| SooperKanoon Citation | sooperkanoon.com/47327 |
| Court | Company Law Board CLB |
| Decided On | May-13-1992 |
| Judge | S Balasubramanian, A Ramanathan |
| Reported in | (1994)79CompCas656 |
| Appellant | Vijaya Commercial Credit Ltd. |
| Respondent | T.K. Alwa (Late) and ors. |
2. The facts of the case are that one Sri T.K. Alva, former managing director of Vijaya Commercial Credit Limited (hereinafter referred to as "the company"), had acquired the following shares in the joint names of his family members as indicated below on various dates.
3. The said T.K. Alva passed away on June 7, 1989. Thereafter, the joint holders transferred these shares to Ferrom. Ferrom lodged the transfer deeds through the Canara Bank, Executor and Trustee section, J.C. Road, Bangalore, on July 18, 1989. The board of directors of the company considered the transfer/transmission in their board meeting held on August 14, 1989, and passed the following resolution : "Resolved that the request for deletion of the name of Sri T.K. Alva, one of the joint holders of the said 76,694 equity shares be and is hereby declined.
Resolved that in the opinion of the board, the approval of the share transfer in respect of the abovementioned 76,694 equity shares would be prejudicial to the interest of the company in view of the various legal proceedings instituted by the company for recovery of monies due to the company both from Vijaya Management Services P. Ltd, and the estate of late Sri T.K. Alva represented by all his legal heirs, who are also the joint holders of the said shares.
Resolved in the opinion of the board, in the event of transfer of the aforementioned 76,694 shares being approved, there is likelihood of it resulting in change in the composition of the board of directors which would be prejudicial to the interest of the company and public interest." 4. The following factors were taken into consideration according to the board of directors of the company in refusing the transfer.
"The board noticed that in the entire lot of 76,694 shares, late Sri T.K. Alva, erstwhile managing director of the company, is a joint holder. The board noticed that late Sri T.K. Alva had committed several serious irregularities while discharging duties as managing director of the company by advancing huge sums of money to Vijaya Management Services P. Ltd., in which T.K. Alva's mother-in-law, Smt. Bellipadi Kalyani, held 75 per cent. of the paid-up capital.
Sri T.K. Alva and his family had made use of monies advanced by the company to acquire 38,985 equity shares in their personal names. The board noted that in spite of a notice of demand having been served upon them, Vijaya Management Services Pvt. Ltd. had not repaid the amount of Rs. 22,11,079.75 (rupees twenty-two lakhs eleven thousand seventy-nine and paise seventy-five only) and interest due to our company and have expressed its inability to repay the same, as a result of which our company had filed a winding up petition in Company Petition No. 84 of 1989, in the Hon'ble High Court of Karnataka and in the said petition a company application has been filed wherein our company had sought permission to proceed against the said 38,985 equity shares. The said petition and application being pending before the Hon'ble High Court of Karnataka, the entire matter is sub judice.
Similarly as regards the remaining 37,709 equity shares the board noticed that late Sri T.K. Alva was the joint holder in these shares also. As per the balance-sheet of the company as at March 31, 1989, a sum of Rs. 2,25,445 (rupees two lakhs twenty-five thousand four hundred and forty-five only) remained due and outstanding from Sri T.K. Alva being the amount drawn by him on suspense vouchers and not returned/restored to the company. The company has, therefore, filed a suit (O. S. No. 4330 of 1989) on the file of the City Civil Court, Bangalore, against the wife and children of late Sri T.K. Alva, as legal representatives of T.K. Alva for recovery of the said amount of Rs. 2,25,445 (rupees two lakhs twenty-five thousand four hundred and forty-five only) and in the said suit, proceedings for attachment of these 37,709 equity shares having been commenced by filing an interlocutory application for attachment before judgment, the entire matter is sub judice.
The board also noticed that the entire lot of 76,694 equity shares had been lodged for transfer in the name of a company, viz., Ferrom Electronics Pvt. Ltd. which is controlled by Shri Ashok Kumar Shetty and his wife, Smt. Roopa A. Shetty, who are also the directors and persons in control of another company, called Shetty Leasing (India) Limited. The board also noted that Shri Ashok Kumar Shetty is the son of the former chairman of our company (late) Shri Sunderam Shetty and there has been business competition between the two companies and the effect of transfer of the said shares would be to bring about a change in the present composition of the board of directors of the company. The board also noted that 76,694 shares would constitute 4.04 per cent. of the present paid-up capital of the company and constitutes one of the largest blocks of shares held by any member.
