Smt. Claude-Lila Parulekar Vs. M/S. Sakal Papers Pvt. Ltd. & Ors [2005] Insc 195 (18 March 2005)
Ruma Pal & P.Venkatarama Reddi
J U D G M E N T RUMA PAL,J.
In 1933 Dr. N. B. Parulekar and his wife Shanta, started a Newspaper called Sakal. In 1948, Dr. Parulekar and Shanta promoted a company known as M/s. Sakal Papers Pvt. Limited, which is the respondent No.1 and is referred to hereafter as 'the company". Dr. Parulekar died in 1973. Shanta died during the pendency of the appeal before this Court. The appeal which is now being prosecuted by the daughter of Dr. Parulekar and Shanta, arises out of proceedings initiated by Shanta and the appellant under Section 155 (as it stood in 1986) of the Companies Act, 1956 (referred to hereafter as 'the Act') in the Bombay High Court.
The appellant was brought on record as Shanta's only legal heir and representative. As Shanta was alive during the proceedings before the High Court, to avoid unnecessary verbiage, the appellant and Shanta are referred to hereafter as 'the appellants'.
One of the matters in dispute in this appeal relates to the transfer of 3417 shares in the company belonging to the estate of late Dr. Parulekar by three of the four executors of the will of Dr. Parulekar. The executors named in the will were Shanta, the respondent No. 2, the respondent No. 3 and the respondent No. 4. There is also a challenge to the transfer of 93 shares by the respondent Nos. 3 and 4 in the company. The basis of the claim of the appellant and Shanta with regard to the 3417 and 93 shares was the failure to allow the appellants to exercise their undisputed right of preemption in respect of the shares.
The second branch of the appellants' grievance pertains to the issue and allotment of 17,666/- shares of the company. The beneficiary of these transfers/allotments is the respondent No.5 and his group represented by the respondents Nos. 6 to 16 (hereafter referred to collectively as the Pawar Group).
According to all the respondents briefly speaking, the appellants were precluded from exercising any right of preemption and had in any event failed to exercise their right of preemption in respect of the 3417 and 93 shares. As far as the issue of 17,666/- shares are concerned it is submitted that it was validly done and the allotment of the shares was duly made to the Pawar group.
The learned Single Judge held that the transfer of the 3417 shares was made contrary to the appellants rights of preemption. He also held that the transfers had been made in violation of the provisions of the Section 108 of the Companies Act, 1956 and the Articles of Association of the Company. It was held that the respondent No. 5 and his group were not bonafide purchasers of the shares as they were aware of the preemptive right of the appellants to the shares. On the issue and allotment of 17,666/- shares the Trial Court held that they were invalid. Having effectively held in favour of the appellants on merits, the Trial Court did not set aside the transfer of the 3417 and 93 shares but set aside the transfer of 3417 and 93 shares to the respondent No. 5 and his group conditional upon the appellants depositing a sum or Rs.80,73,000/- in the Court within a period of six weeks. As far as the 17,666/- shares were concerned, it was directed that they should be allotted to such persons or persons at such price as the Board of Directors may decide. The Company was directed to pay back the Pawar group a sum of Rs.17,66,600/- in respect of the 17,666 shares.
It was then said that in the event the appellants did not deposit a sum of Rs.79,86,110/- within six weeks the entire petition filed by the appellants would stand dismissed. The appellants filed an appeal from this order in so far as it was made conditional on the deposit of the sum of Rs.79,86,110/-. They also filed an application for extension of time for depositing the amount in terms of the Trial Court's order before the Trial Court. The application was dismissed.
In the meanwhile the Appellants filed two suits being CS 225 and 226 of 1988 before the Court in Pune against the respondents seeking specific performance of the contracts of sale of 3417 and 93 shares to them. Alternatively for damages by way of compensation of Rs.3 Crore or 4 Crore? The suits are pending. Also between the decision of the single Judge and the filing of the appeal by the appellants, the company became a Public Limited Company by virtue of Section 43A of the Act.
At the time of admission of the appeal an interim order had been passed by the Division Bench on 21st December, 1989 directing that pending disposal of the appeal, the appellants' right of preemption was not to be disturbed and the company was directed not to issue or invite any fresh capital.
The appeal filed by the appellants against the Judgment and order of the learned Single Judge as also cross appeals filed by the respondents were heard and disposed of by a common judgment. The Division Bench dismissed the appellants' appeal and allowed the cross appeals filed by the respondents holding inter alia that the violation of S.108 was a mere irregularity which was curable, that the sale of 3417 shares had been validly made to the Pawar group and that although there was some irregularity in issuing the 17,666 shares, the irregularity had been cured by the subsequent ratification of the decision. At the instance of the appellants the interim order passed by the High Court on 21st December, 1989 was directed to continue for 8 weeks.
Before the eight weeks expired, the appellants filed the present appeal and an interim order was granted on 16th September, 1991 in terms of the order passed by the High Court on 21st December, 1989. That interim order is operating till today. The matter has been pending before this Court since 1991 and has been heard in part by different Benches from time to time. Efforts for an amicable settlement were not fruitful.
In the meantime several of the parties including Shanta died.
The applications for substitution were allowed.
The respondents have raised a preliminary objection questioning the entertainment of the appellant's application under Section 155 of the Act in the first place. It is submitted that complex questions of fact were involved and the ordinary procedure of a civil suit as opposed to the summary remedy available under Section 155 was more appropriate. This was more so because not only had the appellant and Shanta reserved their right to file a suit for transfer of the disputed shares to them in the Section 155 application, they had in fact filed suits being CS No. 225 of 1988 and 226 of 1988 before the Courts in Pune claiming specific performance of the contract alleged to be existing in favour of the appellants for transfer of the 3417 and 93 shares. It is submitted that the issues involved in the Civil Suits and the proceedings under S. 155 overlapped in so far as the 3417 shares are concerned and that this appeal should be considered only with regard to the challenge to the issuance and allotment of the 17,666 shares.
