, to look for a buyer, outside the appellant-company, who would agree to buy the appellant-company with all its assets and liabilities and the board of directors decided to act upon such resolution and initiated steps accordingly, it would be unreasonable and harsh to hold, even tentatively, particularly, when there is no accusation of mala fide against the board of directors, that the board of directors have decided, with ulterior motive, to act upon the resolution of the majority of the shareholders of the appellant-company to sell the shares to an outsider. In fact, the letter, which was issued, in this regard, by the board of directors, read as under:
To,Date: 9-2-2008(a) Sri Mridul Kr. Bhattacharjee - Joint shareholder(b) Smt. Tumani Bhattacharjee - Joint shareholder(c) Smt. Mahashweta Bhattacharjee - Joint shareholder(d) Smt. Mrdusmita Chablani - Joint shareholder(e) Sri Ronjoy Bhattacharjee - Joint shareholderBamunimaidum,
Guwahati-21 (Assam).
Dear Sir/Madam,
We would inform you that the board of our company has decided to dispose of the company with its tea estate and assets and liabilities as per decisions of the EOGM's held on 15-12-2006 and 19-3-2007 and as such, negotiation with a reputed company has been finalised. The party has agreed to pay the highest reasonable price per kg. of made tea on 4 years average crop and also accepted the terms and conditions put by our Board.
In view of the above, our board of directors has authorised the managing director and Mr. B. K. Bhattacharya, a director of the company to collect the original share certificates of the shares held by the shareholders along with the individual transfer forms signed by them immediately on the above.
It may kindly be noted that the proposed buyer company has requested us to submit the original shares certificates for verification in order to clear the bank dues, all outstanding liabilities including the market liabilities and net share money to each shareholder by individual A/C payee demand drafts. They will not allow any cash payment to any party or person. The buyer has decided to clear 100 per cent, of all the liabilities outstanding as on 31-1-2008 and net share money to the shareholders immediately by A/C payee demand drafts before taking over possession within 3rd week of February, 2008. Hence, they have requested us to produce the original share certificates with the individual transfer forms signed by the shareholders of our company to enable them to complete the transaction without loss of time. They have also agreed to re-imburse our running expenses of the tea estate for the month of February, 2008,
You are, therefore, requested to submit your original share certificates along with the share transfer form signed by you in favour of the proposed buyer whose name will be disclosed by the managing director at the time of submission of the share certificates. The managing director will issue a receipt of share certificates to you accordingly. Kindly treat this a most urgent Thanking you
Yours faithfully,
For Radhabari Tea Co. P. Ltd.
(A.K. Goswarni)
Managing Director.
Strictly Confidential
Estimated net consideration money to be received from the proposed purchaser Rate - Rs. 170 per kg. of made tea on 2,52,505 kgs - offered by the party Crop - 2,52,505 kgs of made tea. i.e,. 4 years average crop - Calender years - 2004, 2005, 2006 and 2007 (from January to December)
Rs. 170 x 2,52,505 kgs = Rs. 4,29,25,850
Rounded of Rs. 4,29,26,000
Less: Liabilities including bank dues, Tea Board, P.F. dues, Market liabilities, etc., etc., Rs. 2,31,10,000, Rs. 1,98,16,000
Refundable by the purchaser along with consideration money:
(Rupees)F.D.R.S. with S.B.I. with estimated interest up to 31-01-2008 11,77,00,000Shareholder-Arpana Goswami's loan amount 10,340.00Shareholder-Dipak Kr. Bhattacharyya's loan amount 60,000.00Old share money of A.F.C. 5,000.00Old Share money of Assam Co-operative Apex Bank Ltd. 250.00NABARD deposit 13,000.00A.S.E.B. labour advance and advance to workers 47,502.00Security deposit with A.S.E.B. 3,38,314.00Security deposit with J.C.M.C. (Mission Hospital), Jorhat 30,000.00Security deposit with Sale Tax Department 15,000.00Security deposit with Bardalol Gas Agency, Jorhat 9,540.00Security deposit with Kaziranga Gas Agency, Bokakhat 500.00Security deposit with post office reference excise duty 1,100.00Advance to staff members 12,736.00Advance to sub-staff 1,800.00Advance to M.K. Bardaloi & Co. Jorhat (C.A.) 8,000.00Amount due from National Insurance Co. 1,869.00Assam Tribune, Guwahati 500.00FDR with Chartered Standard Bank (Grindlays), Kolkata 70,000.00Amount in current account with Chartered Standard Bank (Grindlays)Kolkata 3,000.00Amount in current account with SBI, Dergaon 15,000.00Value of stores in stock 93,000.00---------------Total 19,13,451.00---------------Advance to Tea Board (earnest money) 90,100.00Income-tax refundable 39,000.00Agriculture income-tax refundable 55,000.00---------------Total 1,84,100.00---------------This amount is receivable and being processed by us Rs. 4,29,26,000.00
Rs. 7,00,000.00 (estimated expenditure of February 2008, to be reimbursed to us by the purchaser)
Rs. 19,13,451.00 (Refund of total of security money advances, FDRS's amount, etc. (as above) to be refunded by the purchaser.)