After elaborate deliberations, at which all the members of the board expressed their views and opinions about the prospect of Sri Ashok Kumar Shetty bringing about a change in the present composition of the board which is likely to result if the transfer is approved, it was decided that such change would be prejudicial to the interest of the company. Being a finance company, the directors noted that unless there is cohesion in the board and unanimity in the decisions taken, the image of the company with the depositors and members of the public would be damaged and such consequences would be prejudicial to the interest of the company and public interest." 5. A copy of the reference was forwarded to the transferee and the managing director of the transferee-company who has contested the refusal as mala fide and against the interest of the company and also that it has been done on wrong principles and is contrary to the articles of association of the company and the provisions of the Act.
According to the transferee, it is a third party and, therefore, not concerned with whatever rights the company may have against the transferor and the same should not be enforced against the transferee by refusal of the transfer especially when the shares have been bought for valuable consideration.
6. The matter was heard on March 2, 1992, when counsel for the company, Mr. Naganand and Mr. T. Raghavan, Senior Advocate, assisted by Mr. T.K.Seshadri, Advocate for Ferrom, appeared and argued. Learned counsel for the petitioner-company averred that the decision taken by the board of directors to refuse the transfer was absolutely bona fide and in the interest of the company. The source of funds for the purchase of shares by Sri. T.K. Alva jointly in his name and in the name of other family members was out of various advances given by the company to Vijaya Management Services Private Limited (hereinafter referred to as "VMSPL") in which T.K. Alva and his mother-in-law were 1he two shareholders. A substantial sum of over Rs. 17 lakhs was advanced by T.K. Alva in his capacity as managing director of the company to VMSPL.
Presently a total sum inclusive of interest of Rs. 22,11,079.75 is due from VMSPL to the company and VMSPL has not been able to repay this amount to the company. The company has already filed a Company Petition No. 84 of 1989, on the file of the High Court of Judicature, Karnataka at Bangalore, seeking the winding up of VMSPL and in this case the wife, mother-in-law and the son of late T.K. Alva have been impleaded as respondents. One of the prayers in the proceedings before the High Court is that a declaration be made that the assets acquired by the late T.K. Alva, his wife and his mother-in-law out of the moneys made available by the company should be made available for being proceeded against for recovery of the amounts due from VMSPL. In addition to this amount, the late T.K. Alva had also drawn, under suspense vouchers, a sum of Rs. 2,25,445 from the company which has not been adjusted so far. This money ostensibly has been used to buy 33,709 equity shares of the petitioner-company. To recover this money also a separate suit has been filed in the Court of the City Civil Judge, Bangalore, in O. S.No. 4370 of 1989. Both the cases are still pending.
6. Learned counsel for the petitioner-company also referred to the sequence of events prior to lodgement of the transfer documents.
According to him, the company issued a notice to VMSPL on June 24, 1989, for repayment of money owed by VMSPL to the company within three weeks. The transfer documents were filed on July 13, 1990, and the company filed the winding-up petition on August 1, 1990. Therefore, it is apparent that the shares were transferred after receipt of notice from the company. Therefore, the motive behind the transfer itself is questionable.
7. He also argued that as per article 36(1) of the articles of association of the company the board of directors have absolute discretion, even without assigning any reason, to decline to register any transfer or transmission and, therefore, as long as the board of directors' action is not unjust and in the interest of the company, the Company Law Board should not interfere in the matter. He also argued that the transferee's total holding in the company, if the transfer is ordered, would come to 4.04 per cent. of the total shares in the company and Ferrom would be the largest single shareholder in the company. He also filed a statement of the shareholding pattern of the directors as on January 10, 1992, to indicate that not even a single director has even 1 per cent. share in the total number of shares of the company. The total holding of thirteen directors as on date accounts for only 2.21 per cent. of the total shares of the company.
Once Ferrom holds 4.04 per cent. of shares in the company, it would definitely have its director elected as director of the petitioner-company and since the directors of Ferrom have another company in the name of Shetty Leasing (India) Limited which is in competition with the business of the company, there would be conflict of interest which would be prejudicial to the interest of the company.
Under these circumstances and also in view of the fact that two cases are still pending in courts, learned counsel for the petitioner-company prayed that this Bench should confirm the resolution passed by the board of directors on August 14, 1989, refusing the transfer.
8. Learned counsel for the petitioner-company also averred that there is no provision in the objects clause of the memorandum of association of Ferrom who are the transferees in this case to deal in investment and this fact came to their knowledge only in the year 1990 through a company petition which Ferrom has filed in the High Court of Karnataka, wherein Ferrom have averred that they have not been carrying on their main business of dealing in electronics and they proposed to deal only in financial services. According to the petitioner's counsel, when a company does not commence its business within one year from the date of incorporation it ought to have been wound up and it cannot at this stage indulge in any other activities other than the main business even if such business is included in its subsidiary objects.