The appellants have submitted that they had no alternative but to file the Company Petition for rectification of the company's Register of Members by deleting the names of the respondents No.5 and his group under Section 155 of the Companies Act. Reliance has been placed on the decision of this Court in the case of Ammonia Supplies Corporation (P) Ltd. v. Modern Plastic Containers Pvt. Ltd. & Ors. 1998 (7) SCC 105 in which this Court said that:- "So far as exercising of power for rectification within its field there could be no doubt the court as referred under Section 155 read with Section 2(11) and Section 10, it is the Company Court alone which has exclusive jurisdiction".
It is also submitted that even if the jurisdiction under Section 155 was not exclusive and the Company Court had concurrent jurisdiction with Civil Courts, this Court should not relegate the appellants to the alternative remedy of a Civil Suit having regard to the facts of this case, especially, the pendency of the matter before the different Courts from 1986.
The Trial Court had rejected the preliminary objection and held that it was open to the parties to choose any one of the remedies available to such party and that the remedy under Section 155 of the Companies Act was equally "efficacious, definitely more speedy and certainly appropriate". The Division Bench did not go into the issue having held in favour of the respondents on the merits.
Section 155 of the Act (as it stood in 1986) provided inter alia as follows:- S.155, Power of Court to rectify register of members-- If
(a) the name of any person
(i) is without sufficient cause, entered in the register of members of a company, or
(ii) after having been entered in the register is, without sufficient cause, omitted therefrom; or
(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member, the person aggrieved, or any member of the company, or the company, may apply to the Court for rectification of the register.
(2) The Court may either reject the application or order rectification of the register, and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved.
In either case, the Court in its discretion may make such order as to costs as it thinks fit.
(3) On an application under this section, the Court
(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members, or between members or alleged members on the one hand and the company on the other hand; and
(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.
(4) From any order passed by the Court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the ground mentioned in Section 100 of the Code of Civil Procedure 1908 (V of 1908) (a) if the order be passed by a District Court, to the High Court;
(b) if the orders be passed by a single Judge of a High Court consisting of three or more Judges, to, a Bench of that High Court.
(5) The provisions of sub-sections (1) to (4) shall apply in relation to the rectification of the register of debenture-holders as they apply in relation to the rectification of the register of members".
The power of the Court under Section 155 is limited to the rectification of the register of members of a Company in three situations
(a) when the name of a person is wrongly entered in such register
(b) when the name of a person, whose name having been entered in the register is omitted therefrom and
(3) when default is made in entering the name of any person who has already become or who has ceased to be a member. None of the three situations envisaged under sub-section (1) of Section 155 would allow the person whose right as a member qua the disputed shares is yet to be established to apply for rectification by inclusion of such person's name. The appellants could not, therefore have applied for transfer of the disputed shares in their favour under Section 155 of the Companies Act. They would have to establish that right by way of a separate suit or otherwise. The appellants in paragraph 26 of the Company Petition correctly reserved their right to file appropriate action for transfer of the 3,417 shares to themselves.
The relevant prayers in the appellants Company Petition 476/86 were as follows:-
" (a) That this Hon'ble Court be pleased to order the rectification of the Register of Members of the 1st respondent Company and order that the names of Respondent Nos. 5,6,8,11,12,13 and 14 be removed from the Register of Members of the 1st Respondent Company in respect of 3,417 shares belonging to the estate of Dr. N.B. Parulekar and 93 shares belonging to the 2nd Respondent;
(b) That this Hon'ble Court be pleased to order rectification of the Register of Members of the 1st Respondent Company and do order that the names of Respondent Nos. 11,12,13,15 and 16 be removed from the Register of Members of the 1st Respondent Company in respect of 17,666/- shares;
(c) That Respondent Nos. 5,6,8,11,12,13 and 14 be ordered and directed by a mandatory order and injunction of this Hon'ble Court to deliver up to the 1st respondent the share certificates in respect of the said 3417 shares and 93 shares for removal of their names there from;
(d) That the Respondent Nos. 11,12,13,15 and 16 be ordered and mandatory injunction of this Hon'ble Court to deliver up to the 1st Respondent the share certificates held by them in respect of 17,666 shares allotted on 16.11.1985 to the 1st Respondent for cancellation";
As had been noted by the learned Single Judge, there was no prayer for transfer of the disputed shares to the appellants. The only prayers related to the cancellation of the impugned transfers and the rectification of the Register of Members of the Company by removal of the names of the Respondent 5 and his group.
The prayers in the appellants' suits pending in Pune are inter alia as follows:
" (a) that this Hon'ble Court be pleased to declare that there is a valid and subsisting contract entered into between the Plaintiffs, on the one hand and the Defendants 2,3 and 4 on the other for the sale by the Defendants 2,3 and 4 and purchase by the Plaintiffs of 3417 shares of the 1st Defendants bearing distinctive numbers more particularly described in Exhibit '-'
(b) that the Defendants 2,3 and 4 be directed to specifically perform the said contract by executing the necessary Transfer Forms and doing all other acts necessary to effectually carry out the said transfer;
(c) that the 1st Defendant be directed to register the said shares upon such transfer under prayer (b) in favour of the 2nd Plaintiffs;
(d) that in the alternative to prayer (b) above, the Defendants 2,3 and 4 be ordered and decreed by this Hon'ble Court be pay to the Plaintiffs a sum of Rs. 3 Crores or such other sum as this Hon'ble Court may determine as damages for breach of the contract." Similar prayers were made in respect of the 93 shares.
Clearly the reliefs prayed for in the Company Petition were different from for the reliefs claimed in the Civil Suits filed by the appellants. The Civil Suits arose out of and were consequent upon the findings of the learned single Judge on the petition under Section 155 that there was a concluded contract between the holders of the 3417 and 93 shares and the appellants for transfer of those shares to the appellants.
The learned single Judge correctly held that "This suit was necessary as even if the Petitioners had managed to deposit the amount and got an order of rectification of the register in their favour, there was still no order of any Court which directed the respondents to deliver these shares to the petitioners".
If there is any issue in the suit which was required to be and has been determined in the Company Petition, the effect of that determination would no doubt be the subject matter of consideration by the Civil Judge, Pune, before whom the suits are pending. But the possibility of overlapping of such issues does not preclude the filing of the suits by the appellants. The appellants advisedly did not pray for the transfer and registration of the disputed shares in their favour in the proceedings under Section 155. They could not have done so.
