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CASE NO.:

Appeal (civil) 698-700 of 1995

PETITIONER:

Smt. Claude-Lila Parulekar

RESPONDENT:

M/s. Sakal Papers Pvt. Ltd. & Ors.

DATE OF JUDGMENT: 18/03/2005

BENCH:

Ruma Pal & P.Venkatarama Reddi

JUDGMENT:

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

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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

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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\027

(a) the name of any person\027

(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

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Court\027

(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)\027

(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

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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 '\027-'

(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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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 \026 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 &

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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

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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 "\005.such an act as indicated an

intention to refuse to perform the contract and to set the

other party free from performing his part.\005 an act by

which the party renounced all intention to perform his part

of the contract, and thereby set free the other party\005\005 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 "\005is 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" . "\005.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

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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

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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\005..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

Singh Vs. Bakshi Singh (1960) 30 C.C. 192., L.

Janakirama Iyer Vs. P.M. Nilkanta Iyer and Others (1962)

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 Act of Parliament, under which it

is constituted, with regard to placing persons upon the

register." [See: Barton v. London and North Western

Railway Co. 1889 (24) QBD 77 (CA)].

IV.5.5 Even if the four executors had wanted registration

only in the capacity of executors and the company also

acquiesced in it, the four executors would continue to be

ordinary share holders and the limitation would be illegal

and of no effect. Being on the register as joint share

holders, there is no escape from the proposition that a

transfer by one of them only would be an invalid transfer.

[See: Barton v. London and Northern Western Railway Co.

(1889 24 QBD 77)]

IV.5.6 As far as the company is concerned, the requirement

of execution of the transfer form by each of the joint share

holders could not be met by execution of the transfer form

by one of the shareholders even though between the

share holders inter-se there was an agreement that one

share holder could sign on behalf of all the other share

holders unless the executant signs for himself and for on

behalf of the other share holders/transferors. It would be of

no consequence as far as Section 108 is concerned to

exclude the reluctant share holder on the ground that the

share holder had refused to execute the form. The remedy

of the other joint share holders to compel the reluctant

share holder to sign the transfer form would lie elsewhere

and not in a breach of the requirement of Section 108 of

the Companies Act.

IV.5.7 Here the instruments of transfer had admittedly

been improperly executed. Both the Courts have so held.

It was therefore not lawful for the company to register the

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transfer. The principle that a Court will not interfere in the

affairs of the company if the defect complained of can be

cured would apply if the defect is a technicality and is

curable. The non-compliance of Section 108 is not a

technicality.

IV.6 Apart from the violation of Section 108 as far as the

registration of shares is concerned, the meeting of the

Board of Directors at which the company recorded the

transfer was invalidly held.

IV.6.1. According to the Article 93 of the Articles of the

Association of the Company:-

"Every notice of a meeting of the

Company shall specify a place, date and

hour of the meeting, and shall contain a

statement of the business to be

transacted thereat. No General

Meeting, Annual or Extraordinary, shall

be competent to enter upon, discuss or

transact any business which has not

been specifically mentioned in the notice

or notices upon which it was convened.

In every notice there shall appear with

reasonable prominence a statement that

a member entitled to attend and vote is

entitled to appoint a proxy or, where one

or more proxies are allowed, to attend

and vote instead of himself and that the

proxy need not be a member of the

Company".

IV.6.2 In the notice for the meeting held on 21st September,

1985, there was no mention whatsoever, let alone a

statement, relating to the transfer of the 3417 and 93

shares to the Pawars. At the same meeting, the

respondents Nos.5 and 10, were appointed as Additional

Directors although their shares were not yet entered in

the Company's register of members.

IV.7 As we have found several legal infirmities in the sale of

the 3417 and 93 shares to the Pawars, it is not necessary

to consider whether the respondent No.5 and his group

were purchasers of the shares.

IV.8. The Division Bench erred in holding that the violation of

Section 108 was ratified at the Board Meeting held on 13th

October, 1985. Ratification is possible in respect of an act

which is incompetent, by a person who would have been

competent to do such act. The violation of Section 108

could not be ratified by the Board of Directors as the act

was one which the Board was incompetent to allow. The

Board of Directors never had the legal capacity to direct

the registration of shares invalidly transferred.

IV.9 It is the respondent's final submission that neither of the

appellants could have purchased the shares under Article

57A because Shanta was one of the named executors

and trustees of inter alia shares of Dr. Paruleker under

his will.

