Present: 1. Shri S. Balasubramanian, Vice-Chairman.
2. Shri K.K.Balu,
Member.
IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)
AND
IN THE MATTER OF M/S PRAKATHI
SPINNERS PRIVATE LIMITED
PETITIONER:
G.Venkitapathy
RESPONDENTS:
1. Prakathi Spinners Private Limited
2. V. Srinivasan
3. Usha Srinivasan
4. R. Selvaraj
5. Balaji
6. Juguna Panikkam Parambil
7. V.S. Ravunny
8. P.Mukundan
9. P.P. Ramachandran
10. Lavin D’Silva
11. K.Ramamurthy
12. P.N.Sukumaran Nair
13. C. Selvaraj
PRESENT ON BEHALF OF PARTIES:
1. S. Srinivasan, Practising Company Secretary … for Petitioner
2. K.S.Ravichandran, Practising Company Secretary … for Petitioner
3. V.Ramakrishnan, Advocate …
for Respondents No. 1 to 3
4. B.Senthil Naathan, Advocate …
for Respondents No. 4, 5 and 11.
O R D E R
(Date of Hearing: 2.1.2002)
K.K. BALU:
1.
This is a petition filed under
Section 111(4) of the Companies Act, 1956 (“the Act”) against M/s Prakathi
Spinners Private Limited (“the Company”) and others for rectification of the
register of members of the Company by deleting the name of second and third
respondents and annulling the transfer of shares impugned in the petition effected on 6.
4.2000 and 17.10.2000.
2.
The facts, in brief, as reiterated by Mr.K.S.Ravichandran, Practising
Company Secretary and Authorised Representative of the petitioner are that the
Company was incorporated in January, 1995 to carry on the business of ginners
and spinners. As at 31.3.99, the
authorised capital of the Company is Rs.1 crore divided into 10 lakhs equity
shares of Rs.10/- each. The paid-up
capital of the Company is Rs.95,25,000/- divided into Rs.9,52,500/- equity
shares of Rs.10/- each. The petitioner,
being the promoter is holding 10,000 shares of the Company and was also a
whole-time director attending to the day-to-day affairs and management of the
Company. The petitioner was constrained
to be away from carrying out the day-to-day affairs of the Company on account
of the severe injuries suffered in a road accident in August, 1998. During the absence of the petitioner, one
Shri L.Balusamy who died later and the fourth respondent were managing the
affairs of the Company. In the
meanwhile, the fourth respondent had illegally entered into a Memorandum of
Understanding (MOU) dated 16.02.2000 with the second respondent for transfer of
the control of management of the Company enabling the latter to take control of
the Company. The fourth respondent
signed the MOU on behalf of the Company as well as other promoter directors and
shareholders without any authority. The
second and fourth respondents had fabricated a resignation letter dated
22.03.2000 so as to record as though the petitioner had resigned from the Board
of the Company. Subsequently, the second
respondent had filed form-32 on 18.02.2000 at the office of Registrar of
Companies, Tamil Nadu, Coimbatore to the effect that (a) the second respondent
was appointed as the Managing Director; (b) 13th respondent as
director; and (c) fourth respondent and Dr. G. Kalaiselvi, a promoter director
resigned from the Board of the Company with effect from 16.02.2000. Shri Ravichandran pointed out that on
16.2.2000, there was no duly constituted Board, as there was no quorum. The second respondent had also filed form-32
on 5.6.2000 intimating the resignation of the petitioner and 13th
respondent with effect from 25.05.2000.
The second respondent also managed to register in his name and in the
name of third respondent on 6.4.2000 and 17.10.2000, 8,25,000 shares in
violation of the provisions of Articles of Association of the Company. Shri Ravichandran pointed out that Articles
15 to 23 and 25 restrict the transfer of shares of the Company and also provide
for procedure to be adopted by the seller, Board of Directors and purchaser in
the matter of transfer of shares by the shareholders of the Company. According to him, neither the transferors
nor the Company complied with the Articles relating to transfer of the shares. He reiterated that no opportunity was given
to the existing members to purchase the shares and that right of pre-emption
was not exhausted. The transferors did
not inform the Board about their intention to sell their shares. The Board had neither given 50 days notice
containing the requisite particulars of the shares and the offer price of the
sellers or the fair price fixed by the Board.