Gross total amount Rs. 4,55,39,451.00
Less: Liability amount Rs. 2.31,10,000.00 (including bank's dues, etc., etc., as above) to be paid by the purchaser subject to deduction from consideration money Approx. net . amount to be paid by the purchaser to each shareholder by individual A/C payee D.D. subject to the production of original share certificates with transfer forms signed by individual shareholder.
Rs. 2,24,29,45: 23,760 Nos of shares = Rs. 944.00 per share (Approx. net consideration money per share)
The above estimated net consideration money may slightly differ since confirmation of the outstanding dues of the Tea Board is awaited and the same is expected within a short time.
Rate per kg of made tea on 2,52,505 kgs. on gross amount of Rs. 4,55,39,451.00 = Rs. 180.35 per kg of made tea.
Note: To be deducted from the following shareholders individual share money at the time of releasing the shares money to them by the purchaser and the total amount will be added to our total net share money.
1. Smt. Arpana Goswami Rs. 10,340.002. Sri Dipak Kr. Bhattacharayya Rs. 60,000.00(B) Brokers invoice advance of Rs. 13,00,000.00 (thirteen lakhs) approx will be paid by our company from sale proceeds lying in our bank account at the time of conclusion of the above deal with the proposed buyer.
182. In the circumstances, as discernible from the pleadings of the parties and from the materials on record, and keeping in view the situation, which the appellant-company has been facing, the discretion exercised by the board of directors, in the present case, cannot be prima facie said to be beyond their powers as contained in Sub-clause (i) of Clause (7) and/or mala fide. These aspects of the present case appear to have gone unnoticed by the learned trial court. In such a situation, the reference made by Dr. Saraf to the case of Ramdev Food Products P. Ltd. (supra), cannot be said to be misplaced inasmuch as in Ramdev Food Products P. Ltd. (supra), it has been clearly laid down at paragraph 128 that when the court proceeds on a prima facie misconstruction of documents, adopt and apply wrong standards, interference with the decision, on such misconstruction or on application of wrong standards to the facts of a case, is permissible.
183. The fall out of the above discussion is this: If a shareholder is granted preemptive right to buy share of his company by the articles of association, it is possible for such a shareholder to institute a suit for specific performance of the contract of his pre-emptive right. To such a suit, the shareholder, who proposes to sell shares, would be a necessary party, for, it is that shareholder, who has to sell his share. To such a suit for specific performance of contract, even the company would be a necessary party inasmuch as the right of preemption, granted under the articles of association, would be a contract to which the company as well as the shareholders are parties.
184. The question, which, now, stares at us, is: Whether the present suit is at all a suit for specific performance of a contract? The answer to this question is not very far to seek. If the reliefs, which the plaintiff has sought for (and which I have already reproduced at paragraph 10), are carefully examined, it leaves no room for doubt that the plaintiff-respondent's suit is not a suit for specific performance of contract of his alleged pre-emptive right to buy shares, which the remaining shareholders of the appellant company have decided to sell.