IV.9.1 A trust is created under Section 6 of the Indian Trust Act,

1882 ".. when the author of the trust indicates with

reasonable certainty by any words or acts (a) an intention

on his party to create thereby a trust, (b) the purpose of

the trust, (c) the beneficiary, and (d) the trust-property,

and (unless the trust is declared by will or the author of

the trust is himself to be the trustee) transfers the trust-

property to the trustee." According to the appellant no

valid trust was created as the beneficiaries had not been

named. We do not propose to go into this question in

these proceedings.

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IV.9.2 Under Sections 51 and 52 of the 1882 Act a trustee may

not use or deal with trust property for his own profit or any

other purpose in connection with the trust. And no trustee

whose duty it is to sell trust property may directly or

indirectly buy the same or any interest therein, on his own

account or through his agent or third person.

IV.9.3 Article 57-A does not envisage Shanta purchasing the

shares through her nominee. One of hers rights under

Article 57-A was no doubt to purchase the shares herself.

But she could also nominate any other person to

purchase the shares. The transferor then would have to

make an offer to such other person who would then,

independently of Shanta, be entitled to a transfer of the

shares. In the latter case there is no question of any

conflict of interest between Shanta in her capacity as

trustee under the will of Dr. Paruleker and as a nominator

under Article 57-A. Here, Shanta was not purchasing the

shares. It is true that she could have done so in exercise

of her preemptive right under Article 57-A, but she did not

and only nominated her daughter as the person to whom

shares should be sold.

IV.9.4. This was also how the parties understood the situation

as the correspondence exchanged between the parties

evidences. As we have noted the resolution relied upon

by the respondents authorizing one of them to sell the

trust shares, was taken of a meeting held on

27th November, 1984 which was attended only by two of

the four Executors. Shanta could not attend because she

was ill. Her prayer for adjournment was rejected by the

two executors on the ground that her interest would not

be jeopardized since she would be given notice under

Article 57-A. It was then resolved that notice should be

given under Article 57-A to Shanta. If she exercised her

right under that Article, the executor was to sell the

shares to her at Rs.2,250 per share. If she did not agree

to purchase the shares at the price of Rs. 2,250 then the

price should be fixed in accordance with Article 61. The

resolution further records that only if Shanta did not buy

the shares at such fixed price then the executors "do sell

the shares to any other person or persons at or for the

price of Rs. 2,250 per share". Since the meeting was not

adjourned because Article 57-A protected Shanta, it

follows that if Shanta's rights were not to be protected

under Article 57-A, then the meeting should have been

postponed.

IV.9.5. Indeed the matter was referred to the company's

auditors in purported compliance with Article 57-A.

Certification of the price was made by the auditors also

under that Article. The notice of the respondent Nos. 2,3

and 4 calling upon the appellants to pay the certified price

was also under Article 57-A. The present stand of the

respondent Nos. 2,3 and 4 with regard to the

disqualification of Shanta as a purchaser of the shares

under Article 57-A is thus wholly inconsistent with their

conduct ante litem.

IV.9.6. The respondents now say that Article 57-A has no

application. If it does not then Article 58 would. In that

event, the certification by the auditors was entirely

premature as the willing shareholder (the appellant No.2

in this case) would be at liberty to negotiate the price with

the respondent Nos. 2,3 and 4 and it would only be in

default of any agreement being reached that a "fair value"

would have to be fixed by the auditors. In the

circumstances the principle that the trustee not directly or

indirectly buying the trust property as contained in Section

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57-A of the 1882 Act would also not have any application

because irrespective of her right as a nominee of Shanta,

the present appellant could undoubtedly have purchased

the shares being in the second category in the hierarchy

of purchasers provided under Articles 57-A to 64.

V. This bring us to the second branch of the appellant's

challenge viz. the issuance of 17,666 equity shares.

V.1 The decision to raise the issued capital of the company

and to allot the shares at par was taken at an Annual

General Meeting held on 16.11.1985. It was resolved at

that meeting to immediately issue increased share capital

of Rs.17,66,600 of 17,666 equity shares of Rs.100/- each

to any person whether a member of the company or not.

It was further resolved that the decision would be ratified

by convening a general body meeting preferably in the

month of January/February, 1986 after giving proper

notice and explanatory statement.

