C.P. No. 16/111/SRB/1997

Present: 1. Shri S. Balasubramanian, Vice-Chairman

2. Shri K.K.Balu, Member.

IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)

SECTION 111

AND

IN THE MATTER OF M/S SHOE SPECIALITIES PRIVATE LIMITED

PETITIONERS:

1. Stridewell Leathers Private Limited

2. Standard Distilleries and Breweries Private Limited

RESPONDENTS:

1. Shoe Specialities Private Limited

2. Bhankerpur Simbhaoli Beverages Private Limited

3. Alakananda Manufacturing and Finance Limited

4. Jose Investment Private Limited

5. M.S.K. Eswaran

6. S. Subramanian

7. R. Krishnamurthy

8. M.S.A. Kumar

9. A.K.M.A. Shamsuddin

10. M.M. Gupta

11. K.K. Banerjee

12. A. Syed Ahamed

13. S. Sriram

14. M.R. Chhabria

PRESENT ON BEHALF OF PARTIES:

1. Shri Shankaranarayanan, Advocate ... for Petitioner and

Respondent 1

2. Shri S. Ravi, Advocate ... for Respondents 3 & 4.

3. Shri Krishna Srinivasan, Advocate ... for Respondents 5 to 11,

13 and 14.

O R D E R

(DATE OF HEARING : 09.05.2001)

S. BALASUBRAMANIAN:

1. In this petition filed under Section 111(4) of the Companies Act, 1956, the petitioners have challenged registration of the transfer of 2,000 shares by M/s Shoe Specialities Private Limited (“the Company”) without following the provisions of the Articles of Association.

2. The facts of the case are that the first and the second petitioners hold 2,000 and 1,000 shares respectively in the first respondent Company. The second respondent held 2,000 shares in the Company. The share script in respect of these 2,000 shares were in the custody of one Shri M.D. Chhabria. The Board of Directors of the first respondent Company issued duplicate certificates in respect of these 2,000 shares to the second respondent in a board meeting held on 28.07.1992. In a board meeting held on 2.6.94, 1,250 shares were transferred to the fourth respondent and 750 shares in favour of the third respondent. The petitioners are challenging these transfers on two grounds. One is that when original share certificates were in the custody of Shri M.D. Chhabria, the Company could not have issued duplicate certificate without following the established procedure and that transfer of the shares was not in accordance with the provisions of Articles.

3. The respondents have filed a reply. According to them, the duplicate shares were issued at the request of the second respondent and no newspaper advertisement was issued for this in view of the Company being a closely held company and since article 6 provides that the directors have the discretion to approve the transfer to whom the board of directors agree, the Board had exercised its discretion to transfer the shares to the third and fourth respondents. Accordingly, they have sought for dismissal of the petition.

4. When the matter was taken up for hearing, the counsel for both the sides desired that the matter be disposed of on the basis of the pleadings already filed on behalf of the parties. As far as the issue of duplicate shares is concerned, this issue becomes relevant in as much as it is the duplicate certificates which had been transferred to the third and fourth respondents. There is nothing on record to show as to why the second respondent sought for the duplicate certificates and whether the board of directors of the Company had satisfied itself that either the original certificates had been lost or destroyed as provided in Rules 4(3) of the Companies (Issue of share certificate) Rules, 1960. Therefore, the issue of duplicate certificates itself was invalid, especially when the original share certificates were, in fact, in the custody of Shri M.D.Chhabria.

5. As far as the transfer of shares occasioned by the invalidly issued duplicate certificate is also against the provisions of Article 6 which reads as follows:-

“If at any time any shareholder desires of transfer of his or her share held in the company, the share shall in the first instance be offered at a price determined by the auditors of the company to the existing share holders or to such other party to whom the Board of Directors may agree.”

A reading of this Article would show that the shares under transfer are to be offered at the first instance to the existing shareholders. The reliance of the respondents that the board of directors of the Company has the discretion to transfer the shares “to such other party to whom the board of directors may agree” would apply only after the shares had been offered at the first instance to the existing shareholders. Since in a private limited company the transfer of shares has to be in accordance with the Articles as provided under Section 82 of the Act and since the transfer of shares impugned in the petition is in violation of the provisions of Article 6, we direct that the register of members be rectified by deleting the names of respondents 3 & 4 and inserting the name of the second respondent. This should be done within a month from the date of this order.

(K.K. BALU) (S.BALASUBRAMANIAN)

Dated this the day of June, 2001