M/S Dayagen Pvt. Ltd. vs Mr. Rajendra Dorian Punj & Anr.
2008 Latest Caselaw 894 Del

*                 HIGH COURT OF DELHI : NEW DELHI

+                       Co. A. (SB) No.14/2007

              Judgment reserved on: 07.01.2008
%             Judgment delivered on: 02.07.2008


      M/s Dayagen Pvt. Ltd.                ..... Appellant
                         Through: Mr. A.S. Chandihok, Sr.
                                  Advocate and Mr. U.K.
                                  Chaudhary, Sr. Advocate with
                                  Ms. Ranjana Roy Gawai, Mr.
                                  Saurabh Kalia and Mr.
                                  Parvinder Tanwar, for
                                  Appellant.
                             versus

     Mr. Rajendra Dorian Punj & Anr.        ..... Respondents
                         Through: Mr. Rajiv Shakdher, Sr.
                                   Advocate with Mr. Mukul
                                   Talwar, Mr. Satwinder Singh,
                                   Mr. Vijay Vaish, Mr. Rajiv
                                   Ranjan, Ms. Divya Suman and
                                   Ms. Nirmala Narayanan, for the
                                   respondent No.1.
                                   Mr. Mukul Talwar, Advocate for
                                   respondent No.2.
                                   Ms. Sujata Kashyap, Advocate
                                   for respondent No.3


*CORAM:
HON'BLE MR. JUSTICE VIPIN SANGHI

1. Whether the Reporters of local papers may
   be allowed to see the judgment?

2. To be referred to Reporter or not?             Yes

3. Whether the judgment should be reported        Yes
   in the Digest?



Co.A. (SB) No.14/2007                                   Page 1 of 53
 VIPIN SANGHI, J.

With the consent of the parties, I have finally heard the

appeal and I proceed to dispose of the same.

1. This company appeal under Section 10F of the

Companies Act 1956 (for short, the `Act') is preferred by the

Appellants, M/s. Dayagen Private Ltd. (for short, `the company')

and one Mr. Vinod Pandita. According to respondent nos.1 and 2,

Mr. Vinod Pandita was working in the capacity of an accountant in

the company and was appointed as a Director of the company in

the year 2002. The appeal is directed against the order dated

16th May 2007 passed by the Company Law Board (for short 'the

Board') in Company Petition No.5/2007. By the impugned order

the Board declined to dismiss the Company Petition (being

C.P.No.5/2007) filed by Respondent Nos. 1 and 2 under Sections

397, 398 of the Act, upon hearing C.A. No.59/2007 whereby the

maintainability of the said petition was challenged by the

Appellants. The Board has directed CA No.59/2007 to be

considered along with the company petition.

2. Late Sh. V.P. Punj was holding 980 equity shares out

of the total 1000 Equity Shares issued by the Appellant Company.

The remaining 20 equity shares were held by Respondent No. 2

herein, Sh. P.N. Suri. Shri V. P. Punj expired on 8 th October 2006.

According to Respondent No. 1 and 2, he left behind a Will dated

8th April 2005 bequeathing all his assets in favour of Respondent

No. 1 herein. Respondent No. 1 approached the Company for

transmission of 980 shares in his favour. He was informed that

Late Sh. V.P. Punj had pledged the said 980 shares in favour of

Sh. Nilender Prakash Punj who was Respondent No. 2 in the

Company petition before the Board, and is Respondent No. 3 in

the present appeal. It was the stand of the Company that as a

pledgee Respondent No. 3 herein had already got the shares

transferred in his name and as such the Respondent No. 1 was

not entitled for transmission of these shares in his name. The

appellants also relied upon, what is claimed to be, a nomination

made by late Shri V.P. Punj in favour of respondent No.3 herein. I

may note that Respondent No. 3 herein Sh. Nilender Prakash Punj

is the brother of Late Sh. V.P. Punj. The company, as is obvious,

was a closely held company at that stage with only two

shareholders. The company also took the stand that it had further

allotted 3000 shares on 17th August 2006.

3. Faced with the aforesaid stand of the Company,

Respondent No. 1 and 2 preferred the aforesaid Company petition

No.5/2007 under Section 397 and 398 of the Act before the

Board, inter-alia, challenging the allotment of additional 3000

shares and declaring that Respondent No. 1 is the holder of 98%

of the shareholding which came to him by virtue of the Will of

Late Sh. V.P. Punj. Various other reliefs were also sought by

Respondent No. 1 and 2 before the Board.

4. The Company filed CA No.59/2007 challenging the

maintainability of the petition filed by Respondent No. 1 and 2 by

placing reliance on section 399 of the Companies Act 1956, and

submitting that Respondent No. 1 and 2 did not fulfill the

requirements of the said section and therefore, they did not have

the locus standi to maintain the said petition. It was contended

that the shareholdings of Respondent No. 2 was only to the extent

of 20 shares which, according to the Appellants herein, translated

to less than 0.2% shares. Respondent No. 1 was not entitled to

maintain the petition since he did not have any shareholding in

the Company, and he was not entitled to succeed to the

shareholding of Late Shri V.P. Punj, and he could not be

considered to be a shareholder for the purpose of Sections 399 of

the Act. It was further argued that there were 12 shareholders in

the Company and therefore Respondent No. 2 by himself did not

constitute 1/10th of the membership of the Company. Therefore,

neither in terms of the numbers/percentage of shares, nor in

terms of number of shareholders, the Respondent No. 1 and 2

met the requirements of section 399 of the Act to be able to

maintain the petition under Section 397 and 398 of the Act.

5. To elaborate a little further on the stand of the

appellants and respondent No.3 before the Board their submission

was that during his life time Late Sh. V.P. Punj had borrowed

monies from Respondent No. 3 herein and had pledged all his

shares in the Company in favour of Respondent No. 3 by handing

over the original share certificates to him. Late Sh. V.P. Punj had

confirmed the pledge and the handing over the share certificates

by his letter dated 15th April 2002. In the same letter he had also

nominated Respondent no.3 herein in respect of the shares held

by him. Since Late Sh. V.P. Punj had not repaid the loan before his

death, and the Respondent No.3 herein was also named as the

nominee in respect of the 980 shares held by him, on the demise

of Late Sh. V.P. Punj the shares had been transferred in favour of

Respondent No. 3 herein. In terms of section 109A of the Act, a

nominee of shares becomes entitled to the shares of the

deceased and such nomination overrides the law of testamentary

and intestate succession. Consequently, on the basis of the "Will"

of late Sh. V.P. Punj, Respondent No. 1 could not make any claim

in respect of the 980 shares and he could not be considered to be

entitled to become a member of the Company and therefore was

not entitled to maintain the petition. In respect of Respondent

No. 2, it was argued that after the demise of Late Sh. V.P. Punj,

the Company had issued and allotted 3000 shares on 17th August

2006 consisting of 1000 shares to M/s. Nitam Investments Pvt. Ltd

and 2000 shares to Molar Investments Pvt. Ltd. These shares were

allotted in lieu of the loan of Rs.2 lakhs and Rs.13.2 lakhs taken

from them respectively. Since the loans were not repaid for a long

time, by letter dated 1st August 2006, these companies had

sought either the repayment of the loan or issuance of shares in

the Company. In the meeting of the Board of Directors of the

company held on 17th August, 2006, late Shri V. P. Punj had

consented to the allotment of 3000 shares as aforesaid to clear a

part of the loans. Further in the 19th Annual General Meeting held

on 26th September 2006, the General Body of the members of the

Company had accorded their confirmation to the allotment of

shares to the said two Companies. It was further submitted that

the Board of Directors of the Company in its meeting held on 16th

October 2006 had accorded its approval to the transfer of 80

shares held by Respondent No. 3 herein to 8 transferees of 10

shares each, thus, raising the total number of

shareholders/members to 12.