185. The plaintiff-respondent, under Clause (f) of paragraph 20 of the plaint, has sought for a decree of mandatory injunction directing the defendants to sell and transfer the shares of defendant No. 1 in favour of the plaintiff- respondent from those members, who intend selling their shares and also to deliver possession of Radhabari Tea Estate unto the plaintiff. Is the plaintiff entitled to a decree of mandatory injunction, as has been sought for by him, without seeking specific performance of his alleged pre-emptive right, if any, to buy shares? The answer to this question can be found in Section 39 of the Specific Relief Act, 1963, Section 39 reads:
39. Mandatory injunctions,- When, to prevent the breach of an obligation, it is necessary to compel the performance of certain acts, which the court is capable of enforcing, the court may, in its discretion, grant an injunction to prevent the breach complained of, and also to compel performance of the requisite acts.
186. From a bare reading of Section 39, what becomes transparent is that mandatory injunction can be granted by a court only when the court is required to prevent breach of an obligation, which is cast on the defendant to perform certain act, the court considers that the defendant needs to be compelled to perform such acts and the obligatory act is such, which the court is capable of specifically enforcing. Thus, the two essential elements, whose existence is necessary for obtaining a decree of mandatory injunction, are: (1) The need for prevention of the breach of an obligation existing in favour of the plaintiff and (2) The need to compel the defendant to do certain acts necessary to prevent the breach. Performance of an obligation itself cannot be compelled through a decree of mandatory injunction. Performance of an obligation, which a court is capable of enforcing, can be compelled only, by a decree for specific performance subject, of course, to the conditions and the limitations prescribed by the provisions of the Specific Relief Act, 1963.
187. In the case at hand, when the plaintiff-respondent has not sought for a decree of specific performance of contract of his alleged pre-emptive right, the question of making available to him the same relief by way of mandatory injunction or the question of the plaintiff-respondent being able to obtain, in such a suit, a mandatory injunction of the nature, as has been sought for by him, under Clause (f) of paragraph 20 of the plaint, does not arise at all.
188. The plaintiff-respondent's suit, as Clause (a) of paragraph 20 of the plaint shows, is, in fact, a suit for declaration of his alleged right of pre-emption to purchase share of the appellant-company from the shareholders, who have decided to sell their shares.
189. What is, however, of utmost importance to note is that pre-emptive right of purchase, which is at the core of the suit and regarding which positive and negative declarations have been sought for, in Clauses (a) and (b) of paragraph 20 of the plaint, is based on Sub-clause (b) of Clause 7 of the articles of association. This right, learned trial court appears to have failed to notice, is circumscribed by Clauses 7(c), 7(d) and 7(i) of the articles of association.
190. As I have already discussed above, the plaintiff's right to buy share, under Clause 7(b), is a qualified right and this right comes to the fore only when a shareholder's decision to sell share outside the company does not fall under Clause 7(i) or when the board of directors, notwithstanding the power given to them under Clause 7(i), decide not to allow the selling member to sell his share outside the company without giving an option to buy such share to such a member, who may be interested in buying such share.
191. Thus, the contract of pre-emption, if any, is, in the present case, a contingent contract inasmuch as the right to buy share would arise only when a shareholder's decision to sell his share falls outside Clause 7(1) and/or when the board of directors does not permit a selling member to sell his share outside the company without offering an option to buy share to a shareholder, who may be interested in buying such share. Such a contract, being a contingent contract, is inherently determinable in nature inasmuch as the right of pre-emption is conditional and exercisable only when the transfer of share is not covered by Clause 7(i) or, when, though covered by Clause 7(i), the board of directors does not permit sale of share to an outsider without giving an option to buy share to another willing shareholder. Such a contingent contract, in the light of Clause (c) of Sub-section (1) of Section 14 of the Specific Relief Act, is not specifically enforceable.
192. Thus, when the plaintiff's right, if any, to buy share, under the articles of association of the appellant-company, is a conditional and not an absolute right, such a right, being determinable in nature, is not specifically enforceable unless the conditions precedent, as indicated above, are fulfilled. Consequently, no declaration of so-called absolute pre-emptive right to buy shares, as have been sought for by the plaintiff under Clauses (a) and (b) of paragraph 20 of the plaint, can be prima facie granted, particularly, when there is no pleading in the plaint and no case has been made out by the plaintiff-respondent that the reliefs of declaration, which he has sought for, do not fall within the ambit of Clause 7(i) of the articles of association, which is, as already discussed above, overriding in nature. When the plaintiff cannot be said to have made out any prima facie case for the kind of declarations, which he has sought for, the plaintiff cannot be held to have made out any prima facie case for granting of injunction as has been sought for by him.