That the Court exercising jurisdiction under Section 155 of the Companies Act was competent to entertain the applications filed by the appellants cannot be disputed. The only question is whether the discretion to do so was properly exercised.
Despite the respondents' submissions to the contrary, we do not consider this case as an appropriate one to decide whether this Court's decision in Ammonia Supplies Corporation (supra) was correct in so far as it has held that the jurisdiction to grant relief provided under Section 155 was exclusive. It may be noted that the view has been reiterated by a larger Bench in Canara Bank vs. Nuclear Power Corporation of India Ltd. & Ors. JT 1995 (3) SC 42 (para 31). But assuming that the decision is wrong and that jurisdiction of the Company Court under S. 155 of the Companies Act and the Civil Court under Section 9 of the Code of Civil Procedure is concurrent, there is no reason for us to refuse to entertain the application under Section 155 of the Companies Act. The questions raised in the petition for rectification were determined on the basis of the material available both by the Single and the Division Bench.
Neither of the Courts were of the view that the materials were inadequate or that the disputes were such which could not be resolved under Section 155. Apart from any other circumstance, the fact that the matter has been awaiting disposal by the Courts at the different levels for almost 18 years would render it grossly inequitable and be an improper exercise of judicial discretion if we were to turn the appellants away at this stage to pursue an alternative remedy (if any) available under the general law. The preliminary objection raised by the respondents is accordingly rejected.
Moving to the merits of the appeals the various issues raised relate to the appellants' right to purchase the disputed shares; the transfer of 3417 and 93 shares and the issue and transfer of 17,666 shares.
I.1 The preemptive right which is being claimed by the appellants arises from Article 57A of the Articles of Association of the Company. The right is admitted by the respondents, but as the extent of the right is in dispute, it is quoted verbatim.
"57-A. In the event of any member of Company desires to transfer his shares he shall be bound to offer the same either to Dr. N.B. Parulekar or to Madame Shanta Parulekar or such other person or persons as Dr. N. B. Parulekar or Madame Shanta Parulekar may direct or may nominate and in which event the transferee or transferees shall pay such price as may be certified by the Auditors of the Company."
I.2 Analysed, the right contains four elements which are cumulative:
(i) the desire of any member to sell his shares.
(ii) the offer by such member of the shares to Dr. Parulekar or to Shanta or to their nominee.
(iii) the certification of the price by the Auditors of the Company.
(iv) The payment of such price by the Transferee / transferees.
I.3 The other relevant Articles are Articles 58 to 64. All these articles are under a group entitled "Transfer and transmission of shares". Article 57-A is the first of the group. The remaining articles read as under:-
58. Subject to Cl.57A no shares shall be transferred so long as any member or any person selected by the Directors as one to whom it is desirable in the interest of the Company to admit to membership, is willing to purchase the same at the fair value as mentioned herein below.
59. Except where the transfer is made pursuant to Article 58 here of, the person proposing to transfer any share shall give notice in writing to the Company that he desires to transfer the same. Such notice shall constitute the Directors his agents for the sale of the share to any member or persons selected as aforesaid, at a fair value to be agreed upon between the Transferor and the purchaser and in default of such agreement to be fixed by the Auditors of the Company. The notice may include several shares and in such case shall operate as if it were a separate notice in respect of each share. The notice shall not be revocable except with the Sanction of the Directors.
60. If the Directors, shall, within the space of 30 days after being served with the Transfer Notice, find a purchasing member or a person selected as aforesaid willing to purchase the share and shall give notice thereof to the proposing transferor, he shall be bound upon payment of the fair value fixed as aforesaid to transfer the shares to the purchaser.
61. In case any differences arises between the Transferor and the Purchaser as to the fair value of a share, the Auditors of the Company shall certify in writing the sum which in their opinion is the fair value and the same be binding on the transferor and the purchase. Provided however that the Auditors so certifying shall not be considered to be acting as Arbitrators and the Indian Arbitration Act 1940 shall not apply. The Auditor shall be considered to be acting as an expert.
62. If in case the proposing transferor, after having become bound as aforesaid, makes default in transferring the share, the Directors may receive the purchase money and shall there upon cause the name of the purchaser to be entered in the Register as the holder of the share and shall hold the purchase money in trust for the Transferor. The Directors may appoint any person to execute a transfer of the said share on behalf of the defaulting transferor. The receipt of the Directors for the purchase money shall be a good discharge to the purchaser and after his name has been entered in the Register in purported exercise of the aforesaid power the validity of the transfer shall not be questioned by any person.
63. If the Directors, shall not, within the time prescribed as aforesaid after being served with the Notice, find a purchasing member or select a person as aforesaid willing to purchase the shares or any of them and give notice in manner aforesaid, the transferor shall at any time within 30 days thereafter be at liberty subject to Article 65 thereof to sell and transfer the shares to any person and at any price.
64. Every share specified in the Notice given pursuant to the Article 59 hereof shall be offered to the members in such order as shall be determined by the Directors and in such manner as the Directors think fit. If no member is ready and willing to take up such shares the same may be offered to any person selected by the Directors as one to whom it is desirable in the interest of the company to admit to its membership".
I. 4.1 The Articles give the hierarchy of the persons entitled to purchase shares upon transfer. The first right is given to the preemptors under Article 57-A. Next in the hierarchy is any member who is willing to purchase the shares at a fair value. This follows from a reading of Article 58 with Article 64. The third category is of any person or persons selected by the Directors as being desirable in the interest of the company to admit to membership. The last category is the person to whom the transferor may choose to sell the shares. As long as there is any person in a higher category, there is no question of sale or purchase by a person in a lower category. Thus for example the right of a member or a person in the 2nd category to purchase shares can arise only in the event there is a default or refusal on the part of the preemptor and so on. A person may fall within any one or more of these four categories and would, by virtue of these articles have distinct and separate rights to purchase the shares in each of the four categories. So even if a preemptor or a nominee of a preemptor does not exercise his/her right under Article 57-A to purchase the shares at a price certified by the company's Auditors, such person may choose to exercise the right as an ordinary member and purchase the share at a fair value or the transferor may choose to sell the shares to such person under Article 63.