V.2 The notice of the Annual General Meeting was given on

13.10.1985. Although details of ordinary business and

special business were given, there was no indication

whatsoever that there would be any decision taken with

regard to the increase in the issued capital and allotment

of shares in the notice. According to the respondents,

after the notice of the Annual General Meeting had been

issued on 13.10.85, on 5.11.85, the Ministry of Finance

gave notice to the company extending the validity of a

sanction for foreign exchange loan to 30.11.85 and

stating that no further extension would be granted. On

9.11.1985 a letter dated 7.11.1985 was sent to the

company by Modular Finance and Consultancy Private

Limited (the respondent No.12 before us and a member

of Pawar Group) proposing that the share capital of the

company be increased and requesting the issue to be

decided at an ensuing AGM. On 11.11.1985 a letter was

also received by the company from the United Western

Bank advising the company in view of its expansion

programme, to increase its share capital.

V.3 According to the respondents, the increase was by

reason of the urgent need of the Company to purchase

machinery. We are unable to agree. The purchase of

the machinery was in contemplation of the company

from much prior to the date of the notice. The alleged

letter from the Ministry of Finance was not produced

before the High Court and we are not prepared to allow

the same to be brought on record at this stage.

V.3.1 The Division Bench affirmed the finding of the

learned Single Judge that the need to increase the issued

capital from Rs.7,33,400 to Rs.25 lakhs was not

established. Indeed the Division Bench went on to find

that the action of issuing the increased share capital

clearly indicated that the respondent No. 5 and his group

who were in control of the company, had decided to make

a fresh issue of share capital to themselves at par so as

to strengthen their control over the company.

V.4. We have already noticed that Article 93 specifically

provides inter alia that every notice of a meeting of the

Company shall contain a statement of the business to be

transacted thereat and no General Meeting, Annual or

Extraordinary, shall be competent to enter upon, discuss

or transact any business which has not been specifically

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mentioned in the notice or notices upon which it was

convened.

V.4.1 Additionally, in terms of Article 94, the relevant extract

whereof is quoted hereunder:

"94 (a) In the case of an Annual General

Meeting all business to be transacted at the

meeting shall be deemed special except\005..

b) xxx xxx xxx xxx

c) Where any item or business to be

transacted at the meeting is deemed to be

special as aforesaid, there shall be annexed

to the notice of the meeting a statement

setting out all material facts concerning ach

special item of business, including in

particular the nature and extent of the

interest, if any, therein, or every Director,

Secretaries and Treasurers, if any, and the

manager, if any.

V.4.2 The increase in issuance of share capital does

not fall within the exceptions carved out in Article 94

as not being special business. Article 94 reflects the

substance of Section 173 of the Companies Act, 1956

and it was therefore, incumbent for notice to be given

not only indicating the issuance of the share capital as

a special item of business but also giving a statement

setting out all material facts relating thereto. The

violation of this Article by the company is patent and

the Annual General Meeting is to the extent of the

violation vitiated thereby.

V.4.3 In Pacific Coast Coal Mines Ltd. vs. Arbuthnot &

Ors. (1917) AC 607 PC, the Privy Council was of the

opinion;

" that to render the notice a compliance

with the Act under which it was given it

ought to have told the shareholders,

including those who gave proxies, more

than it did. It ought to have put them in

position in which each of them could

have judged for himself whether he

would consent, not only to buying out

the shares of directors, but to releasing

possible claims against them. Now this

is just what it did not do and therefore,

quite apart from the fact that the

meeting was held in half an hour from

the time the Act passed and before the

shareholders could have had a proper

opportunity of learning the particulars of

what the Legislature had authorized,

their Lordships are of opinion that the

notice was bad, and that what was done

was consequently ultra vires". (pg.282)

V.4.4. Again in Baillie vs. Oriental Telephone and Electric

Company Ltd., (1915)1 Ch.D.503 (CA) it was said by

the Court of Appeal;

"\005I feel no difficulty in saying that

special resolutions obtained by means

of a notice which did not substantially

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put the shareholders in the position to

know what they were voting about

cannot be supported, and in so far as

these special resolutions were passed

on the faith and footing of such a notice

the defendants cannot act upon them."

(See also LIC vs. Escorts (1986) 1 SCC 246 at pg.

343] .

V.5.1 The respondents have relied on Article 94 (e) which

says that " the company shall also carry out the

requirements of Section 188 of the Act" to contend that

due notice was given under Article 94 because the

letter of Modular Finance had been forwarded to the

shareholders.