193. To put it a little differently, I may pause here to point out that the term 'contingent', when appended to the term 'contract', determines the time for the performance of the contract. Section 31 of the Indian Contract Act, 1872, states that a 'contingent contract' is a contract to do or not to do something if some event, collateral to such contract, does or does not happen. In 'contingent contract', the performance of contract is, thus, dependent on the happening or not happening of some collateral event. Thus, a 'contingent contract' contains, within itself, two contracts, firstly, tire principal act agreed to be done or not be done, and embedded, in this principal contract, is the collateral contract of contingency. Sections 32, 33, 34 are various contingencies contemplated in the Indian Contract Act, 1872.
194. So far as the performance of contract is concerned, the courts can direct specific performance only in a concluded contract. The principal contract, in a contingent contract, cannot be specifically performed unless the contingency arises and, therefore, it can be said that till the contingent condition is fulfilled, the contract is not a concluded contract.
195. In the present case, when the plaintiff-respondent does not have absolute right to buy share in preference to an outsider, it clearly follows that his right is dependant on the fact as to whether a shareholder's decision to sell share falls within the ambit of Clause 7(i) or not and whether the board of directors does or does not permit the shareholder concerned to sell his share to an outsider. When the plaintiff-respondent's case is dependant on fulfilment of the conditions precedent embodied in Clause 7(i), it cannot, merely on the basis of the provisions contained in Clause 7(b) of the articles of association of the appellant-company, be contended that in each and every case, a shareholder, such as, the plaintiff, has an absolute right to buy shares in preference to an outsider. No decree of declarations, in the present case, can, therefore, be prima facie granted as has been sought for by the plaintiff-respondent, particularly, when the plaintiff has not pleaded any such fact to show that in the facts and attending circumstances of the present case, the provisions of Clause 7(i) are not attracted or that the decision of the board of directors to act upon the resolution, adopted in the extraordinary general meeting of the shareholders of the appellant-company, is beyond their competence even in the face of the provisions of Clause 7(1).
196. In the facts of the present case, one is also required to bear in mind the provisions of Section 34 of the Specific Relief Act, 1963. Section 34 reads:
34. Discretion of court as to declaration of status or right.- Any person entitled to any legal character; or to any right as to any property, may institute a suit against any person denying, or interested to deny, his title to such character or right, and the court may, in its discretion, make therein a declaration that he is so entitled, and the plaintiff need not in such suit, ask for any further relief:
Provided that no court shall make any such declaration where the plaintiff, being able to seek further relief than a mere declaration of title, omits to do so.
197. A careful reading of Section 34 shows that a person is not entitled to seek a decree of declaration of his right to a property if he, being able to seek further relief than mere declaration of his right, omits to do so. In the present case, the reliefs, which the plaintiff-respondent has sought for, clearly show that the plaintiff-respondent is seeking a declaration that he has an absolute preferential right to buy shares. This is a positive relief, which the plaintiff-respondent is seeking. The plaintiff-respondent is also seeking a declaration that the appellant-company has no right to sell or transfer shares to any outsider depriving the plaintiff-respondent of his preferential right to buy shares. This is a negative relief, which the plaintiffs respondent has sought for. The plaintiff-respondent is further seeking, amongst others, an injunction compelling the defendants to sell and transfer shares in favour of the plaintiff-respondent from those members, who intend to sell their shares, treating his (plaintiff-respondent's) alleged preemptive right to buy shares as an absolute (and not conditional) right. This is, again, a positive relief, which the plaintiff-respondent is seeking. In the face of these reliefs, which the plaintiff-respondent has sought for, it is clear that the plaintiff-respondent, if his case is correct, was entitled to seek specific performance of the contract of his alleged right of pre-emption, but he chose, for reasons best known to him, not to seek the relief of specific performance of contract. In such circumstances, a suit for mere declaration of the plaintiff-respondent's alleged right is prima facie not maintainable.