I. 4.2. In the case of a transfer to a person in the 2nd and 3rd categories of putative purchasers, the Directors are appointed agents of the transferor. The notice of transfer is required to constitute the Directors as the transferor's agents. This notice is distinct from the other required to be given under Article 57-A. In respect of these two categories, the price of the shares is at first to be negotiated with the transferor. It is only in the case of a default in such agreement being reached that the company's Auditors step in and fix a "fair price". The third distinctive feature of these two categories is that upon refusal/default of the preemptor, the transferor is required to give a notice in writing of his desire to transfer. Giving of this notice must necessarily be subsequent to the failure of Article 57-A for whatever reason, as the Directors are required to find a willing person either in the 2nd and if not the 3rd category within a period of 30 days.
There is no time limit specified for the completion of the preemptive transfer under Article 57-A. Therefore unless the transferor gives a separate notice of the failure of Article 57-A how would a willing member know whether he/she has a right or when the period fixed for intimating their willingness to purchase was to lapse? Article 60 also requires the Directors to give a notice to the transferor after finding a willing purchasing member or selectee under Article 58. Giving of this notice is important because if 30 days expires without such notice by the Directors, Article 63 would come into play and the transferor would be at liberty to sell the shares to any person and at any price, albeit also within a period of 30 days from the expiry of the first period of 30 days. It follows that a notice issued prior to the preemptor exercising or failing to exercise the right under Article 57-A would not be in keeping with Articles 59 and 60 as this would make the period of 30 days uncertain if not illusory. Thus the notice by the transferor under Article 58 must succeed the factual failure of Article 57-A and notice, if any, under Article 60 must follow the failure of Article 58.
I.4.3 Assuming there is a willing purchaser under Article 58, there is no time limit fixed either for the parties to arrive at a negotiated price or for the Auditor to fix a fair value. But Article 63 indicates that the entire transaction envisaged by Articles 59, 60, 61 and 62 would have to be completed within a period of 60 days after Article 57-A failed to operate.
I.4.4. Section 36 of the Companies Act, 1956 makes the Memorandum and Articles of Company, when registered, binding not only on the company but also the members inter-se to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the Memorandum and of the Articles. The Articles of Association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The Articles are a source of powers of the Directors who can as a result exercise only those powers conferred by the Articles in accordance therewith. Any action referable to the Articles and contrary thereto would be ultra vires.
I.4.5 Thus in Hunter vs. Hunter (1936) A.C. 222, the shareholders in a private company challenged the transfer of shares by another shareholder to 3rd parties without compliance with the provisions of Articles of Association. In terms of the articles a member could not transfer his shares until he had given notice to the Secretary offering to sell the shares at a price to be fixed by the auditor and until the Secretary had offered them to the other members. It was found that in violation of this article, one of the shareholders had sold the shares to nominees of a bank from which that shareholder had obtained loans. The application for rectification of the share register was resisted by the purchaser in whose favour the shares had already been registered with the company. The House of Lords came to the conclusion that the purchase was not in terms of the Article and that the transfer in violation of the Articles was inoperative.
I.4.6 A similar situation arose in the case Lyle and Scott Ltd. Scott's Trustee (1959) 2 All ER 661. There was a similar article which provided for inter alia the preemptive right in the existing shareholders to purchase shares.
There was no dispute that the article had been violated.
"The purpose of the Article is plain: to prevent sales of shares to strangers so long as other members of the appellant company are willing to buy them at a price prescribed by the Article.
And this is a perfectly legitimate restriction by the Article. And this is a perfectly legitimate restriction in a private company". (p.667) The House of Lords was of the view that the Article would have to be complied with in order to effect a valid transfer. [See: Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. (1971) 1 SCC 50, 107; H.P. Gupta vs. Heera Lal (1970) 1 SCC 437, 440 and 441).
With this prefatory statement of the relevant law we may now look at the facts.
II Facts II.1 The narration of facts starts with the will of Dr. Parulekar by which he appointed the four Executors, viz. Shanta and the respondents 2,3 and 4 as Executors and Trustees of the will. The will inter alia empowered the Executors and Trustees to sell or to postpone the sale from time to time of all the properties vested in them by the will for payment of estate duty and to invest the same as the Executors and Trustees thought fit. After providing for specific legacies, the Executors and Trustees were directed to hold the rest and residue of the estate on trust
(1) for the spread of education through newspapers, magazines and periodicals
(2) for effecting improvement of the quality and standard of journalism and training of personnel in journalism
(3) for purchase of shares of concerns, firms, companies or from persons or persons interested in or concerned with newspapers, magazines, periodicals and otherwise in journalism
(4) for publication of books and literature for masses at low and reasonable prices, and
(5) for such other objects and acts that may be necessary to bring about improvement of information amongst the masses and also which may be incidental or conducive to the above objects. The trust was to be known as "Sakal Papers Trust".
Although the probate of the will had been granted in 1975 to the four Executors and all four of them had been entered in the register of members of the company as joint shareholders of the 3417 shares belonging to the estate of late Dr. Parulekar on 26.4.1977, no steps were taken by the Executors to convert the shares into money till 1984.
II.2 It is the claim of the respondent Nos. 2, 3 and 4 that in 1984 a company by the name of M/s. Jain Plastic Pvt. Ltd. offered to purchase the 3417 and 93 shares at a price of Rs.2250/- per share. The offer is not on record.
What is on record is a letter dated 10.11.1984 written by the respondents Nos. 3 and 4 as the holders of 93 shares to Shanta as well as the Board of Directors of the Company offering to sell those shares to Shanta or her nominee under Article 57-A at a price of Rs.2250/- per share. The letter further stated that in the event Shanta was not agreeable to pay the price, the letter should be treated as notice to the Directors within the meaning of Article 57-A to Article 61 who were called upon to take steps to get the price fixed under Article 61. It was further stated that if Shanta did not exercise her rights under Article 57-A or was not willing to pay the price or not willing to complete the transactions in accordance with Article 61, then the respondent Nos.3 & 4 would be free to sell the shares to any other person in accordance with Articles of the company. Article 61, as we have already seen, pertains to the valuation of shares when a shareholder expresses his or her willingness to purchase the shares.