According to the petitioner, there was no meeting of the Board of
Directors either on 6.4.2000 or 17.10.2000, being the dates of approval of the
impugned shares. As on 6.4.2000 only the petitioner, the second respondent and
13th respondent were directors of the Company. The petitioner did not receive any notice
for the Board meeting said to have been held on 6.4.2000. Consequently, there was no duly convened meeting
of the Board of Directors on 6.4.2000.
As on 17.10.2000, excepting the second respondent, no other person was
on the Board of Directors of the Company.
As a result registration of the transfer of impugned shares by the Board
on 6.4.2000 and 17.10.2000 is illegal and void. In the circumstances, Shri Ravichandran sought for rectification
of the register of members of the Company by deletion of the names of
respondents 2 & 3 in respect of the shares impugned in the petition. Shri Ravichandran, in support of his legal
submissions relied upon the following decisions:-
(i)
Stridewell
Leathers (P.) Ltd. And Another Vs. Shoe Specialities (P) Ltd. And others –
(2001) 44 CLA 264 (CLB).
(ii)
Cruickshank
Company Ltd. And Another Vs. Stridewell Leather Pvt. Ltd. And Others. – (1996)
86 CC 439.
(iii)
Satyanarayana
Rathi Vs. Annamalaiar Textiles Pvt. Ltd. And Others - (1999) 95 CC 386.
(iv)
Shanta Genevieve
Pommeret And Another Vs. Sakal Papers Pvt. Ltd. And others – (1990) 69 CC 65.
- to show that the Company Law Board is empowered to order
rectification of the register of members of a company, in case shares in a
private limited company are not transferred in accordance with the company’s
Articles of Association.
(v)
M.C. Duraiswami
Vs. Sakthi Sugars Ltd.- (1980) 50 CC 154 – to show that a blanket consent letter cannot be a consent
as contemplated by Section 399(3).
(vi)
V. Shankar Vs.
South Indian Concerns Ltd.- (1997) Vol.11 SEBI & Corporate Laws – Reports
105 and
(vii)
S.S.
Laxminarayanan and Another Vs. Mather and Plant India Ltd. And Others – (1998)
92 CC 109.
- to show that the CLB has to ensure whether transferors who
gave letters of offer have applied their mind while giving their consent and
that they should also be aware of the allegations made in the offer letters.
(viii)
Sikkim Bank Ltd.
And Others Vs. R.S. Chowdhury and Others – (2000) 102 CC 387 – to show that notice is necessary in case any meeting is
adjourned and meeting without any notice for the adjourned meeting is not
valid.
(ix)
Pushpa Prabhudas
Vora and Others Vs. Voras Exclusive Tools (P) Ltd. And Others – (2000) 36 CLA
377 – to show that any meeting of
the Board of Directors without adequate notice to all directors would be
improper.
(x)
Puneet Goel and
Others Vs. Khelgaon Resorts Ltd. And Others – (2000) 38 CLA 259 (CLB) – to show that a meeting without notice to the directors and
without proper quorum is not valid.
(xi)
Col. Kuldip
Singh Dhillon and Others Vs. Paragaon Utility Financiers P. Ltd. And Others –
(1988) 64 CC 19 – to show that
notice must be sent to all directors for the Board meetings.
(xii)
Registrar of
Companies, Orissa Vs. Orissa Paper Products Ltd. And Others.- (1988) 63 CC 460
– to show that a letter of
resignation addressed by a director to a third party has no effect and is not
valid.
(xiii)
Anand Hemant Patel
Vs. Ornate Club Pvt. Ltd. And Others – (2000) 99 CC 318 – to show that the provisions of Section 108 of the Act are to
be complied with in case of transfer of shares, without which the transfer is
not valid.