198. What logically follows from the above discussion is that when no declaratory decree can be given in favour of the plaintiff as has been sought for by him, the question of granting any preventive injunction, interim or otherwise, does not arise, particularly, when the injunction, in the present case, is only a consequential relief. This apart, when (as already held above) no specific performance of the alleged pre-emptive right of the plaintiff-respondent is, in the facts and attending circumstances of the case, possible, the preventive injunction which the plaintiff-respondent had sought for, could not have been granted.
199. Coupled with the above, what also needs to be noted is that though a court's satisfaction that a suit is prima facie maintainable is a pre-requisite for granting of injunction, the maintainability of the suit is, somewhat, a variable concept.
200. 'Maintainability', according to Advanced Law Lexicon, quoting Corpus Juris Secundum, has three meanings. The first meaning is 'to commence, to begin, to bring, to institute'. The second meaning is 'to continue, to carry on, to support, as contradistinguished from to institute'. The third meaning of the term is to commence and prosecute to a conclusion that which has already been begun.
201. The impact of non-joinder of a necessary party on the above three facets of maintainability will not be the same. A statute may provide that a suit cannot be instituted at all without joining some person as a party. Such a non-joinder, in violation of the statutory provision, would make the suit not maintainable at all within the first meaning indicated above. If, however, the non-joinder is merely procedural, as indicated in Order I, Rule 9 and Order XXVII, Rule 5A of the Code of the Civil Procedure, the suit may not be maintainable within the second and the third meaning of the term 'maintainable' as indicated above. If the defect remains un-rectified, the suit may only be dismissed. A party, who has not been joined initially, may be added later subject to law of limitation. In relation to an order of injunction, because of non-joinder of a necessary party, the suit may become prima facie not maintainable within the first meaning. The inability to pass an effective decree in a suit, because of non-joinder, which is one of the tests to determine who is a necessary party, as applied to an order of injunction, would amount only to seeing whether the order of injunction can or cannot be made operative at all, because of non-joinder.
202. As already indicated above, the present one is a suit for a decree declaring that the plaintiff-respondent has a preferential right and/or a right of pre-emption to purchase the shares of the appellant-company from the selling members and also for a decree declaring that the defendants have no right to sell or transfer shares of the appellant-company to any outside third party depriving a willing and desirous shareholder from purchasing shares from those members, who seek to sell their shares. Thus, the present suit is a suit for declaration of plaintiff-respondent's alleged preemptive right to buy share and a suit for injunction. To such a suit, which is not a suit for specific performance of contract, a shareholder (had the suit been, otherwise, prima facie maintainable) was not a necessary party and the suit against the company would have been prima facie maintainable. It is in this, context that Order XXXIX, Rule 5 needs to be viewed inasmuch as Order XXXIX, Rule 5 clearly lays down that when an injunction is passed against a company, the shareholders, even if they were not parties to the suit, would be bound by the order of injunction, whereby the personal action of the members and officers of the Corporation are sought to be restrained.
203. The appellants are also-correct when they point out that the learned trial court has assigned no reasons for coming to the conclusion that there is a prima facie case for trial or that the balance of convenience is in favour of the plaintiff or irreparable loss would be caused if injunction was not granted. Having set out the facts of the case, the learned trial court concluded and directed as follows:
After considering the above facts and circumstances, I find that petitioner-plaintiff has established a prima facie case in his favour and if the prayer of the petitioner-plaintiff is not allowed, then it will cause irreparable loss to the petitioner-plaintiff which cannot be compensated by money and the balance of convenience is also in favour of the petitioner-plaintiff.
Considering the claim and counter claim of the parties, I find that is a fit case for granting temporary injunction in favour of the petitioner-plaintiff and it is also found that if the injunction is not granted in favour of the petitioner-plaintiff, then very purpose of instituting the suit will be defeated and it will be infructous. After hearing both sides, it appears that the disputes between the parties likely to go for trial.
204. From a bare reading of what has been observed by the learned trial court, it becomes clear that the learned trial court has assigned no reason as to why it considered that the plaintiff had a prima facie case. The learned trial court has also assigned no reason as to why the learned trial court has arrived at the conclusion that irreparable loss would ensue if injunction is not granted and how balance of convenience is in favour of granting injunction. Thus, the learned trial court's mere observation that dispute between the parties is likely to go for trial and/or that balance of convenience is in favour of granting injunction and/or that irreparable loss would ensue if injunction is not granted do not carry any force, particularly, when the learned trial court has not even considered the existence, meaning, effect and import of Clause 7(i) of the articles of association vis-a-vis the facts of the present case.