II. 3 On 27.11.1984 the Board of Directors resolved that the 93 shares held by the respondent Nos. 3 & 4 should be offered to the other members of the company subject to the preemptive right of Shanta under Article 57-A.
II. 4 As far as the 3417 shares are concerned, a similar resolution was taken that if Shanta did not exercise her rights or did not pay the shares at a price fixed under Article 61 then the Executors could sell the shares to any other person or persons for the price of Rs.2250/- per share. It was also resolved that any one of the Executors was authorized to implement the resolution and also to take steps to execute the transfer forms and complete the transaction.
II.5 Notice was given on 29.11.1984 by the Executors to Shanta with the respondent No.2 signing on behalf of all the Executors. The contents of the notice are materially the same as the notice given by the respondent Nos. 3 & 4 in respect of the 93 shares. The company similarly issued a notice to all share holders to indicate whether they were willing to purchase the shares subject to Shanta's right under Article 57-A.
II.6 On 14.12.1984 the appellants wrote a letter accepting the offer to sell the 3417 shares. The letter stated that Shanta was agreeable to buy the shares by herself/or her nominee and that her nominee was her daughter, now the sole appellant. Shanta stated that she was agreeable to pay such price as may be certified by the Auditors of the company as stipulated in Article 57-A.
A copy of the letter was sent by Shanta to the Board of Directors and countersigned by her daughter signifying her assent.
II.7 The Company's Chartered Accountant gave notice to Shanta on 20.1.1985 stating that he had received several documents from the company pertaining to the valuation of the shares. A list of such documents was given.
Shanta was also called upon to submit any documents that she may desire in that connection within seven days.
Shanta asked for an extension of time to submit such information. This was granted by the Auditors upto 20.2.1985. By a letter dated 20.2.1985 Shanta called upon the Auditors to submit a draft report and draft certificate within seven days in order to enable her to make her submissions in respect thereof. By a letter written on the next date, Shanta asked for copies of the documents submitted by the Company to the Auditors.
There was no response to either of these letters by the Auditors who straightaway issued a certificate on 21.2.1985 certifying that the price of the 93 shares was Rs.2,10,273/- and of the 3417 shares Rs.77,25,837/-.
II. 8 The respondent Nos. 3 & 4 then wrote to Shanta on the same date calling upon Shanta to pay the sum of Rs.2,10,273/- in respect of 93 shares on or before 2.3.1985 "time being of the essence" failing which they would dispose of the shares in such manner as they thought fit.
II.9 In the meanwhile, the appellants had protested against the certification to the Auditors both with regard to the procedure followed as well as the value certified. The allegation against the Auditors was that the valuation had been fixed collusively and was not just, fair or reasonable according to the recognized principles of valuation. The appellants called upon the Auditor to fix a fair valuation after giving the appellants a proper opportunity of being heard. They also wrote to the respondents Nos. 3 and 4 contending that there was no question of time being of the essence either under Article 57-A or under the offer letters. It was alleged that the stipulation of time could not be imposed unilaterally. They also stated that the time fixed was unreasonable and that in any event the certificate issued by the Auditor could not be treated as a final certificate. It was also stated that there was a final and concluded contract between the parties for the purchase of the said shares. Without prejudice to all that was stated and also without prejudice to their legal rights to take actions relating to the Certificate dated 21.2.1985 issued by the Auditors, the appellants wrote:
"We are willing to deposit with any stakeholders of our mutual choice an amount of Rs. twenty lacs as an earnest of our bonafides and genuine desire to purchase the said shares. The said amount will be paid to the stakeholders within three days from the receipt of your confirmation that you are ready and willing to accept this interim arrangement. The stakeholder shall hold these monies until such time, but not later than one month within which we hope the Company's Auditors will submit a just, fair and impartial Certificate and it will be accepted by us.
In case a just, fair and impartial Certificate is not issued by the Company's Auditors, within the said period, then the stakeholder shall return the said monies to us without any objection immediately on a written demand by us".
The appellant also protested against the threat held out in the letter dated 21.2.1985, to sell the shares to third parties.
II.10 In response to this letter a telegram was sent by respondent No.3 stating "Will communicate action nothing in your letter deemed as admitted".
II.11 On 2.3.1985 and 1.4.1985 two suits were filed by the appellants before the Civil Judge, Pune praying for a permanent injunction to restrain the respondents Nos. 2, 3 and 4 from selling the shares contrary to the concluded contract with the appellants. The suits were rejected on 5.8.1985 by the Civil Judge on the application of the respondents Nos. 2, 3 and 4 on the ground that the subject matter involved in the suit was outside the pecuniary jurisdiction of the Court.
II.12 According to the respondents, the 3417 and 93 shares were then sold to the respondent No.5 and his group on 9.9.1985. There is no record when the offer of the respondent No.5 or his group had been made either to respondent Nos. 3 or 4 or to the Executors prior to the sale nor of any further notice being given in respect of the sale of the shares to the respondent No.5 and his group to the appellant.
II.13 On 16.9.1985 a notice was issued by the Board of Directors of the Company that a meeting would be held on 21.9.1985. The appellants' claim that the notice was given by a telegram late in the night on 16.9.1985. On the next date, the appellants sent a telegram to the Company protesting against holding the meeting of the Board of Directors at such short notice and requesting for postponement. This was followed by a letter dated 21.9.1985 written by the appellants. The day before the meeting was held, on 20.9.1985, the respondent No.5 and his group lodged transfer forms in respect of the 3417 and 93 shares with the company. The request of the appellant for adjournment of meeting was not heeded to and the meeting was held on 21.9.1985 as scheduled. At the meeting, despite there being no item in the agenda relating to the registration of the shares sold, a resolution was passed to register the transfer of the 3417 equity shares standing in the name of the four Executors as well as the 93 shares to the respondent No.5 and his group which included the respondent Nos. 11 to 16, all private limited companies. The respondent No.5 himself was appointed as an Additional Director of the Company together with another member of the respondent No.5's group. The respondent No.2 was appointed as a Chairman upon the retirement of the respondent No.3.