6. The application CA No.59/2007 was contested by

Respondent No. 1 and 2 herein who submitted that the "Will" of

Late Sh. V.P. Punj was not in dispute. They relied on the decision

of the Supreme Court in Worldwide Agencies (Pvt.) Ltd. and

another vs. M/s. Margret T D'sor and others, (1990) 1 COMP

LJ 208 (SC) to contend that the legal heirs of a deceased member

can maintain a petition under Sections 397 and 398 of the Act

even without their names being entered in the register of

members. They also argued that applicants in CA No.59/2007 had

relied on an alleged letter of Late Shri V.P. Punj dated 15.4.2002

without even disclosing the same in their application. Only a

copy of the said letter was produced and the original was

withheld. Even assuming for the sake of argument, without

admitting that Late Shri V.P. Punj has pledged his 980 shares in

favour of respondent No.3 herein in terms of Section 176 of the

Contract Act pledged goods could not be transferred or

appropriated by the pledgee without notice to the pledger,

thereby giving him an opportunity to redeem the pledge. In this

case no notice had been issued by respondent No.3 herein before

appropriating the shares to himself. These respondents relied on

Prabhat Bank Ltd. vs. Babu Ram, AIR 1966 Allahabad 134 in

support of the submission that since the mandatory notice to the

pledger had not been given, the appropriation of the pledged

goods, namely, the shares was null and void. The said

respondents also disputed the authenticity of the letter dated

15.4.2002 attributed to Late Shri V.P. Punj and argued that the

said communication, in any event, did not constitute a

nomination in terms of Section 109A of the Act since it was not in

the prescribed form. Unless the nomination had been made in

the prescribed form, the purported nomination cannot be held to

be valid. Reliance was placed on Nazir Ahmed vs. King

Emperor. AIR 1936 PC 253(2) wherein it had been held that

where a certain thing is prescribed to be done in a certain way,

the thing must be done in that way or not at all. A mere

statement in a letter stating that someone had been nominated

could not be taken cognizance of by the company. Reliance was

also placed on Smt. Sarbati Devi vs. Usha Devi AIR 1984 SC

346 to contend that a nominee merely holds the property of the

deceased for the benefit of the legal heirs of the deceased who

are entitled to succeed to the estate of the deceased. It was

argued that even if one were to assume that there was a valid

nomination, that by itself would not entitle the nominee to

appropriate to himself the property of the deceased.

7. So far as the allotment of 3000 shares by the

appellant company is concerned, it was argued by respondents

No.1 & 2 that the same was in violation of Article 8 of the Articles

of Association according to which, only persons who were lineal

descendants in the male line of Pt. Kanhiya Lal Punj could be

admitted as members of the company. Consequently, shares

could not have been allotted to incorporated companies as this

was impermissible under the Articles. Therefore, these 3000

shares had not been validly allotted and the allotment of shares

deserved to be cancelled. It was also argued that the allotment of

3000 shares was justified as being on account of a part

settlement of the outstanding loans. As per the balance sheet of

the company as on 31.3.2005, the company owed sum of

Rs.97.6 lakhs to late Shri V.P. Punj advanced by him as unsecured

loans. However, no shares were similarly allotted to him in the

discharge of his loans. If shares had to be allotted to other

creditors of the company, similar treatment would have been

given to Late Shri V. P. Punj. It was further argued that two of the

subsequent transferees from respondent No.3 herein, in respect

of ten shares each, were also incorporated companies and did

not satisfy the requirements of Article 8 of the Articles of

Association and, therefore, could not hold the said shares. If all

the four incorporated companies are excluded from membership,

there would be eight members, even if it is assumed that

respondent No.3 herein had been validly recorded as a member

of the company. Consequently respondent No.2 alone would

represent 12.5% of the number of shareholders and he could

maintain the petition. Reliance was placed on a decision of the

Board in Rajkumar Devraj vs. Jai Mahal Hotels Pvt. Ltd.

134 CC 405 wherein the Board had held that the legal heirs of a

deceased member can file a petition under Section 397/398 of the

Act irrespective of the fact whether their names were in the

register of members or not. To decide whether the petitioners

had fulfilled requirements of Section 399, the Court has to

examine only the averments in the petition.

8. The appellant and respondent No.3 herein in their

rejoinder contended that though under Section 176 of the

Contract Act a notice is required to be given to the pledger

before the goods pledged could be appropriated by the pledgee,

in the present case since late Shri V.P. Punj had died before the

pledge could be redeemed, there was no question of issuance of

notice to him. They also relied on the nomination allegedly

created in favour of respondent No.3 herein in respect of the said

shares. It was argued that the form in which the nomination is to

be done is only procedural and, therefore, directory. The

substantive provision of Section 109A was that once a nomination

is made the same takes effect even if the same is not in the

prescribed form. On a reading of the letter dated 15.4.2002 of

late Shri V.P.Punj it was clear that he had intended to nominate

respondent No.3 herein in respect of the said 980 shares and a

copy of the letter had also been endorsed to the company. The

company had acted in terms of that letter. Consequently

respondent No.1 could not claim the said shares of late Shri V.P.

Punj on the basis of the alleged Will.

9. In so far as allotment of additional shares is

concerned the appellants and respondent No.3 contended that in

the Board meeting held on 17.8.2006 late Shri V.P. Punj who held

the overwhelming majority of shares had given his consent for

allotment shares to outsiders (i.e those who were not the direct

lineal descendants of late Shri Kanhaiya Lal Punj) in terms of

Article 5 of the Articles of Association. That apart, the company

got the shareholders approval to the allotment of the 3000 shares

in the 19th AGM held on 26.9.2006. Consequently there was no

violation of Article 5 of the Articles of Association in allotment of

shares to incorporated companies. It was further argued that ten

shares transferred to each of the two incorporated companies by

respondent No.3 were companies controlled by lineal descendants

of Pt.Kanihya Lal Punj and the spirit of Article 8 stood complied

with.

10. The Board passed the impugned order by

observing that there are only two main allegation in the petition;

firstly, that the company had declined to transmit the shares in

favour of respondent Nos.1; secondly, that further issue of

shares was in violation of the Articles of the company. Both

these acts were claimed to be oppressive to the respondent

nos.1 and 2, since, on account of these acts they had been

reduced to a hopeless minority. The Board observed that the

case presents a peculiar situation in the sense that determination

of the application challenging the maintainability would also

result in disposing of the petition on merits and that the material

placed by the appellants and respondent No.3 in their application

being CA No.59/2007 were inadequate. The Board observed that

no primary documents like copies of Board resolution approving

the transfer/transmission of the 980 shares in favour of

respondent No.3, the letter of late Shri V.P. Punj dated 15.4.2002,

the Board resolution approving membership of eight other

persons/entities had been disclosed in the application. The Board

further observed that it was not clear as to whether the claim of

respondent No.3 to the said shares of late Shri V.P. Punj was

based on foreclosure of the pledge, or on the basis of his being

the nominee of late Shri V.P. Punj. No Board resolution has been

attached with the application. In case the respondent No.3 had

foreclosed the pledge, in that case he ought to have filed a

transfer instrument with the company and there was no averment

to this effect made in the application CA No.59/2007. Board

further observed that the validity of the foreclosure without

notice in terms of Section 176 of the Contract Act also required to

be examined. Only in their rejoinder the applicants in CA

No.59/2007 enclosed a copy of the Board resolution dated

16.10.2006 from which it transpired that 980 shares in question

had been transmitted in the name of respondent No.3 herein on

the basis of nomination. Along with the rejoinder the applicants

had enclosed in a sealed cover only a photocopy of the alleged

letter dated 15.4.2002 when a question was raised about the

alleged nomination being in order, in terms of Section 109A of the

Act. The Board also recorded that when the applicants produced

the original of the said letter, the respondents No.1 and 2 had

disputed the signatures of the deceased on that letter. Thus the

validity of the transfer/transmission of the said 980 shares in the

name of respondent No.3 herein was required to be examined to

determine whether respondent No.1 was not entitled to the said

shares.