205. Above all, when ultimate decree cannot be granted in a given fact situation, no injunction, in aid of such a decree, can be granted. The reference made by the learned trial court to the provisions of Order XXXIX, Rule 5 of the Code of Civil Procedure is misplaced inasmuch as Order XXXIX, Rule 5 does not deal with necessary parties. What it lays down is that when an order of injunction is made, it would not only bind the corporation, but also its members and officers, whose personal action the order of injunction seeks to restrain; whereas the present suit, in effect, seeks, indirectly and with the help of mandatory injunction, specific performance of contract by forcing the shareholders to sell their shares to the plaintiff-respondent. In such a suit, since no effective decree can be passed in the absence of the shareholders concerned, they were necessary parties and in their absence, no injunction could, have been granted.
206. There can also be no doubt, as contended on behalf of the appellant, that it is the duty of the court, particularly, when it is dealing with the appeal that the developments, which are subsequent to the passing of the impugned order, be taken note of. Reference made by Dr. Saraf to the case of Pasupuleti Venkateswarlu v. Motor and General Traders reported in : [1975] 1 SCC 770, is also not misplaced inasmuch as in this decision, the apex court at paragraphs 4 and 5, has observed as under (pages 772 and 773):
4. We feel the submissions devoid of substance. First about the jurisdiction and propriety vis-a-vis circumstances which come into being subsequent to the commencement of the proceedings. It is basic to our processual jurisprudence that the right to relief must be judged to exist as on the date a suitor institutes the legal proceeding. Equally clear is the principle that procedure is the handmaid and not the mistress of the judicial process. If a fact, arising after the lis has come to court and has a fundamental impact on the right to relief or the manner of moulding it is brought diligently to the notice of the tribunal, it cannot blink at it or be blind to events which stultify or render inept the decretal remedy. Equity justifies bending the rules of procedure, where no specific provision or fair play is violated, with a view to promote substantial justice - subject, of course, to the absence of other disentitling factors or just circumstances. Nor can we contemplate any limitation on this power to take note of updated facts to confine it to the trial court. If the litigation pends, the power exists, absent other special circumstances repelling resort to that course in law or justice. Rulings on this point are legion, even as situations for applications of this equitable rule are myriad. We affirm the proposition that for making the right or remedy claimed by the party just and meaningful as also legally and factually in accord with the current realities, the court can, and in many cases must, take cautious cognisance of events and developments subsequent to the institution of the proceeding provided the rules of fairness to both sides are scrupulously obeyed. On both occasions the High Court, in revision, correctly took this view. The later recovery of another accommodation by the landlord, during the pendency of the case, has as the High Court twice pointed out, a material bearing on the right to evict, in view of the inhibition written into Section 10(3)(iii) itself. We are not disposed to disturb this approach in law or finding of fact.
5. The law we have set out is of ancient vintage. We will merely refer to Lachmeshwar Prasad Shukul v. Keshiuar Lai Chaudhri : [1940] FCR 84 : AIR 1941 FC 5, which is a leading case on the point. Gwyer, C.J., in the above case, referred to the rule adopted by the Supreme Court of the United States in Patterson v. State of Alabama [1935] 294 US 600:
We have frequently held that in the exercise of our appellate jurisdiction we have power not only to correct error in the judgment under review but to make such disposition of the case as justice requires. And in determining what justice does require, the court is bound to consider any change, either in fact or in law, which has supervened since the judgment was entered.
and said that that view of the court's powers was reaffirmed once again in the then recent case of Minnesota v. National Tea Co. [1940] 309 US 551, Sulaiman, J., in the same case relied on English cases and took the view that an appeal is by way of a re-hearing and the court may make such order as the judge of the first instance could have made if the case had been heard by him at the date on which the appeal was heard (Here printed in italics). Varadachariar, J. dealt with the same point a little more comprehensively. We may content ourselves with excerpting one passage which brings out the point luminously (at page 103):
It is also on the theory of an appeal being in the nature of a re-hearing that the courts in this, country have in numerous cases recognised that in moulding the relief to be granted in a case on appeal, the court of appeal is entitled to take into account even facts and events which have come into existence after the decree appealed against.