3.
Shri V.Ramakrishnan, Advocate
appearing for the respondents 1 to 3, at the outset has raised the following
preliminary objections:-
(a)
Section 3(iii)(d) of the
Companies Amendment Act, 2000 which has come into effect from 14th
December, 2000 prohibits a private company from inviting or accepting deposits
from persons other than its members, directors or their relatives. He pointed out that the statute is
unambiguous. In the instant case, the Articles of Association of the Company
does not contain such a restrictive clause and therefore it is a public company
and not a private company. The
provisions of Section 111 do not apply to public companies. In this connection, he relied on (i) Shashi
Prakash Khemka Vs. NEPC Micon Ltd. – (1997) 4 Comp LJ 265 (CLB) and
(ii) Canara Bank Vs. Mahanagar Telephone Nigam Ltd. And others –
(1998) 93 CC 60 to show that the Company Law Board has no jurisdiction
to entertain application filed under Section 111 seeking rectification of
register of members on the grounds specified in Section 111(4) in respect of
public limited companies. Therefore,
the present petition under Section 111(4) is not maintainable under law.
(b) The petitioner has failed to implead 11 out of 18
transferors, who are necessary parties to the petition. The petition is bad for non-joinder of
necessary parties and ought to be dismissed.
4.
Shri Ramakrishnan pointed out
that the Company was having huge liabilities in and around the year 2000. At this juncture, the petitioner and other
directors approached the second respondent offering to sell the controlling
interest in the Company. Accordingly,
the second respondent agreed to purchase the shares at a price of Rs.0.10 per
share in view of the negative worth of the Company. The transferors agreeable to sell their shares to the second
respondent had sent sale notices in accordance with Article 17 to the Board of
Directors of the Company on various dates from 25.11.1999 to 1.12.1999. A Board meeting of the Company was convened
on 15.12.1999, wherein notices of the proposed sale by the transferors were
given to the members of the Company in tune with Article 18. The notice of proposed sale was also sent to
the petitioner. None of the existing
members including the petitioners was willing to purchase the shares. Thereafter, the Board of Directors accorded
its consent for sale of the shares.
After complying with the requirements of Article 17 and 18, the fourth
respondent entered into an MOU with the second respondent for sale of 70 per
cent of the shares of the Company. The
petitioner joined the MOU as a witness.
After the MOU, the second respondent and 13th respondent were
appointed as the Additional Directors at a Board meeting held on 16.02.2000,
wherein the second respondent was appointed Managing Director of the
Company. Shri Ramakrishnan pointed out
that the said Board meeting was presided by the petitioner himself. At the same Board meeting, the fourth
respondent and Dr. Kalaiselvi resigned from the Board. The petitioner also participated in this
meeting and approved the resolutions passed therein. The relevant form-32 in respect of this appointment and
resignations was filed by the petitioner himself on 18.02.2000. At the Board meeting held on 6.4.2000, the
Board of Directors approved the transfer of 8,25,500 shares in favour of the
respondents 2 & 3. As the second respondent
had agreed to clear the liabilities of the Company and also purchased majority
of the shares in terms of the MOU, the petitioner resigned from the Board and
accordingly addressed a letter of resignation to TIIC, principal creditor of
the Company, forwarding a copy of his resignation letter to the Company. The Board of Directors have accepted the
petitioner’s resignation at its meeting held on 25.5.2000 and form-32 was also
filed with the Registrar of Companies on 5.6.2000. Shri Ramakrishnan further pointed out that at a Board meeting
held on 17.10.2000, the transfer of 10,000 shares from Mrs.Shanta in favour of
the third respondent was approved. The
third respondent, is a member of the Company since 6.4.2000 and transfer in
favour of the third respondent is a inter-se transfer between the members, in
which case the question of compliance with the formalities prescribed under
Articles 17 to 22 does not arise. Shri
Ramakrishnan has, therefore, reiterated that the transfer and approval of the
transfers in favour of the respondents 2 & 3 are in compliance with the
relevant Articles of Association of the Company. He further pointed out that
the petitioner had already filed a civil suit in O.S. No.1086/2001 on the file
of District Munchief, Coimbatore prior to filing of this petition raising
identical issues relating to the appointment and continuance of directors and
validity of the MOU dated 16.02.2000.