11. In so far as allotment of additional shares in favour

of two incorporated companies and the transfer of shares to two

other incorporated companies is concerned, the Board observed

that the validity of the allotment and transfer of shares had to

examined with reference to the relevant Articles of Association of

company and in particular Articles 5 and 8. The issue whether

the alleged consent given by the shareholders to admit

incorporated companies as members had the effect of

overriding/amending Articles 5 & 8 required to be examined. The

Board also observed that the shares transferred were those held

in the name of the deceased late Shri V.P. Punj which were

allegedly transferred/transmitted in favour of respondent No.3

herein, and unless the said transfer/transmission was held to be

valid the subsequent transfers could not be held to be valid. All

these issues required determination. The Board invoked the

principle laid down in Margret T D'sor and others (supra) since

respondent No.1 was the legal heir of late Shri V.P. Punj and held

that at this stage it was not possible to decide on the issue of

maintainability of the petition and that the said issue would be

considered at the time of consideration of the petition.

12. On the aforesaid basis the Board came to the

conclusion that the maintainability of the petition in terms of

Section 399 could not be examined at the threshold and can be

determined only after completion of the pleadings. The Board

also observed that it had been held in a number of cases that if

the shareholding of the petitioner in a petition under Sections 397

and 398 of the Companies Act got reduced to below 10% on

issue/allotment of further shares and if the said issue/allotment is

the very act which is challenged as "oppressive" in the said

petition, the maintainability of the petition would be decided

after determining the validity of the issue of allotment. Since in

this case respondent No.1 was the legal heir of late Shri V.P. Punj

who held 980 out of the 1000 issued shares, and if the said shares

devolved upon respondent No.1 and had been transmitted in his

name by the company, he would have been entitled to maintain

the petition and, since respondent No.2 was only one of the two

members of the company before the increase in the number of

shares from 2 to 12, and prior to such increase in number he

could have maintained the petition under Sections 397 and 398 of

the Act, the aspect of maintainability of the petition at the behest

of both respondents No.1 and 2 depended on the determination

of the issue of nomination as well as allotment/transfer of shares

to the new shareholders/entities.

13. The primary submission of Sh. A.S. Chandhiok,

learned senior counsel appearing for the appellants is that the

Board has failed to appreciate some material distinguishing

features present in this case, which were not present in Margret

T D'sor and others (supra). His submission is that the issue

whether there was a pledge created by late Shri V.P. Punj in

favour of respondent No.3 herein; whether the pledge had been

validity foreclosed, and; whether the nomination made by late

Shri V.P. Punj was valid or not, were issues which respondents

No.1 & 2 ought to raise in an independent proceeding in a

competent court of jurisdiction. Respondent No.1 would be

entitled to get the said 980 shares transmitted in his name

provided he is able to establish the due execution of the 'Will'

set up by him; that there was no valid pledge of the said shares;

that the pledge had not been duly foreclosed; that the shares had

not been legally transferred to respondent No.3 herein, and; that

the nomination made in favour of respondent No.3 herein is not

valid. He argued that there was litigation pending between

respondent No.1 and his sister with regard to the estate of late

Shri V.P. Punj wherein respondent No.1 had set up the 'Will'. He

argued that respondent No.1 had essentially raised a dispute of

title to the said 980 shares which can be determined only by a

civil court. If the said dispute is decided in favour of respondent

No.1 there would be no need to maintain the petition under

Section 397 and 398 of the Companies Act since the grievance of

respondent No.1 would stand remedied. He emphasised that in

Margret T D'sor and others (supra) the factual position was

materially different, inasmuch, as there was no dispute with

regard to the identity of the heirs of the deceased shareholder

who were entitled to succeed to his estate, which included the

shares in question. Whereas, in the present case the shares held

by late Shri V.P. Punj did not form a part of the estate left by him,

inasmuch as, not only the said shares had been pledged by him

with respondent No.3 herein but there was also a nomination

made in respect of the said shares in favour of respondent No.3.

He also argued that the correct remedy for respondent No.1 in the

present case lay under Section 111 of the Act, i.e. to prefer an

appeal, and not under Sections 397 and 398 of the Act. Sh.

Chandhiok also submitted that Section 109A(3) is a special

provision. Subsection (3) thereof begins with a non obstante

clause. The said provision overrides any other law for the time

being in force, whether testamentary or otherwise, and states

that in respect of shares and debentures of a company, where a

nomination has been made which purports to confer on any

person the right to receive the shares or debentures on the death

of the shareholder or debentureholder, the nominee shall be

entitled to all the rights in the shares or debentures of the

company on the death of the share/debentureholder to the

exclusion of all other persons unless the nomination is varied or

cancelled. He also argued that the nomination in favour of

respondent No.3 had been made by late Shri V.P. Punj in the year

2002 whereas respondent No.1 and 2 had belatedly filed the

petition only on 26.12.2006, that is, after a lapse of over four

years. Sh. Chandhiok also expresses the helplessness of the

company in addressing the grievances of respondent Nos.1 & 2,

since respondent No.1 based his claim on an unprobated "Will"

when, admittedly, he had a sister who was litigating with him in

respect of estate of late Shri V.P. Punj. He submitted that the

Board wrongly applied the ratio of Margret T D'sor and others

(supra) in the facts of the present case. Sh. Chandhiok also relied

on various other decisions in support of his submissions to which I

shall refer to a little later.

14. Sh. U.K. Chaudhary, learned senior Advocate

appearing on behalf of respondent No.3 argued that the Board of

Directors of the company had passed a resolution on 16.10.2006

wherein the nomination made by late Shri V.P.Punj on 15.4.2002

was taken note of, and the request of respondent No.3 herein for

registration of respondent No.3 as a member of the company in

respect of the 980 shares held by late Shri V.P.Punj was approved.

He argued that the dispute regarding the validity and

genuineness of the nomination could not be gone into in the

proceedings under Sections 397 and 398 of the Act. He also

referred to the observation of the Board in paragraph 8 of the

impugned order to the effect that the letter of late Shri V.P. Punj

dated 15.4.2002 had not been disclosed in the application (CA

59/2007) and stated that the same was a factual error since the

said letter of nomination dated 15.4.2002 was produced before

the Board.

15. Sh. Rajiv Shakdher, learned senior counsel

appearing on behalf of the contesting respondents No.1 and 2

submitted that earlier there were only two shareholders of the

company, namely, late Shri V.P.Punj and respondent No.2 herein.

Late Shri V.P.Punj held 98% of the shareholding, that is, 980 out

of the 1000 issued and paid up equity shares of the company. He

submitted that late Shri V.P. Punj had executed a registered Will

on 8.4.2005 prior to his demise on 8.10.2006. He further

submitted that there was no challenge to the "Will" by any other

class I heir and that the only other Class I heir was the sister who

had, in fact, accepted the 'Will' but was otherwise claiming a right

of maintenance on account of being an unmarried daughter of

late Shri V.P. Punj. He argued that even the applicants in CA

No.59/2007, while challenging the maintainability of the petition

had not disputed, and possibly could not have disputed, the

genuineness of the "Will" since respondent No.3 herein is not

even a Class-I heir of late Shri V.P. Punj. "Will" or no "Will",

respondent No.3 in any event would not have succeeded to the

estate of late Shri V.P. Punj, since, the estate would have, in any

event, devolved only upon respondent No.1 and his sister. He

also argued that the genuineness of the so called letter dated

15.4.2002 was in serious dispute whereby it was claimed that late

Shri V.P. Punj nominated respondent No.3 herein as his nominee

in respect of the said 980 shares in the company. He submitted

that, firstly, the applicants in CA No. 59/2007 did not file the

alleged letter dated 15.4.2002. Along with the rejoinder a

photocopy of the said letter was filed in a sealed cover. Even at

that stage the original was not filed before the Board. Only during

the course of argument the same was produced and shown to the

Board and the respondents No.1 & 2. At that stage itself the

respondents No.1 & 2 had disputed the genuineness of the said

document and the signatures attributed to late Shri V.P. Punj

thereon. He also argued that a perusal of Section 109A itself

shows that the nomination has to be in the prescribed form and,

admittedly, in the present case the so called nomination was not

in the prescribed form. He also referred to the form in which the

nomination is required to be made which is contained in Form

No.2B. Sh. Shakdher also referred to the provisions contained in

Order XIV Rule 2(2) of the Code of Civil Procedure to contend that

the company petition could be disposed of at the initial stage on

the ground of maintainability, only if the Board was of the opinion

that the said issue was a pure issue of law and did not involve an

issue of fact or a mixed issue of fact and law. He argued that in

the facts of the present case it could not be said that only issues

of law arose on the basis of which maintainability of the petition

could be determined. He also relied on various decisions in

support of his case which shall be referred to in the course of my

discussion.