II.14 On 1.10.1985 the appellant wrote to the respondent Nos.
2, 3 and 4 stating that they were willing to purchase the shares at the price fixed by the Company's Auditors and would pay the same immediately upon the modalities for such payment being intimated. No reason was put forward for this volte face by the appellant In response to this letter, two letters dated 2.10.1985 and 3.10.1985 were written by respondent No.2 on behalf of the Executors and by the respondent Nos. 3 and 4 as holders of 93 shares intimating the appellant that the shares had already been sold. It was however not intimated as to whom the shares were sold.
II.15 On 13th October, 1985 a Board Meeting was held at which the appellants were present. The appellants affirm that they came to know of the transfers of the shares to the Pawar group only when the Minutes of the earlier Meeting held on 21.9.1985 were put up for approval. Despite their protest the Minutes were approved.
II.16 It was in these circumstances that the application under Section 155 of the Companies Act, 1956 was filed by the appellants.
II.17 Before we close this chapter of facts on the transfer of 3417 and 93 shares, it may be noted that the District Court at Pune recalled its order rejecting the plaints in the two suits which had been filed by the appellants on a review application filed by them. The respondents challenged the order before the High Court. The High Court set aside the order of the District Court and remanded the matter to the Trial Court for re-deciding the appellant's application for review afresh.
III. Submissions III.1 According to the appellants once Shanta had exercised her rights under Article 57-A, there was a binding contract in respect of the 3417 and 93 shares. With the exercise of the right, notice to the other shareholders as required under Article 58 being a conditional one ceased to operate. It is submitted that there was no question of the respondents Nos. 2, 3 and 4 fixing a time frame for the implementation of the concluded contract unilaterally.
It is the case of the appellants that the contract had never been repudiated. The conduct of the appellants spoke to the contrary. Furthermore there was no acceptance of the repudiation by the respondent Nos. 2, 3 and 4. While denying the alleged repudiation of the contract, the appellant contended that in any event in accordance with Article 63, the Directors had to find a willing member or desirable outsider to purchase the shares within 30 days.
Only after that could the transferor sell to any person within 30 days. The sale to the respondent No.5 and his group was beyond that date. As far as Shanta's right to purchase the shares offered, despite the fact that she was herself one of the Executors/Trustees of the 3417 shares, it is the appellant's contention that Section 153 read with Article 29 showed that the Company was not bound to recognize any interest in shares other than that of the registered shareholder. It is further averred that Dr. Parulekar did not by his Will, seek to deprive Shanta of her right to preemption by appointing her Executor/Trustee. In any event there was nothing which deprived the present appellant of her right to purchase the shares independently, not only as a nominee under Article 57-A but also as a "willing member" under Article
58. According to the appellants there was no bar either under the Bombay Public Trust Act, 1950 or under the Indian Trusts Act, 1982 allowing Shanta to exercise her right under Article 57-A. It is contended that the three trustees could not by themselves make any offer of sale of the 3417 shares to the Pawar group. The power of the Executor was not delegatable under the Will and the authorization, if any, by Shanta to transfer the shares stood revoked once she had exercised her option under Article 57-A. It was argued that the transfer to the Pawar group by three of the four joint shareholders of the 3417 shares was in any event contrary to Section 108 of the Companies Act which mandatorily required all the joint shareholders to execute the transfer forms. It is said that the respondent No.5 and group were not bona fide purchasers. This had been so held by the Learned Single Judge which finding was not challenged before the Division Bench.
III. 2 According to the respondents, as far as Article 57-A is concerned, it is said that the article could not be construed to provide for a concluded contract merely upon the acceptance of the offer because in such event it would be open to the transferee to file a suit challenging the price and effectively subverting the transfer of shares as a result of which the transferor would be deprived of the immediate use of the funds. According to the respondents, the contract under Article 57-A would be concluded only after payment of the price. It is conceded that this particular argument had not been raised in the Courts below but being an argument on the interpretation of Article 57-A, it is submitted that it should not be excluded from consideration. According to the respondents the appellant's conduct clearly showed repudiation of the contract. The appellants had failed to perform their obligation by challenging the certificate of the Auditor. It was submitted that the respondent Nos. 2, 3 and 4 were entitled to fix a time for the performance of the contract not only under Section 32 of the Sales of Goods Act but also under Article 57-A. By not paying the certified price for the shares, the contract came to an end.
The respondents have said that by the resolution of the executors dated 7.11.1984, the three executors had been authorized to transfer the shares to a 3rd party under Section 108 (1) of the Companies Act. The transfer could be made by or on behalf of a shareholder. In fact the respondent Nos. 2, 3 and 4 need not have signed the transfer forms and any one of them could have done so.
The transfer was in keeping with Article 63. The respondents then submitted that Shanta was a trustee and she could not under any principle of law applicable to trusts either herself or through a nominee purchase any trust property as this would invariably lead to a conflict of duty and interest. In fact by challenging the price fixed in the shares by the Auditor and contending that it was too high, the conflict between the interest of the beneficiary and the interest of the trustee was manifest.
IV. Conclusion IV.1 In our opinion the entire transaction of sale is riddled with illegalities.
IV.1.1 The notices issued in respect of the 93 and 3417 shares were not in keeping with the Articles as far as Articles 58 to 63 were concerned. As we have already observed, notices to willing members or to selected persons under Article 58 must succeed and not precede the actual operation of Article 57-A. The notices issued by the respondent Nos. 2, 3 and 4 also did not constitute the Directors as the transferor's agents for the purposes of selling the shares in terms of Article 59. There was, in the circumstances, no question of the transferors selling their shares to any 3rd party under Article 63 unless proper notice had been issued to the 2nd and 3rd category of persons if any. There was also no question of the transferor invoking Article 61 bypassing the right of a willing member or selectee, if any, to negotiate a fair price.