The petitioner has suppressed these material facts and approached the
CLB not with clean hands. The CLB,
therefore, in exercise of its powers being equitable and discretionary, should
not grant any relief to the petitioner, in support of which he relied on Suresh
Kumar Manchanda Vs. Prakash Road Lines Ltd. (1996) 87 CC 102. The petitioner is not a transferor,
not the transferee of the impugned shares and also not a aggrieved member, in
which case the petitioner has no locus standi to seek for rectification of the
register of members of the Company. He
further submitted that the petitioner cannot allege infirmities on account of
the appointment and resignation of directors or constitution of the Board or
quorum in the Board meetings in a petition under Section 111. In this
connection, he relied on Ammonia Supplies Corporation (P) Ltd. Vs. Modern
Plastic Containers Pvt. Ltd. – (1998) 94 CC 310 to show that “if it
truly is rectification all matters raised in that connection should be decided
by the Court under Section 155 and if it finds adjudication of any matter not
falling under it, it may direct a party to get this right adjudicated by the
Civil Court”. According to him, even
though, there are certain discrepancies in the letters of the transferors,
which are not substantial, do not affect the transfer in view of the fact that
the transferors are not challenging the transfers effected by them and approved
by the Company. He further pointed out
that not all the transferors are before the Company Law Board challenging the
transfers approved on 6.4.2000 and 17.10.2000. They should necessarily be
heard. In this connection, he relied on
Muniamma And Others Vs. Arathi Cine Enterprises Pvt. Ltd. – (1993) 77 CC
97 to show that rectification of the register of members of the Company
sought for by the petitioners in respect of the persons other than the petitioners
as stated in the petition, cannot be granted in this petition. In the
circumstances, Shri Ramakrishnan prayed that the petition must be dismissed.
5.
Shri B. Senthil Naathan,
Counsel appearing for the respondents 4, 5 & 11 supported the respondents 1
to 3 and reiterated that the petition is without any merit and sought for
dismissal of the petition.
6.
We have considered the
pleadings and oral submissions of Counsel.
7.
The main issue that arises for
our consideration is whether the transfer of impugned shares in favour of
respondents 2 and 3 is in accordance and in compliance with the relevant
Articles of Association of the Company.
8.
Before going into the merits,
we shall deal with the preliminary objections raised by Counsel for the
respondents.
9.
The Company has been
incorporated in January, 1995 as a private limited company within the meaning
of Section 3(1)(iii) of the Act and accordingly its Articles contain the
relevant restrictive clauses as prescribed in that Section. By virtue of the Companies (Amendment) Act,
2000, with effect from 14.12.2000, Section 3(1)(iii)(d) prohibits a private
company from inviting or accepting deposits from persons other than its
members, directors or relatives. A
plain reading of Section 3, in our view shows that a company cannot be
incorporated as a private company after the commencement of the Companies
(Amendment) Act, 2000 unless its Articles provide for the aforesaid
prohibition. However, we find that no
provision has been made in this behalf in respect of existing private
companies, unlike sub-sections (3) to (5) for enhancing the paid-up
capital. Non-insertion of such a
prohibition in its Articles by an existing private company, in our view, shall not ipso facto change its character
into a public company. However, such
company should not accept deposits from persons other than its members,
directors and their relatives.
Therefore the arguments of Counsel for the Company must fail.
10. The other preliminary objection whether the transferors are
necessary parties to the petition will depend upon our findings on the merits
of the petition which will be dealt appropriately elsewhere.
11. The Articles 15 to 23 and 25 will assume relevance to decide
the contentious issue whether the transfer of impugned shares is in compliance
with these Articles.