16. Having considered the rival submissions, I am

inclined to dismiss this appeal since I do not find merit in the

submissions of the appellants. In Jer Rutton Kavasmaneck &

Others V. Gharda Chemicals Ltd & Others, 106(2001) Comp.

Cas. 25, the Bombay High Court has taken the view that a petition

under Section 397 can be thrown out only if the case put forward

is unarguable. The petition can be held demurrable only if the

claim put forward cannot be established even if all the allegations

made in the petition are accepted to be true. It is only at the final

hearing of the petition that the Court would be able to decide the

complicated issues of facts and law. The test is whether, even if

the facts pleaded by the petitioner in his petition under Sections

397 & 399 are assumed to be true, the petition filed by him can

be held to be not maintainable. This test is similar to the test

applied by a civil Court while dealing with the issue of rejection of

the plaint under Order 7 Rule 11 CPC.

17. If this test is applied to the facts of the present

case, the obvious answer is a clear and emphatic "No." This is

because it is well settled that the denial of the rights of

membership to an heir of a deceased member, and the reduction

of percentage of shareholding of an existing member to a

miniscule minority have been recognised as acts of oppression. If

the case of respondent nos. 1 and 2 were to be believed, it may

even tantamount to usurption of the shareholding and

management of the company by respondent no.3, which is also

an act of oppression. Reference may be made to Malleswara

Finance and Investments Co. P. Ltd. v. Company Law

Board, (1995) 82 Comp. Cas 836. The Division Bench of the

Madras High Court observed in the facts of that case that the

impugned increase in the shareholding by way of issuance of

20,000 equity shares was not made in good faith. By the said

increase a stranger was sought to be inducted in the company

with full voting rights and the majority was being reduced to the

status of the minority. Ill motive and mala fide intention to defeat

the rights of the shareholders being writ large, the allotment of

shares was held to be invalid. The act of issuance of shares

purely for the purpose of creating voting power, or to dilute the

majority voting power was condemned. It was also held that even

if the fraudulent allotment of shares is a single act, its

consequences are continuous and, therefore, it constitutes

oppression.

18. If an allotment of shares, increase in the issued

share capital, or increase in the number of members is with the

sole aim of gaining control over the management of the

Board/company and to defeat the legitimate right of other

shareholders, the Court can always set aside such increase or

allotment [see Needle Industries India Ltd. Vs. Needle

Industries Newey (India) Holding Ltd. (1981) 51 Comp. Cas.

743; also see [1974] AC 821 (PC); [1903] 2 Ch 506 (Ch D)].

19. I find merit in the submission of respondent Nos.1 &

2 that it is for the board to decide in its discretion whether an

issue sought to be raised as a preliminary issue by one of the

parties ought to be decided as the preliminary issue, or at the

final hearing of the case. In Mithlesh Kumri & Ors. v. Gaon

Sabha, Kishanpur & Ors. AIR 1999 Allahabad 304, the

Allahabad High Court noticed the principle that it was not

obligatory on the Court to try an issue as a preliminary issue as

subrule (2) of Rule 2 of Order XIV CPC leaves discretion in the

Court to try an issue as a preliminary issue. In this regard

reliance was placed on Dhirendranath Chandra v. Apurba

Krishna Chadra AIR 1979 Patna 34 and Usha Sales Ltd. v.

Malcolm Gomes AIR 1984 Bombay 60. On the same lines is the

decision of the Gujarat High Court in Kaushiklal Nanalal Parikh

& etc. v. Mafat Lal Industries Ltd. & Ors. AIR 1995 Gujarat

115. In this case an issue of jurisdiction of the Court had been

raised. The Trial Court allowed the application of the defendant

for treating the issue of jurisdiction as a preliminary issue. The

Gujarat High Court reversed the decision. The reasoning adopted

by the High Court in para 7 of the judgment reads as follow:

7. Moreover, it is settled principle of law that all the issues be decided together. In this connection reference may be made to a decision of learned single Judge of this Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. Esma Industries Pvt. Ltd., reported in 1989(2) 30 Guj. LR 1263. In para 17 of the decision, after referring to Order 14, Rule 2 of Code of Civil Procedure, it is observed as follows:

"After the amendment in this provision in 1976, it comes clear that the legislature has frowned upon trial of suits piece-meal. The reason is obvious. If on preliminary, the suit is tried and if the issue is decided one way or the other, it would lead to further proceedings by way of appeal or revision. Number of yers would lapse and ultimately when the highest Court which is approached in hierarchy decides the matter one way or the other a stage may be reached where the suit has to be tried further and that would involve lot of delay and the parties would be tried further and that would involve lot of delay and the parties would get completely exhausted and exasperated by passage of time underlying such piece-meal trial of suits. With a view to avoiding such delay and exasperation to the litigating public , this provision of Order 14, Rule 2 in the amended form has been brought in the statute book. Consequently, underlying principle of this provision is laudable and beneficial one. As per this provision, it is indicated by the legislature that suit must be tried as a whole in all issues. "

In view of this settled legal position, the order passed by the trial court is required to be quashed and set aside. The application submitted by defendant No.1 is required to be dismissed."

20. In Ramesh B. Desai & Ors. vs. Bipin Vadilal

Mehta & Ors. (2006) 5 SCC 638 the Supreme Court held that

unless it becomes apparent from the reading of the plaint/petition

(a company petition in this case) on the principle of demurrer

that the same is barred by limitation, the plaint/petition cannot be

rejected under Order VII Rule 11(d) CPC. The Supreme Court held

that on the principle of demurrer the company petition does not

disclose that it is barred by limitation. The company judge could

not have referred to the facts in reply to determine the question

of limitation at the preliminary stage. Therefore, if facts in the

company petition are disputed the question of limitation could not

have been determined at a preliminary stage without a decision

on facts after the parties had been given an opportunity to

adduce evidence. The Supreme Court also held that the Civil

Procedure Code confers no jurisdiction on Courts to decide mixed

question of fact and law as preliminary issues, unless the facts are

clear from the plaint itself and the mixed question of fact and law

can be determined on the principle of demurrer. Where a

decision on an issue of law depends upon a decision of fact, it

cannot be tried as a preliminary issue.

21. In the present case on a reading of the company

petition it cannot be said on the principle of demurrer that the

same is not maintainable at the instance of respondent Nos.1 & 2.

The averments made in paragraphs 7, 8, 23, 25, 29, 30, 33, 46 &

47 on the principle of demurrer have to be accepted as correct to

examine whether the company petition could have been rejected

at the threshold. The relevant averments contained in these

paragraphs are reproduced hereunder:

"7. It is important to note that the Respondent

Company has only two shareholders viz Mr. Virendra Prakash Punj and Mr. P.N. Suri (petitioner no.2), holding 980 shares (98%) and 20 shares (2%) respectively in the company. The majority shareholder, Mr. V.P. Punj died on 8 October 2006 th

leaving behind a son, the petitioner herein and a daughter.

PARTICULARS OF THE PETITIONERS

8. The Petitioner no.1 herein is the only son and sole legatee of late Mr. Virendra Prakash Punj and by virtue of a registered Will of his father, he has been bequeathed 98% shraeholding in the Respondent Company. The Petitioner no.1, by virtue of this Petition is challenging the acts of oppression and mismanagement being carried out by the Respondents herein, whereby they have not only denied transfer of 980 shares to which he is entitled through the registered Will dated 08.04.2005 of his late father, but have also drastically reduced the existing shareholding existing shareholding of late Mr. V.P. Punj to which the Petitioner is entitled to in the Respondent Company by making further allotment of shares in gross violation of the provisions of the Articles of Association of the Respondent Company. The Respondents 2, 3 & 4 have even trespassed into the registered office of the Company and gained illegal and wrongful control of the premises, since the death of Mr. V.P. Punj.