V.5.2. Section 188 provides that a meeting could be

requisitioned by the prescribed number of members,

after notice of any resolution which may properly be

moved and is intended to be moved at a meeting

together with a statement with respect to the matter

referred to in any proposed resolution. Assuming that

Modular Finance's letter was in fact circulated, this

could hardly be termed to be compliance with the

requirement of Section 188 of the Act which deals with

meetings called at the instance of requisitionist and

circulation of a statement by the requisitionist of a

proposed resolution and a statement in support

thereof. Moreover, such a notice in terms of the

proviso of Sub Section 3 of Section 188 is required to

be given "in the same manner and, so far as

practicable, at the same time as notice of the meeting,

and where it is not practicable for it to be served or

given at that time, it shall be served or given as soon

as practicable thereafter". Further it is clear from

Article 94(e) that compliance with Section 188 was in

addition to the requirements with the other parts of

Article 94 which admittedly have not been complied

with.

V.5.3 The Division Bench found that there was no

explanatory statement annexed to the notice and held

that the respondents certainly committed an irregularity in

not mentioning the proposal to increase and allot the

share capital on the agenda of the annual general

meeting. However, it went on to hold that the irregularity

did not vitiate the decision because it could be cured

since the Pawar group already had majority control and

also because the decision had been taken at the annual

general meeting that an extraordinary general meeting

would be called after proper notice to ratify the fresh issue

of 17666 shares at Pawars.

V.5.4 We are unable to accept the reasoning of the

Division Bench. The two grounds which persuaded

them not to interfere with the fresh issue are

questionable . For one, we have already come to the

conclusion that the sale of 3417 and 93 share to the

Pawar Group was bad. The Pawar group did not

legally have the majority to push through the decision

to increase the share capital or to allot the further

shares to themselves. For another, the majority

cannot be permitted to ride rough shod over the

provisions of the Articles and the Companies Act

merely because they could if they so desired follow the

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proper procedure. The haste with which the Pawar

Group sought to ensure their position in the company

is evident from the fact that a Board Meeting was held

immediately after the Annual General Meeting on

16.11.1985 at which the Board resolved to issue the

additional 17,666 shares at par to the Pawar Group.

There was no notice given of the Board meeting at all.

V.6.1 The Respondent Company was bound to offer the

further shares on a fresh issue of capital to the existing

equity share holders in proportion to the capital paid up

on the shares at that date. The Division Bench noted that

this was provided in Section 81 of the Companies Act.

However, because Section 81(3) does not apply to a

private limited company (which the company was at that

stage) and since according to the Division Bench, the

Articles of Association did not require such further issue

of shares to be allotted in any particular manner to the

existing share holders, the allocation of the further issue

to the respondent No. 5 and his group was not illegal or

contrary to law.

V.6.2 As a matter of fact the finding as to the absence of such

a requirement in the Articles of Association of the

Company was erroneous. Increase of share capital is

dealt with in Articles 14 and 15 . Article 15 says:

" Subject to the directions that may be given

by the meeting that sanctions the increase of

capital (i) such new shares shall be offered to

the persons who are at the date of the offer

members of the Company in proportion as

nearly as circumstances admit to the capital

paid up on their shares at that date, (ii) the

offer aforesaid shall be made by notice

specifying the number of shares to which the

member is entitled and limiting a time not less

than fifteen days from the date of the offer,

within which the offer, if not accepted, will be

deemed to have been declined, (iii) after

expiry of the time specified in the notice

aforesaid or on the earlier intimation from the

member to whom such notice is given that he

declines to accept the shares offered, the

Directors may dispose of the same in such

manner as they think most beneficial to the

Company." (emphasis added)

V.6.3 No offer was made by notice in writing in terms of

this Article. The fresh shares were, as we have seen,

allotted on the day they were issued before the expiry of

15 days without waiting for the expiry of the period. The

allocation of shares to the Pawars' group contrary to this

Article was invalid.

V.6.4 No court could possibly object to a decision on

merits provided it is taken in accordance with law. The

decision to issue all the additional shares to the Pawar

Group at par may not by itself have warranted

interference were it not for the manner in which the

entire exercise was undertaken.