Article 15 provides that the shares should not be
transferred to a person who is not a member of the Company, unless an
opportunity is first given to the existing members to purchase the shares
except where the transferee is a relative of the transferor specified in the
Article.
Article 16 provides that shares should not be transferred
unless right of pre-emption is exhausted.
Article 17 provides that the persons proposing to transfer
the shares should inform the Board about their intention to sell the shares,
upon which the Board of Directors should give 50 days notice containing
particulars regarding shares offered for sale and the offer price of the seller
or the fair price fixed by the Board.
Article 18 provides that the Board will find a purchaser
among the existing shareholders within 50 days of the sale notice and if any
existing shareholder is willing to purchase the shares at the sale price
offered by the seller or at the fair price fixed by the Board. The purchase will be completed within 14
days thereafter.
The other Articles, namely, Article 19, 20, 21, 22, 23 and
25 are not relevant for the purposes of this petition. Now, we shall proceed to see whether the
transfer of impugned shares in favour of the respondents 2 and 3 has been in
compliance with Articles of Association of the Company. It is observed that 18 transferors have
intimated the Board separately in writing on various dates from 15.11.99 to
11.12.99 (pages 1 to 18 of typed set of documents of respondents) about their
intention to sell the shares aggregating 8,25,500 at Rs.0.10 per share. Copies of the letters of these transferors
have been produced before us, the fact of which is not in dispute. However, the petitioners have challenged the
validity of such letters taking into account the facts that the letters are
similarly worded and that the transferors have not applied their mind while
sending the letters offering to sell the shares in favour of the Company. This plea of the petitioners is without
substance in view of the fact that none of the transferors before us has
challenged the validity of such letters.
It is observed from the minutes of the Board of Directors of the Company
held on 15.12.1999 (page 20 of typed set of documents of respondents) that the
letters received from 18 shareholders desiring to sell the impugned shares were
considered and after detailed discussion fixed their rate at Rs.0.10 per share
and that resolved to send a communication to all the members of the Company
informing them about the intention of the 18 shareholders to sell their shares
and to find out any member is interested in acquiring the shares at the rate of
Rs.0.10 per share. Thereafter, the
Company, by its letter dated 5.2.2000 (page 19 of typed set of documents of respondents),
advised the transferors that none of the other existing members is willing to
purchase the impugned shares and therefore advised the transferors to sell the
shares to any person of their choice within three months from 5.2.2000. The transferors were also advised to send
the share certificates along with the transfer forms duly signed by the parties
to enable the Board to give effect to the transfer of shares. This letter is also not challenged by the petitioner.
It is also observed from the minutes of the meeting of the Board of Directors
held on 6.4.2000 (page 26 of typed set of documents of respondents) that the
Board of Directors approved the transfer of 8,25,500 shares in favour of the
respondents 3 & 4. It is,
therefore, beyond doubt that the relevant provisions of Articles have been duly
complied with in transfer of the impugned shares in favour of the
respondents. The minutes of the meeting
of the Board of Directors held on 17.10.2000 (page 36 of typed set of documents
of respondents) show that the Board of Directors approved the transfer of
10,000 shares effected by Mrs. Shantha in favour of third respondent. Admittedly, the third respondent is a member
of the Company and the transfer is between two members, the requirement of
fulfillment of Articles 17 & 18 does not arise. We are, therefore, of the view that transfer of impugned shares
in favour of the respondents has been in accordance with Articles of the
Company and accordingly uphold the transfer of impugned shares in favour of the
respondents. The other issues regarding
manipulation of resignation letter of the petitioner, appointment and
resignation of directors of the Company and the validity of MOU dated
16.02.2000 are not relevant and cannot be adjudicated in Section 111 proceedings. The case laws cited by Counsel for the
petitioner are also not relevant in the facts and circumstances of the
case. As we have upheld the transfer of
impugned shares in favour of the respondents, the plea of non-joinder of the
transferors does not arise.
12. With
the above directions, we dispose of the petition, without any order as to cost.
(K.K.
BALU) (S.
BALASUBRAMANIAN)
Dated this the 7th day of February, 2002