The petitioner humbly submits that the petition has been filed under Section 398, 397 of the Companies Act, 1956, in the capacity of the legal heir and a shareholder of the Respondent Company. The Petitioner in this regard is relying on the judgment of the Hon'ble Supreme Court in the matter of Worldwide Agencies (P) Ltd. and another V. Mrs. Margaret T Desor and others (1990) 1 Comp LJ 208 (SC), wherein it was held:

`having regard to the purpose of Section 399 of the Companies Act, 1956, it would not be just construction to deny the legal representatives of

the deceased member the right to maintain a petition under Sections 397 and 398. To hold that the legal representatives of the deceased shareholder could not be given at the same time of a member under Sections 397 and 398 of the Act would be taking a hyper-technical view which does not advance the case of equity and justice.

...................................................

Here, the legal representatives have been more than anxious to get their names put on the register of members in place of deceased member, who was the managing director and chairman of the Company and had the controlling interest. It would, therefore, be wrong to insist that their names must be first put on the register before they can move an application under Sections 397 and 398 of the Act. This would frustrate the very purpose of the necessity of action.'

9. That the petitioner no.2 is a minority shareholder with 2% shares in the Respondent Company. All the shares held by the Petitioner no.2 are fully paid up and no calls or any other amount is outstanding or payable in respect thereof. He is therefore entitled to file this petition along with Petitioner no.1 challenging the acts of oppression and mismanagement by the Respondents 2, 3 & 4, whereby his shareholding has been reduced from 2% to 0.5% by allotment of further shares in a board meeting, which are in gross violation of the provisions of the Companies Act, 1956 and the Articles of Association of the Respondent Company. The Petitioner no.2 is also aggrieved by the act of the Respondents 2, 3 & 4 whereby Annual General Meeting is purportedly shown to be was held on 26th September 2006, without any notice to him and without his participation.

23. That consequent to the arbitration award dated 15th November, 1989, shares in the Respondent Company held by the then existing shareholders Mr. S.N. Punj, Mr. R.P. Punj, Mr. U.P. Punj, Mr. A.P. Punj and

N.P. Punj in the Respondent Company were transferred to late Mr. V.P. Punj and Mr. P.N. Suri by way of a Board Resolution dated 20th November, 1989. In the year 2002, the paid up share capital of the Respondent Company was increased by way of a bonus issue, to Rs.1,00,000 divided into 1,000 equity shares of Rs.100 each out of which 980 shares were held by late Mr. V.P. Punj. Thus, as a result, late Mr. V.P. Punj became the 98% i.e. the majority shareholder of the Respondent Company. Till the date of death of Mr. V.P. Punj this status quo was maintained which is evident from the balance sheet of the Respondent Company for year ending 31st March, 2006.

25. That as stated earlier, late Mr. V.P. Punj had allowed his younger brother Respondent no.2 to continue as the director of the Respondent Company. The Respondent no.2 along with the other directors have betrayed the trust reposed upon him by his late brother by conniving with Respondent nos.3 &4 to illegally usurp the Company for his own personal gains.

29. That the Petitioner no.1 would like to bring to the knowledge of the Hon'ble an important fact that during his life time late Mr. V.P. Punj had executed a Will dated 8.5.2005 which has been duly registered vide Volume No.462, at pages 53 to 56, Book No.3. As per this Will, 98% shareholding in Respondent Company held by late Mr. V.P. Punj along with all the other properties, businesses, interest and shares in the businesses both the self-owned and self-acquired were bequeath entirely to his son Petitioner no.1 herein. That as per the Will, Petitioner no.1 was also given the right to collect own and use the rent in respect of properties belonging to Mr. V.P Punj build on Plot No.4 & 5, Connaught Place, New Delhi, after his death. A copy of the Will dated 08.05.2005 is annexed herewith as Annexure `F' to this petition.

30. That being the only legal heir of his late father, on 16.10.2006 Petitioner no.1 for the first time after his father's demise went to the office of his father at M-13, Connaught Place, New Delhi in order to take charge of the premises and the business of the

Respondent Company in his capacity as the legal heir and the majority shareholder of the Respondent Company. Petitioner no.1 was shocked when, under the direction of Respondents 2, 3 & 4 he was stopped by the security personnel outside the building and entry was denied to him. It was only after a lot of persuasion that he was allowed to enter the premises.

33. That Mr. V.P. Punj had kept his equity share certificate for the 980 shares held by him in the Respondent Company along with other confidential papers during his life time in trust with Respondent No.2. But when Petitioner no.1 in the capacity of the legal heir of his father demanded the share certificates and other documents from Respondent no.2, who in no uncertain words told Petitioner no.1 that nothing would be given to him vis-à-vis M-13, Connaught Place as well as Respondent Company.

46. That it is the humble submission of Petitioners that the fresh allotment of shares to M/s Nitam Investment Pvt. Ltd. and Muller Investments Pvt. Ltd. is in total contravention of the provisions of Articles of Association namely Clauses 5 & 8. It is further submitted that as per Form 2 the new shares were allotted on 17th August, 2006 by way of a board meeting that is much prior to the date of demise of Mr. V.P. Punj, the majority shareholder of the Respondent Company. As per the Articles of Association, fresh allotment of shares can be done only by holding a general meeting of the shareholders. In reality no such meeting has been held during the life time of Mr. V.P. Punj.

Clause 5 of the Articles of Association clearly provides that the company has to call a general meeting of its shareholders in order to increase the share capital. The clause further provides that the new shares are to be first offered to the existing members in proportion to their existing shareholding in the issued capital and it is only if the existing shareholders decline to exercise their right or do not do so within the time specified then, the directors may dispose of or allot the said shares in such a manner which may be beneficial

to the company.

47. That is further submitted that the right of the directors to dispose or allot the shares is not an unfettered right but is subject to the conditions provided in Clause 8 of the Articles of Association which provides that so long as the Respondent Company is a private limited company, no person other than male lineal descended in the main line of Pt. Kanahya Lal Punj shall be made a member for the company. In view of the aforesaid provisions of the Articles of Association , assuming that Mr. V.P. Punj or Petitioner no.2 declined to accept the fresh shares, the same should have been offered only to the lineal descended of late Pt. Kanahya Lal Punj which in this case is Petitioner no.1 herein. In the present case, the shares have been allotted to two private limited companies which is in absolute contravention of the provisions of Clause 8 of the Articles of Association which clearly. Such allotment of shares could not have been made with the consent of late Mr. V.P. Punj and Petitioner no.2 as they would never have been consented to an increase in shareholding in a manner as to reduce their shareholding and with no benefit to themselves or petitioner no.1, the legal heir of Mr. V.P. Punj.

48. .................................That the increase in the share capital of the Company by allotting equity shares to M/s Nitam Investments Pvt. Ltd. and M/s Muller Investments Pvt. Ltd is totally against the provisions of the AOA of the company and a calculated step taken by the Respondents 2, 3 & 4 in order to gain illegal control over the affairs of the Company and to reduce the shareholding of Petitioner no.1 to minority by taking advantage of the demise of Mr. V.P. Punj and absence of Petitioner no.1. The Respondents have no authority and power to increase the share capital of the Respondent Company by passing resolution in their meeting and the increase in share capital is in gross violation and in utter disregard of the provisions of the Articles of Association and the Companies Act, 1956.

The fresh allotment has caused irreparable damage to Petitioner no.2, the minority shareholder of the Respondent Company, whose shareholding has been reduced from 2% to 0.5%. The documents filed with the Registrar of Companies showing the increase in the share capital in the month of August are all fudged and fabricated. It is important to mention here that that Respondent No.2, 3 and 4 who are directors of the Respondent company may have manipulated the minutes book of the company to show the board meeting prior to the death of Mr. V.P. Punj showing allotment of shares to new entities."

22. If the above averments are assumed to be correct

not only it cannot be said that respondent Nos.1 & 2 do not

disclose sufficient locus standi to maintain the petition for

oppression and mismanagement under Sections 397 and 398 of

the Act, the respondent Nos.1 & 2 would also be entitled to the

relief claimed by them.