207. Even in Laxmi and Co. v. Dr. Anant R. Deshpande reported in : [1973] 1 SCC 37, on the question of subsequent development, the apex court has observed as under (page 45):
27. It is true that the court can take notice of subsequent events. These cases are where the court finds that because of altered circumstances like devolution of interest it is necessary to shorten litigation. Where the original relief has become inappropriate by subsequent events, the court can take notice of such changes. If the court finds that the judgment of the court cannot be carried into effect because of change of circumstances of the court takes notice of the same. If the court finds that the matter is no longer in controversy the court also takes notice of such event. If the property which is the subject-matter of suit is no longer available the court will take notice of such event. The court takes notice of subsequent events to shorten litigations, to preserve rights of both the parties and to subserve the ends of justice. Judged by these principles it is manifest that in the present case suits are pending. On the one hand the appellant has challenged the decree obtained by Ashar and others as also the warrant of execution. On the other hand, the suit instituted by Ashar and others against inter alia the appellant in 1965 for possession is pending. This Court cannot say with exactitude that any final decision has been reached on the respective and rival rights and claims of the appellant and the respondent. It is, therefore, neither desirable nor practicable to take notice of any fact on the rival versions of the parties as to subsequent events.
208. In fact, as late as in 2000, the apex court in Jai Mangal Oraon v. Smt. Mira Nayak reported in : [2000] 5 SCC 141, has observed that it is, by now, well-settled that even subsequent developments or facts and turn of events coming into existence, but found really relevant, genuine and vitally important in effectively deciding the issues raised and necessary to do real, effective and substantial justice or prevent a miscarriage of justice is not only can but ought to be taken into consideration by courts even at the appellate stage.
209. If the subsequent events can be taken into consideration and in the facts and circumstances of the present case, when subsequent developments are required to be taken into account, it clearly follows that the plaintiff-respondent has received the offer to purchase shares at the rate of Rs. 800 per share with all assets and liabilities of the appellant-company, but he refused to buy the shares. As a measure of abundant caution, even this Court has enquired from learned Counsel for the plaintiff-respondent if he was willing to buy shares at the rate of Rs. 800 per share. Mr. Ali, learned Counsel for the plaintiff-respondent, has not been able to assert that the plaintiff is willing to buy shares at the rate of Rs. 800 along with the assets and liabilities of the appellant-company. In such circumstances, the shareholders cannot be restrained from selling shares to an outsider at the rate of Rs. 800 per share nor can the appellant-company be restrained from allowing the shareholders to sell their shares at the rate aforementioned along with the assets and liabilities of the appellant-company. Any restriction, if imposed in this regard, may prove disastrous not only for the company, but the public at large, for, a large number of lives are depending on the outcome of this appeal.
210. The discussions, held above, as a whole, may be summarised thus : The decision of the shareholders of the appellant-company to sell shares outside the company is a decision of the company itself, particularly, when the board of directors of the appellant-company has acted upon the decision so taken by the shareholders. The plaintiff-respondent is as much bound by this decision as any other shareholder. It is not the case of the plaintiff-respondent that the shareholders' decision to sell shares outside the company is not in public interest or prejudicial to the interest of the company. If the plaintiff-respondent is aggrieved by the said decision as a minority shareholder, his remedy lies in invoking jurisdiction under Sections 397 and 398. Viewed thus, the present suit is not prima facie maintainable. This apart, the reliefs of various declarations, which the plaintiff-respondent has sought for, cannot, in the background of the discussions already held above, be prima facie made available to the plaintiff-respondent. Situated thus, it is made clear that the plaintiff-respondent's suit is prima facie not maintainable and the plaintiff-respondent could not have been said to have made out a prima facie case entitling him to obtain injunction of the nature as he had been sought for. In no way, therefore, the impugned order of injunction can be sustained.
211. In the result and for the reasons discussed above, this appeal is allowed with cost and the impugned order is hereby set aside.
212. With the above observations and directions, this appeal shall stand disposed of.