V.6.5 During the course of the hearing both before the

Division Bench and before this Court, the respondents

offered to make an allotment of the issued capital to

the appellants to participate prorata in the additional

issuance. The offer did no more than what the

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company's articles required to have been undertaken.

VI Having effectively held in favour of the appellants, the

question finally to be determined is what reliefs can be

granted to them.

Reliefs

VI.1 The respondents contended that the relief of

cancellation of 17,666 shares cannot be granted in a

petition under Section 155 petition as any reduction of

capital must be made strictly in accordance with

Sections 100 to 104 or Section 402 of the Companies

Act.

VI.2. The issue need not detain us as there was no such

prayer made by the appellants. They have asked only

for rectification of the share register by deletion of the

names of the Pawar Grpoup as shareholders in the

company. The learned Single Judge merely directed

the Board of Directors to dispose of the fresh shares,

one can only assume, in accordance with the Articles

of the Company and the Act.

VI.3. Having effectively held on all issues in favour of the

appellant the question remains as to whether we should,

in exercise of our discretion under Section 155, grant the

appellant the relief of rectification of the shares as

claimed. Although the logical conclusion of our findings

would be to set aside the transfers and restore the status

quo ante, the question is should the share register of the

company be directed to be rectified now in respect of

shares, the impugned transfer of which took place more

than 20 years ago? The respondents have submitted in

the course of the hearing that this Court should not in any

event disturb the status quo but should mould the relief by

awarding compensation, if necessary as prayed for by the

appellant. They have referred to the decision in Needle

Industries (India) Ltd. V. Needle Industries (Newey)

India Holding Ltd. 1981 (3) SCC 333 in support of this

submission. We agree. There has been a sea change in

the factual scenario. Shantha has died. The company

has become a public limited company. The respondents

have been at the helm of the company more than, two

decades during the legal struggle. Many decisions must

of necessity have been taken and implemented. The

situation cannot now be unscrambled. It is a course of

action which would make the company disfunctional

harming the interests of the whole body of share holders,

affect company's employees, its creditors and customers.

It is not as if we are able to grant any relief directly to the

appellant except to the extent of setting aside the

transfer. The appellant will still have to pursue her

remedies for effective relief in the two pending suits in the

District Court of Pune in which the appellant has prayed

for specific performance of the contracts for sale of the

shares. The outcome of the suits is uncertain. What is

certain is that whatever the outcome of the litigation it will

be another long round of litigation. Yet another factor to

be borne in mind is that the appellant had her own role to

play in contributing to the situation which she had to face

eventually. Admittedly, Shanta and the appellant

ultimately accepted the Chartered Accountant's report.

As we have noted, no reason whatsoever was given for

the sudden change of attitude. If they could agree

subsequently to pay the price they could have done so

earlier, paid the price and then challenged the value.

Further, the Single Judge also gave the appellant and

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Shanta an opportunity of paying the share price into the

Court within a period of six weeks. Had the appellant and

Shanta done so, they might have been in a stronger

position vis-`-vis- the Pawars in the appeal Court.

VI.4 In these circumstances and weighing in the balance the

comparative advantages and disadvantages of granting

the appellant the relief of rectification, we are of the view

that it would not be appropriate at this stage to exercise

our discretion to grant the relief of rectification. However,

the fact remains that the appellant has been wronged and

she is entitled to be compensated. Section 155 of the

Companies Act, allows the giving of damages in addition

to or in lieu of rectification. In the pending suits, the

appellant has put forward alternative prayers for payment

of compensation of Rs. 3 crores on account of the 3417

shares and Rs. 1 crore for the transfer of the 93 shares in

the event specific performance of the contracts was not

grantable. It was pointed out by some of the respondents'

counsel, without prejudice to their contentions on merits,

that the figure specified in the plaint, though on the higher

side, could form a rough and ready basis to quantify the

compensation. Having due regard to these submissions

and in order to give a quietus to the litigation we are of the

view that the ends of justice would be met by directing

that the appellant should be compensated with an amount

of Rs.3 crores to be paid by the company to the appellant

in full and final settlement of the appellant's claims in

respect of the 3417 and 93 shares. Additionally, the

company will also allot shares to the company out of the

17,666 shares on par proportionate with the appellant's

present share holding. We are told that the appellant is at

present employed by the company and is also a Director

of the company. The appellant shall continue in this

capacity for the appellant's life time.

VI.5. The appeals are accordingly disposed of without any

order as to costs.