IV.1.2 The Division Bench held that the notices dated 29.11.84 and 10.11.84 issued by the respondent Nos. 2,3 and 4 in respect of the 3417 shares, and the 93 shares respectively, were valid notices under Articles 57-A and 58 to the other shareholders in the company. But the Division Bench erred in holding that none of the other shareholders showed any interest in purchasing the shares. In fact the conclusion of the Division Bench is contradictory. If the notices could be combined notices under Article 57-A and Article 58, then the appellants' acceptance of the offer as made in the notices should also be construed as a combined assent under both the Articles. The Division Bench erred in holding that there was no material before the Court to indicate that the second appellant had at any time informed the company that she proposed to exercise her rights as a shareholder to purchase the shares. The Division Bench should have considered whether there was any offer to the second appellant as a shareholder to purchase the shares. If there was not an offer to the shareholders, obviously, there was no question of the second appellant accepting the offer. But whatever offer was made whether under Article 57-A or under Article 58 by the two notices, that offer was accepted by the appellant. And upon such acceptance, there was a concluded contract between the respondent Nos. 2,3 and 4 on the one hand and the second appellant on the other.
IV.1.3 The learned Single Judge correctly held that:- "The offers being both under Article 57-A and Articles 58 to 64, the acceptance by the second petitioner must be deemed to be not only as a nominee, but also as a member of the first respondent-company entitled to take up the shares in her own right.
There is a concluded contract to sell the shares to the second petitioner. The second petitioner was and is not an executrix or a trustee. This contract cannot, therefore, be said to be void or unenforceable".
IV.2.1 Article 57-A does not by itself indicate when the contract is concluded between the offeror and offeree. It was concurrently held by the Single Judge and the Division Bench that with the acceptance of the offers of the respondent Nos. 2, 3 and 4 by the appellants, the contract to purchase the shares under STA was concluded. Having regard to Section 9(1) of the Sale of Goods Act, 1930 we see no reason to differ from this conclusion. Section 10(1) of the Sale of Goods Act also speaks of avoidance of an agreement if the third party valuer either cannot or does not fix the price of the goods to be sold. Apart from the fact that the third party valuer in this case did in fact make the valuation, the section proceeds on the basis that the agreement is already concluded otherwise there would be no question of avoidance. Section 32 of the Sale of Goods Act provides:
"32. Payment and delivery are concurrent conditions Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods".
The section has no relevance to the question whether there was a contract at all between the parties. It pertains to a condition which is to be implied, unless there is a provision to the contrary, in a contract. Indeed the section assumes the existence of a contract in respect of which such a term may or may not be read in.
IV.2.2. The respondents' argument that a contract could not be said to be concluded until the price was in fact paid because it would then be open to an offeree like the appellants to stall the transfer of shares to a third party buyer and hold the offeror to ransom, is ingenious but not an argument which is legally acceptable. The legal consequence of a concluded contract will remain irrespective of how a particular party in a given situation might abuse the rights flowing from it. It is platitudinous that the possibility of abuse of a right cannot determine whether the right exists as a matter of law. Such arguments are normally met by the aphorism "hard cases make bad law".
IV.2.3 In Sudbrook Trading Estate Ltd. v. Eggleton & Ors. (1982) 3 All ER 1, 64 a clause in the lease gave the lessees an option to purchase the reversion in fee simple at a price to be agreed by two valuers, one to be nominated by the lessors and the other by the lessees and, in default of agreement, by an umpire to be appointed by the valuers, a minimum purchase price being specified in the clause. When the lessees sought to exercise the option in December 1979 the lessors claimed that the option clauses were void for uncertainty and refused to appoint a valuer. The lessors also contended that the options were unenforceable as there was no contract of sale since the purchase price had not been fixed. It was held that since the contract between the parties provided that the price was to be determined by valuers, it necessarily followed that the contract was a contract for sale at a fair and reasonable price assessed by applying objective standards, and " on the exercise of the option clauses a complete contract for the sale and purchase of the freehold reversion was constituted".
IV.2.4 There was thus a concluded contract which was breached by the respondent Nos. 2, 3 and 4 when they purported to sell their shares to the Pawar group.
IV.2.5 If the notices issued by the respondent Nos. 2,3, and 4 were not under Article 58, then it was not open to the respondent Nos. 2,3 and 4 to have sold the shares to the Pawar Group without issuing such notices. Hence irrespective of whether there was a concluded contract between the appellants and the respondent Nos. 2,3 and 4 in respect of the 3417 and 93 shares, the shares could not have been sold to the Pawar Group. Apart from the lack of notice under Article 58, as we have already noticed, the right of a transferor in terms of the Articles of the company to sell the shares to a person of the transferor's choice is required to be exercised within the period specified in the Articles. This is clear from Article
63. According to the respondents the appellants had repudiated the contract by challenging the certification of the auditor in February, 1985. If that were so then the Directors were required to give the notice to the transferor or if no such notices were given, the transferors could sell within the period of 30 days thereafter. Those 30 days had long since expired much before the date on which the sale of the shares is said to have taken place between the respondent Nos. 2,3 and 4 and the Pawar Group.
IV.3 We are of the view that there was also no repudiation of the contract by the appellants as contended by the respondents on account of the appellants alleged failure to pay the price within the time fixed by the respondent Nos. 2, 3 and 4 by their notices dated 21.2.1985.
IV.3.1 Section 11 of the Sale of Goods Act, 1930 expressly says:
"11. Stipulation as to time. - Unless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale.
Whether any other stipulation as to time is of the essence of the contract or not depends on the terms of the contract".
IV.3.2. As there was no time fixed either under Article 57-A or in the offer letters, the question of time being of the essence did not at all arise. As was held in S.C.Gomathinayagam Pillai v. Palaniswami Nadar 1967 AIR 1967 SC 868 "the stipulation must show that the intention was to make the rights of the parties depend on the observation of the time limits prescribed in a fashion which is unmistakable." If there is no stipulation as to time, it is not open to a party to unilaterally stipulate a time and then cancel the contract because of an alleged failure of the other party to act within the time stipulated.