23. The submission of Sh. Chandhiok, Senior Advocate

that respondents No.1 & 2 should raise a private dispute with

respondent No.3 to challenge the pledge created by late Shri V.P.

Punj and the rights claimed therein by respondent No.3 herein,

as also the nomination made by late Shri V.P. Punj in favour of

respondent No.3 in a civil court, is to my mind without any force.

What is raised as a grievance before the Board is the act of the

company and its directors in transmitting the 980 shares in

favour of respondent No.3 herein on the basis of the alleged

nomination by late Shri V.P. Punj dated 15.4.2002 which is not

only disputed as being forged but as also not being in conformity

with the law. The other aspect under challenge is of the issuance

of shares to various other persons and entities who are claimed

as not being entitled to hold shares in the company, not being the

direct lineal descendants of late Sh. K.L.Punj. The result of both

these actions is that respondents No.2 has been reduced to a

meager minority, while respondent No.1 has been completely

ousted from the membership of the company though,

undoubtedly, he is one of the two children and Class-I heirs of

late Shri V.P. Punj. Simultaneously, issuance of the additional

shares and transfer of those shares, inter alia, to corporate

entities has had the effect of reducing respondent No.2 to an

insignificant minority in terms of number of shareholders of the

company from constituting 50% of that number to merely 1/12th

that is a little over 8% of the total number of shareholders. These

actions of the respondent company can validly be challenged as

being oppressive to the company and its members in a petition

under Sections 397 and 398 of the Act and it would be for the

company and its directors to meet the challenge and defend the

same in such a petition. Such disputes cannot be dismissed as

mere private dispute between two persons who are claiming

interest in the same set of shares, since the company has

chosen not only to accept and act on the basis of the claim laid by

one of the persons on the basis of nomination and/or pledge

allegedly created by late Shri V.P. Punj, but also to ignore the

claim of the legal heirs of the deceased member. Above all, it has

chosen to also stoutly defend its action even when it is confronted

with an undisputed and registered "Will" in favour of a Class-I heir

of the deceased member. In Malleswara Finance &

Investments Co. P. Ltd v. Company Law Board & Others,

(1994) 81 Comp. Cas. 66, the Board had set aside the allotment

of additional shares as invalid in a petition under Section 397, 398

of the Companies Act. It also directed the deletion of the name of

the petitioner, Malleswar, who was the declared pledgee of shares

held by one 'B' from the Register of Members and directed 'B' to

immediately repay the loan to Malleswara, in respect of which the

pledge was created. One of the arguments of Malleswara before

the Madras High Court was that the action of the Board

tantamounted to proceedings under Section 111 of the

Companies Act for rectification of the Register of members. The

Madras High Court rejected this submission holding that once the

allotment had been set aside by the Board, there was no scope

for invoking Section 111. The proceedings did not get converted

into one under Section 111. Therefore, the Court found the action

of the Board in setting aside the transfer of shares to Malleswara

as legal even in a proceeding under Section 397 and 398 of the

Act.

24. In Scientific Instrument Co. Vs. R.P. Gupta

(1999) 95 Comp. Cas. 615, in a petition under Sections

397/398 of the Act, an objection was raised that out of the 113

alleged shareholders who had been granted permission to file the

petition, only 12 were members of the company, and the rest

were not recorded in the register of members. It was also

contended that the share certificates of these persons were not

genuine and unless it was decided that the share certificates were

genuine the issue could not have been determined. It was argued

that the Board committed a legal error in applying Section 84

while concluding that the petition was maintainable. Section 84

states that the share certificate is a prima facie evidence of title.

The High Court remanded the matter back to the Board by

observing that the questions involving maintainability required a

detailed enquiry and that it should hear the petition on merits

including the question regarding maintainability on the basis of

evidence and the material placed by the parties.

25. The Act is a special code and provides for special

remedies before a specially created tribunal. Section 397, 398

and 402 can be invoked by a petitioner in certain circumstances

when a case of oppression and/or mismanagement is made out.

Relief against oppression and mismanagement can be granted

only by the Board. Merely because it may be open to an

aggrieved person to avail of more than one remedies in a civil

court and/or before the Board under the Act for the purpose of

remedying some of his grievance which may also constitute acts

oppression and/or mismanagement, it does not mean that such a

person should be driven to first exhaust his remedy in a civil

court or other forum and thereafter initiate another independent

proceedings under the Act to complain about oppression and/or

mismanagement. Such a course of action would defeat the very

purpose of creation of special remedies before a specialised

tribunal. In matters concerning rights of shareholders of a

company, time is of the essence since, with the passage of time,

one or the other party may suffer irreparable injury. It would,

therefore, be against the spirit with which the legislature has

created special remedies, such as those under Sections 397 and

398 of the Act, to relegate an aggrieved party to an ordinary civil

remedy.

26. The appellants and respondent No.3 have relied on

the following decisions to contend that where there are serious

disputes with regard to the title in the shares, the parties should

be relegated to a civil suit and a petition under Section 111 is not

an appropriate remedy. These decisions are: -

1. National Insurance Company Ltd. Vs. Glaxo India Ltd.

(1999) 2 Comp. L.J. 205

2. The Public Passenger Service Ltd. v. M.A. Khader & 2 Others (1996) 1 SCR 683

3. Bipin K. Jain v. Savik Vijay Engg. Pvt. Ltd. (1998) 91 Comp. Cases 835

4. Smt. Kamla Devi Mantri v. Grasim Industries Ltd. & Anr.

              (1990) 69 Comp. Cases 188

27.                In   National   Insurance      Co.    (supra),      the

respondent company, in answer to a rectification petition filed by

National Insurance Co. Ltd. took the stand that it had not received

the share certificates in respect of 6050 shares from Stock

Holding Corporation of India Ltd. (SHCIL) and therefore, it refused

to register the transfer in respect of those shares (and consequent

rights and bonus issue shares) in the name of the National

Insurance Co. Ltd. In respect of the said 6050 shares, the

respondent company had registered subsequent transfers. The

Court took the view that since the matter involved complicated

questions of fact which could not be decided in a petition under

Section 111 of the Act, the controversy could be decided only by

a civil Court.

28. This decision, in my view, has no application in the

facts of this case and was a decision rendered in the facts as

existed in that case. The stand of the company in National

Insurance Co. Ltd. (supra) was that it had never received 6050

shares for transfer. In other words, there was a dispute as to the

very transaction itself, which was not merely a matter concerning

rectification. In the present case, the appellant company has

chosen to act on the basis of the so-called nomination made by

late Sh. V.P. Punj in favour of respondent No.3. The registration of

980 shares in favour of respondent No.3 is, therefore, founded

upon the so-called nomination and not upon the pledge claimed

to have been created by late Sh. V.P. Punj in favour of respondent

No.3 in respect of the said 980 shares. The right to claim the 980

shares of late Sh. V.P. Punj set up by respondent No.3 on the

basis of the alleged pledge created by late Sh. V.P. Punj. does not

appear to be of much relevance. This is so because, admittedly, a

notice was required to be given to the pledger before the

foreclosure of the pledge. In this case no notice was given to late

Shri V.P. Punj during his life time. After his demise the notice

should have been given to his legal heirs, that is, respondent No.1

and his sister to enable them to redeem the pledge. Admittedly

that too has not been done. Even otherwise no legal proceedings

were initiated to foreclose the pledge and it is not even the case

of the respondent No.3 that he has acquired the said shares on

transfer either from the pledger or in pursuance a decree by a

competent court directing the sale of shares. A pledgee cannot

appropriate to himself the pledged goods unilaterally. This is so

held in the Division Bench decision in Malleswara (supra). It is

the appellant company which has accepted and acted upon the

so-called nomination attributed to late Sh. V.P. Punj. It is,

therefore, this act of the company by which the respondent Nos.1

& 2 were aggrieved. No third party or outsider is involved to

determine the issue with regard to the validity of the nomination

attributed to late Sh. V.P. Punj other than respondent No.3, the

appellant company, and respondent Nos.1 & 2. Therefore, the

decision in National Insurance Co. Ltd. (supra), in my view,

has no relevance in the facts of this case.