9. Learned counsel for the opposite party pleaded that the arguments of the company are misconceived and are not supported either by Section 22A of the Act or by its own article 36, paragraph 2. Article 36(1) of the articles of association, paragraph 2 : "... Registration of transfer shall not be refused on the ground of the transferor being alone or either jointly with any other person or persons indebted to the company on any account except a lien on the shares." 10. In this case, one of the joint holders who is alleged to have advanced money to the company in which he was one of the directors is no longer alive. As per statutory provision, the surviving joint holder has full right to dispose of the shares and these joint holders have transferred the shares to Ferrom for valuable consideration. If the company has any claim against the joint holders, it should proceed against the joint holders and cannot nullify a transaction which has taken place for valuable consideration. The company has not lost its right of enforcing its claim against the consideration paid to the transferors as in the place of the shares they have solid consideration paid to them. Being a third party, the opposing party, the transferee-Ferrom should not be made to suffer. Even in the two cases that the company has filed, the court has not passed any restraint order nor has it attached the shares. Therefore, there is absolutely no justification for the company to refuse the transfer on the ground that one of the joint holders had allegedly misused his position to purchase shares out of company's funds. Regarding the second argument that by getting the transfers effected, Ferrom would be in a position to induct one of its directors on the board of directors of the company and that would be prejudicial to the interest of the company and the public interest, it was argued by learned counsel for Ferrom that the company is a very widely held company having thousands of shareholders, 4.04 per cent. cannot tilt the management. Shri Ashok Kumar Shetty, one of the directors of Ferrom, already holds shares in the company and as a matter of fact he was on the board of directors on an earlier occasion.
To get into the board of directors he does not have to go after this 4.04 per cent. shares. Even assuming that at a later date, by the will of the members of the company, he is inducted into the board of directors, it would not mean that his being in the board would be prejudicial to the interest of the company. No explanation as to how it would be prejudicial to the interest of the company has been offered by the company. In view of these reasons, learned counsel for Ferrom submitted that the resolution of the board of directors should not be confirmed and that the company should be directed to register the shares in the name of Ferrom.
11. We have considered the arguments made in writing and also the oral submissions made by the company as well as Ferrom. The main reason, as could be ascertained during hearing for the refusal of registration was the apprehension of the company that once the registration is effected, they may find it difficult to recover the money owed by VMSPL, as according to the information of the company, Sri T.K. Alva does not hold any significant real estate to pay off their dues. During the course of hearing, a statement was made by counsel for the petitioner-company that Ferrom has not paid the full consideration for the shares and at least the unpaid consideration should be paid directly to the company towards adjustment of loans against VMSPL. It is apparent to us that the refusal to register the shares seems to be mostly on the apprehension that the company may lose its effectiveness in realising the dues from VMSPL and the reasons for refusal being against the interest of the company does not hold water. As per the provisions of their own Article 36, paragraph 2, as cited by counsel for Ferrom, the company cannot refuse the transfer even in case the transferor is a delator of the company. In the present case, it is not the transferor but a limited company which is a debtor. It is an established law that individuals are different from a company and even though T.K. Alva was a director of VMSPL, both are separate entities.
Secondly, the grounds on which the company has refused the transfer have not been covered under any of the four grounds under which a transfer could be refused as provided in Section 22A(4) of the Act.
Even though at the time of passing the board resolution, the board of directors felt that since two cases have been filed in a court of law and the matter is sub judice, yet in the absence of any stay order or an injunction from the court, the company should not have refused registration on the ground that the matter is pending in court.
12. As regards the other grounds on which the transfer was refused, i.e., that the transfer is likely to bring about a change in the management of the company, we find that Shri Ashok Kumar Shetty, a director of Ferrom, is already a member of the company and he had also earlier been on the board of directors. The present transfer is only with reference to 4.04 per cent. of the total shares in the company which, according to us, cannot change the composition of the board of directors especially when we find that there are thirteen directors as on January 10, 1992, and the total holding of all is only 2.21 per cent. of shares indicating that the percentage of shareholding is not such a relevant factor to become a director in the company. By no stretch of imagination could one see that a mere 4.04 per cent. in addition to a small percentage of shares already held could alter, the composition of management. The issue raised by the petitioners that Ferrom has not commenced its main business within one year of incorporation is not relevant and was not also a ground for refusal by the board of directors.
13. On the basis of our above finding, we are of the view that the board of directors erred in refusing the transfer of shares.
Accordingly, we direct the company to register 76,694 equity shares in the name of Ferrom Electronics (Private) Limited within 10 days from the date of receipt of this order. The office is directed to return the transfer deeds/share scrips to the petitioner-company.