[See: National Co-operative Sugar Mills Ltd., Alanganallur v. M/s. Albert & Co. AIR 1981 MAD 172 (D.B.) IV.3.3. Of course if time is fixed by the contract but it is not originally of the essence, a party could by notice served upon the other call upon him to complete the transaction within the time fixed and intimate that in default of compliance with the requisition the contract will be treated as cancelled (ibid p.872). But where no time is fixed for completion, it is not open to either the vendor or purchaser to serve notice limiting a time at the expiration of which he will treat the contract as at an end.
IV.3.4 In the circumstances, the contract for sale of the shares to the appellants could not be avoided by reason of any alleged failure on the part of the appellants to pay the price fixed by the Auditor.
IV- 4 Furthermore for an act to constitute a repudiation of a contract it must be ".such an act as indicated an intention to refuse to perform the contract and to set the other party free from performing his part. an act by which the party renounced all intention to perform his part of the contract, and thereby set free the other party or an intimation that it was no use for you to go on, because I tell you that I do not mean to keep to the contract" .
[See: Freeth v. Burr (Lord Coleridge, CJ (1874- 80) All ER.753]. The question to be asked is "is the act to be relied on as rescission, an act which on the part of the person doing it amounts to an abandonment, or refusal by him to perform his part of the contract?" (ibid at pg.754) IV.4.I Repudiation of a contract is "a serious matter, not to be lightly found or inferred". From the facts as narrated earlier, it is clear that there was no such repudiation on the part of the appellants. The letters exchanged, the suits filed do not show that the appellants were renouncing the contract nor that they were absolutely refusing to perform the contract. The question is not whether the valuation by the company's auditors was correct. The Division Bench held that it could not be said to be incorrect. But the question which should have been asked was, was the challenge permissible in law and if so was it made bonafide? The Division Bench did not answer this question in the negative. There was in fact no refusal to perform the contract, but a questioning of the mode of performance. It may be that they were mistaken in their challenge to the Auditors' certificate, but that is a long way from saying that they were unwilling to pay. As was said in Sweet & Maxwell Ltd. vs. Universal News Services Ltd. 1964 QBD 699 (CA) 179 "their view might have been a wrong one, but that does not justify it being treated as a repudiation of the contract" . ".If A and B, parties to a contract, form different views as to the construction and effect of their contract, and A demands performance by B of some act which B denies he is obliged to perform upon the true interpretation of the contract, then, if B says "I am ready and willing to "perform the contract according to its true tenor, but I contend that what you, A, require of me is not obligatory upon me "according to the true construction of the contract," and if in so saying he is acting in good faith, he does not manifest the intention to refuse to perform the contract. On the contrary, he affirms his readiness to perform the contract, but merely puts in issue the true effect of the contract."(ibid pg.737) IV.4.2 There would have been no point in the appellant challenging the valuation of the shares by the auditors if they were not interested in completing the transaction.
There would have been also no point in their offering to deposit Rs.20 lakhs as proof of their continued interest in purchasing the shares. The filing of the suit in Pune is not conduct in keeping with an intention of not performing the contract. If the offers were in terms of Article 58, as is now contended by the respondents, then, as we have said, the acceptance of that offer must also be understood to be under Article 58. In that case it was for the parties to negotiate the price for the shares and not for the auditors to determine. The challenge to the certification may be taken as a method of negotiating a fair value under Article 58. Be that as it may, the appellants in fact accepted the price as certified by the auditors on 1st October, 1985.
IV.5 The respondents have relied on the resolution at the Executor's meeting on 27.11.1984 at which it was determined that the sale of the shares would be made.
The resolution of the executors was that one of the executors could implement the sale and execute the transfer forms but did not name anyone. Before the sale of the 3417 shares was made to the Pawars by the Executors, it was abundantly clear from the conduct of Shanta
(i) that she had revoked consent she may have given qua Executor and Trustee to the sale of the 3417 shares to third parties and
(ii) that the appellants were desirous of purchasing the shares themselves in whatever capacity.
IV.5.1 In any event the Executors' resolution dated 27.11.84 authorizing one of them to effect the transfer of the shares could not override the provisions of Section 108 of the Companies Act which prohibits a company from registering or transferring of shares in the company "unless a proper instrument of transfer duly stamped and executed by and on behalf of the transferor and by and on behalf of the transferee and specifying the name, address and occupation if any of the transferee, has been delivered to the company.
IV. 5.2 For the purposes of registration of the transfer under Section 108 the instrument of transfer must be executed by the transferor or it must be executed on behalf of the transferor. But there must be execution. The learned single Judge has found as a fact that the instrument of transfer had been signed by only three of the joint shareholders.
Shanta had not signed. There were three signatures on the transfer deed. Each transferor had therefore, executed qua shareholders in respect of their own interest. There was no 4th signature on behalf of the 4th joint shareholder.
This was also the finding of the Division Bench. But the Division Bench held that it was a mere irregularity which did not vitiate the registration. It was also held that the irregularity could be cured by one of the Executors signing on his behalf.
IV.5.3 But compliance with the provisions of Section 108 was and is mandatory. As held in Mannalal Khetan & Ors. vs. Kedar Nath Khetan & Ors. (1977) 2 SCC 424:- "The words "shall not register" are mandatory in character.. The mandatory character is strengthened by the negative form of the language. The prohibition against transfer without complying with the provisions of the Act is emphasized by the negative language. Negative language is worded to emphasise the insistence of compliance with the provisions of the Act.The provisions contained in section 108 of the Act are for the reasons indicated earlier mandatory.
The High Court erred in holding that the provisions are directory".
(See also: Halsbury's Law of England 4th edn.Vol.7 para 1632, Palmers Company Law 24th Edn. Pg.638, Jarnail Supp.1 SCR 206.) IV.5.4. The power to act by majority qua executors and authorizing someone to act as a shareholder on another's behalf are distinct. There is no question of transferring shares by signature of a majority. Whatever the agreement between the executors was inter-se, the agreement could not over-ride the provisions of the Companies Act and under Section 108 the Company is bound to recognize only those transfers for the purpose of registration which are executed in terms of that section. It is true that they were in fact executors, and that, with regard to the beneficiaries mentioned in the will, they would be trustees of the stock, but the company does not take notice of any trust, and must act in accordance with the