29. The decision in The Public Passenger Service

Limited (supra) is also of no assistance to the argument of the

appellants. The Supreme Court in this decision held that "Where

by reason of its complexity or otherwise the matter can more

conveniently be decided in a suit, the Court may refuse relief

under Section 155 of the Act and relegate the parties to a suit".

This decision does not state that in every case, wherein dispute is

raised, the parties should be relegated to a suit. It is to be

examined in the facts of each case whether the disputed

questions of facts are so complicated as to relegate the parties to

a civil suit. Pertinently, in the facts of the case before the

Supreme Court, the Court concluded that the issue of validity of

the notice dated 20.01.1957 could well be decided summarily and

held that the Courts below rightly decided to give relief in the

exercise of the discretionary jurisdiction under Section 155 of the

Act. Having found that the notice was defective and the forfeiture

was invalid, the Court could not arbitrarily refused relief to the

respondents. It is for the Board to determine whether the facts as

presented in the present case are such as to relegate the parties

to a civil suit. That decision the Board would be arrived at, at the

stage of hearing of the petition. By the impugned order all that

the Board has done is to direct that CA No.59/2007 be considered

alongwith the company petition. The application filed by the

Appellants had not been disposed of or rejected.

30. Turning now to the decision in Bipin K. Jain

(supra), which is a decision of the Board - Southern Region Bench,

the Board in this decision simply reiterated the aforesaid legal

position, namely, that where there are complicated questions of

fact raised in proceedings under Section 111 of the Act, the Board

should relegate the parties to a civil suit. There is no quarrel with

this proposition. However, the stage for examination of this

aspect would be when the Board hears the petition filed by the

respondent Nos.1 & 2. This decision is also, therefore, of no avail

to the appellants.

31. The decision of the Himachal Pradesh High Court in

Smt. Kamla Devi Mantri (supra) and Surendra Kaur & Ors.

v. Engineering Works Pvt. Ltd. (1977) 47 Company Cases are

also on the same lines, as the aforesaid decisions and, therefore,

do not need any further elaboration.

32. I also do not agree with the submission of Sh.

Chandhiok, that the ratio of the Supreme Court decision in

Margret T D'sor and others (supra) does not apply in the facts

of the present case. In that decision the Supreme Court was

dealing with the issue whether the legal heirs of a deceased

member, whose names are not entered in the register of

members, are entitled to maintain a petition under Sections 397

and 398 of the Act. The Court rejected the argument that Section

399, which enables members of a company to file a petition under

Sections 397 and 398 of the Act, should be given a strict

interpretation. The Supreme Court held that having regard to the

purpose of Section 399 of the Act, it would not be a just

construction to deny the legal representatives of the deceased

member the right to maintain a petition under Sections 397 and

398 of the Act, and that taking a view that only the registered

members could maintain a petition under Sections 397 and 398

of the Act would be to take a hyper technical view. It would not

advance the cause of equity and justice.

33. Pertinently, the fact that the respondent No.1 is the

son of late Shri V.P. Punj and that he is a Class-I heir in respect of

the estate of late Shri V.P. Punj is not in dispute. Neither is a

dispute raised, nor could any have been raised by the appellants,

or respondent No.3, with regard to the registered "Will" of late

Shri V.P. Punj which purports to bequeath, inter alia, the shares in

question in favour of respondent No.1. Like in Margret T D'sor

and others (supra), in the present case as well the vesting of the

estate of the deceased shareholder late Sh. V.P. Punj in

respondent no.3 is alleged to be illegal and wrongfully effected

on the ground that the nomination is alleged to be invalid. The

estate of late Shri V.P. Punj is entitled to be represented through

respondent nos.1 and 2 to determine the issue whether there was

a valid nomination made by late Sh. V.P. Pujn, since respondent

No.1 is directly and substantially affected by the determination of

that issue one way or the other. To challenge the action of the

Appellant company in acting upon the so-called nomination made

by late Sh. V.P. Punj in favour of respondent No.3 the issue with

regard to the validity of the 'Will' of late Sh. V.P. Punj, in fact, does

not even arise for consideration before the Board. This is so

because respondent No.1 is one of the two Class-I heirs of late Sh.

V.P. Punj and respondent No.3 has no similar claim since he is not

a Class-I successor and heir of late Sh. V.P. Punj. Therefore, in

any event, respondent No.1 would be the successors-in-interest, if

not the sole successor-in-interest, and respondent No.3 is not be

the successor-in-interest in respect of the 980 shares held by late

Sh. V.P. Punj. Even if the 'Will' of late Sh. V.P. Punj propounded by

respondent No.1 were to be ignored, the only consequence would

be that apart from respondent No.1, his unmarried sister would

also inherit the shareholding in question i.e. the 980 shares in the

appellant company in case the nomination claimed by respondent

No.3 in his favour is found to be illegal. Though it is claimed by

the appellants and respondent No.3 that an inter se dispute is

pending between the respondent No.1 and his unmarried sister in

relation to the estate of late Sh. V.P. Punj, nothing has been

placed on record to show that there is a challenge to the 'Will' of

late Sh. V.P. Punj set up by respondent No.1.

34. The decision of the Kerala High Court in T.J.

Thomas & Ors. v. Rev. C.F. Joseph & Ors. (1988) 1 CLJ 22

relied upon by the appellants, is a decision rendered prior to the

Supreme Court decision in Margret T D'sor and others (supra)

and is, therefore, of no relevance.

35. The decision of this Court in Pamela Manmohan

Singh v. State & Ors. 83 (2000) DLT 469, has no no relevance

whatsoever in the facts of this case. Even according to the

appellants this decision holds that it is not mandatory that a

probate has to be obtained in respect of a 'Will' executed in and

dealing with properties in Delhi. The contention of the petitioner

that there is overwhelming probability of the 'Will' set up by the

respondent No.1 being disputed is vague and without any basis.

As aforesaid, respondent No.3 is not even Class-I heir of late Sh.

V.P. Punj, which respondent No.1 is. Respondent No.3 has failed

to show that any dispute has been raised with regard to the 'Will'

set up by respondent No.1. It is not the case of respondent No.3

that there is any other 'Will' of late Sh. V.P. Punj in his favour or

that there is any other claimant laying a similar claim in respect of

the said 980 shares on the basis of any other 'Will' of late Sh. V.P.

Punj. For the said reason in my view, the decision of the Supreme

Court in Bina Paniker Chaudhary v. Satyabrata Basu (2006)

10 SCC 442 has no application in the facts of this case, since the

real issue that arises for consideration before the Board is with

regard to the validity of the nomination set up by respondent No.3

and its acceptance by the appellant company. The decision of

this Court in Channo Devi v. DDA 86 (2000) DLT 213 on the

face of it is distinguishable since in that case there was an inter

se dispute between two successors of the deceased. The 'Will' set

up by the petitioner was disputed by another heir of the same

class and, therefore, the Delhi Development Authority directed

the petitioner to obtain a probate of the 'Will'. This action of the

DDA was upheld by the Court. However, in the present case,

respondent No.3 is neither a Class-I heir like respondent No.1 nor

has he set up a claim by way of testamentary succession in

respect of the 980 shares. He has set up a claim on the basis of

nomination.

36. The second grievance regarding issuance of

additional shares to various entities who are not the direct lineal

descendants of late Sh. K.L. Punj directly concerns the conduct of

the directors of the company and the company itself, since it is

alleged to be in violation of Articles of Association of the appellant

company, and is an issue which squarely falls within the realm of

Sections 397 and 398 of the Companies Act and has to be

decided by the Board.

37. Now I turn to consider whether the nomination

allegedly created by late Shri V.P. Punj was valid or not. I may

note that the Board in its impugned order did not rule on the

validity of the nomination and merely observed that the

execution and validity of the nomination are issues which would

require consideration. However, the parties have advanced

detailed arguments and even cited case law in support of their

respective stands. The issue, whether the nomination set up by

respondent No.3 is valid or not, assuming that late Shri V.P. Punj

in fact signed the document dated 15.4.2002, is a purely legal

issue since it involves the interpretation of Section 109A of the

Act and the nomination attributed to late Sh. V.P. Punj. Therefore,

I now proceed to determine this issue on the assumption that the

said document was in fact executed by late Shri V.P. Punj.

38. Sections 109A and 109B of the Act read as follows:

"109A. Nomination of shares.- (1) Every holder of shares in, or holder of debentures of, a company may, at any time, nominate, in the prescribed manner, a person to whom his shares in, or debentures of, the company shall vest in the event of his death.

(2) Where the shares in, or debentures of, a company are held by more than one person jointly, the joint- holders may together nominate, in the prescribed manner, a person to whom all the rights in the shares or debentures of the company shall vest in the event

of death of all the joint-holders.

(3) Notwithstanding anything contained in any other law for the time being in force or in any disposition, whether testamentary or otherwise, in respect of such shares in, or debentures of, the company, where a nomination made in the prescribed manner purports to confer on any person the right to vest the shares in, or debentures of, the company, the nominee shall, on the death of the shareholder or holder of debentures of, the company or, as the case may be, on the death of the joint-holders become entitled to all the rights in the shares or debentures of the company or, as the case may be, all the joint- holders, in relation to such shares in, or debentures of the company to the exclusion of all other persons, unless the nomination is varied or cancelled in the prescribed manner.

(4) Where the nominee is a minor, it shall be lawful for the holder of the shares, or holder of debentures, to make the nomination to appoint, in the prescribed manner, any person to become entitled to shares in, or debentures of, the company, in the event of his death, during the minority.

109B. Transmission of shares. - (1) Any person who becomes a nominee by virtue of the provisions of section 109A, upon the production of such evidence as may be required by the Board and subject as hereinafter provided, elect, either-

(a) to be registered himself as holder of the share, or debenture, as the case may be; or

(b) to make such transfer of the share or debenture, as the case may be, as the deceased shareholder or debenture-holder, as the case may be, could have made.

(2) If the person being a nominee, so becoming entitled, elects to be registered as holder of the share or debenture, himself, as the case may be, he shall deliver or send to the company a notice in writing

signed by him stating that he so elects and such notice shall be accompanied with the death certificate of the deceased shareholder or debenture- holder, as the case may be.

(3) All the limitation, restrictions and provisions of this Act relating to the right to transfer and registration of transfers of shares or debentures shall be applicable to any such notice or transfer as aforesaid as if the death of the member had not occurred and the notice or transfer were a transfer signed by that shareholder or debenture-holder, as the case may be.

(4) A person, being a nominee, becoming entitled to a share or debenture by reason of the death of the holder shall be entitled to the same dividends and other advantages to which he would be entitled if he were the registered holder of the share or debenture except that he shall not, before being registered a member in respect of his share or debenture, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company:

Provided that the Board may, at any time, give notice requiring any such person to elect either to be registered himself or to transfer the share or debenture, and if the notice is not complied with within ninety days, the Board may thereafter withhold payment of all dividends, bonuses or other moneys payable in respect of the share or debenture, until the requirements of the notice have been complied with."

39. From a reading of the aforesaid provision it is seen

that a shareholder may, at any time, nominate in the prescribed

manner a person in whom his shares in the company shall vest in

the event of his death. Subsection (3) of Section 109A begins

with a non obstante clause which overrides any other law for the

time being in force or any disposition whether testamentary or

otherwise, in respect of shares of which a nomination is made in

the prescribed manner, and states that upon the demise of the

shareholder such nomination would entitle the nominee, in

relation to the shares to all the rights therein, to the exclusion of

all other persons, unless the nomination is varied or cancelled in

the prescribed manner. Therefore, if a member desires to make

a nomination, it is required to be made "in the prescribed

manner" by virtue of sub-section(1) of Section 109A and the

nomination would have an overriding effect "where a

nomination is made in the prescribed manner". Even the

variation or cancellation of an earlier nomination has to be made

"in the prescribed manner. In Shin-Etsu Chemical Co. Ltd. v.

Aksh Optifibre Ltd. (2005) 7 SCC 234 the Supreme Court, while

dealing with Section 45 of the Arbitration and Conciliation Act,

1996 observed as follows: -

"29. If the requirements of a statute which prescribes the manner in which something is to be done are expressed in negative language, that is to say, if the statue enacts that it shall be done in such a manner and no other manner, it has been laid down that those requirements are in all cases absolute, and that neglect to attend to them will invalidate the whole proceeding."

40. The submission of Mr. Shakdher based on Sarbati

Devi (supra), that a nominee merely holds the estate of the

deceased for the benefit of the legal heirs of the deceased, and

that the legacy does not vest in the nominee does not appear to

be correct, in view of the express language of Section 109A of the

Act. From a plain reading of Section 109A, it is abundantly clear

that the intendment of the Legislature is to override the general

law of succession and to carve out an exception in relation to

nomination made in respect of shares and debentures. The

section expressly vests the nominee, who is nominated in the

prescribed form, upon the death of the share/debenture holder

with full and exclusive ownership rights in respect of the

shares/debentures of which he is the nominee. The prescribed

manner, to which repeated reference is made in Sections 109A,is

to be found in Form No.2B which reads as follows:

"Form No.2B [See rules 4CCC and 5D] Nomination Form (To be filled in by individual(s) applying singly or jointly)

I/We.............and.............and...............the holders of Shares/Debentures/ Deposit Receipt bearing number(s)........... of M/s.............wish to make a nomination and do hereby nominate the following persons(s) in whom all rights of transfer and/or amount payable in respect of shares or debentures or deposits shall vest in the event of my our our death.

Name: .......................

Address .......................

.......................

........................

........................

Date of Birth.......................

*(to be furnished in case the nominee is a minor)

**The Nominee is a minor whose guardian is ................. Name and Address ......... ............... .................... ................... ............... ............. ........... .................. .................. ................... ................. ............. ......... ........ ........................... ..................... ............ ..... ...

(**To be deleted if not applicable)

Signature :.................................... Name :..................................... Address :...................................... Date :.....................................

Signature :...................................... Name :...................................... Address :...................................... Date : ......................................"

From the aforesaid it is evident that the nomination

is required to be attested by witnesses.

41. Keeping in view the fact that Section 63 of the

Indian Succession Act requires an unprivileged "Will" to be

attested by at least two witnesses in a particular manner, and

that the purport of Section 109A is to override even a "Will" so

executed, the requirement of attestation by a witness of a

nomination made by a shareholder, in my view cannot be said to

be merely procedural or directory. To construe the requirement

of attestation as merely directory in respect of a nomination made

by a shareholder/debenture holder would not be in consonance

with Section 63(c) of the Indian Succession Act, and would also be

contrary to the express language of Section 109A of the Act. It

appears that the only departure made under the Act from the

general law of testamentary succession is that the attestation of

the nomination need not be in the same manner in which it is so

required to be done under Section 63(c) of the Indian Succession

Act, but the attestation by at least two witnesses appears to be,

in any event, necessary. Since nominations made under Section

109A purport to override even testamentary succession, I am of

the view that the procedural requirements laid down in the said

section, for such overriding effect to be given to have to be

strictly adhered to. The attestation of the nomination form by two

witnesses in my view is an essential requirement which cannot be

done away with. Admittedly, in the present case the purported

nomination made by late Shri V.P. Punj has not been attested by

any witness. Consequently, in my view the said nomination is

invalid and would not have the effect of overriding the normal

law of succession. The principle laid down in Nazir Ahmed

(supra), in my view, squarely applies to the procedure for

nomination prescribed under the Act.

42. For the aforesaid reasons, this appeal is dismissed

with costs quantified at Rs.50,000/- payable by the appellants to

respondent Nos.1 & 2. I further direct that the board shall now

proceed to decide the appeal along with CA No.59/2007 in view of

my aforesaid observations. A copy of this order be sent to the

Company Law Board for information and compliance.

43.                Parties    to   appear   before   the   Board   on    to

23.07.2008.



                                                      VIPIN SANGHI, J.
July 02, 2008
AJ/RSK