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FACTS

With an intention to earn foreign exchange by attracting non-resident individuals of Indian nationality or origin to invest in shares of Indian companies, the Government of India decided to provide incentives to such individuals with prior permission of RBI.

Desiring to take advantage of the Non-Resident Portfolio Investment Scheme and to invest in the shares of Escorts Ltd., (an Indian company), thirteen overseas companies, twelve out of whose shares was owned 100% and the thirteenth out of whose shares was owned 98 per cent by Caparo Group Ltd., designated the Punjab National Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as their broker for the purpose of such investment.

Escorts Ltd. sought detailed information from Punjab National Bank and the brokers about the names of investors and also whether the Reserve Bank of India has given permission to them. And Escorts didn’t register the transfer of share.

Life Insurance Corporation of India who along with other financial institutions held as many as 52% of the total number of shares in the company, issued a requisition dated 11.2.84 to the company to hold an extra ordinary general meeting for the purpose of removing nine of the part-time Directors of the company and for nominating nine others in their place.

Union of India, the Reserve Bank of India and the Caparo Group Ltd. claimed that the requisition to hold the meeting was arbitrary, illegal, ultra vires etc.

ISSUE-

Whether LIC has right of issuing requisition notice to hold extra ordinary general meeting?

 HELD-

1. New directors to continue as Managing Directors until the Board of Directors take a decision in the matter.
2. The action of the Life Insurance Corporation of India in issuing the requisition notice to hold an extra ordinary general meeting of the Escorts Company Ltd. for the purpose of removing nine of the part time Directors of the company and for nominating nine others in their place is neither contrary to the provisions of section 284 of the Companies Act, 1956 nor ultra vires to the powers vested in the Life Insurance Corporation under section 6 of the Life Insurance Corporation of India Act.
3. The holders of the majority of the stock of a Corporation have the power to appoint, by election, Directors of their choice and the power to regulate them by a resolution for their removal. This is the essence of corporate democracy.
4. Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements to call an extra ordinary general meeting in accordance with the provisions of the Companies Act, 1956. He cannot be restrained from calling a meeting and he is not bound to disclose the 918 reasons for the resolution proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review.
5. When a requisition is made by a shareholder calling for a general meeting of the company under the provisions of the companies Act validly to remove a director and appoint another, an injunction cannot be granted by the Court to restrain the holding of a general meeting.
6. When the State or an instrumentality of the State ventures into the corporate world and purchases shares of a company it assumes to itself the ordinary role of a shareholder and dons the robes of a shareholder, with all the rights available to such a shareholder. Therefore, the State as a shareholder should not be expected to state its reasons when it seeks to change the management by a resolution of the company, like any other shareholder.
7. The rights of a share holder are (i) to elect directors and thus to participate in the management through them; (ii) to vote on resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; and (vii) to share in the surplus on winding up.
8. The Reserve Bank of India alone that has to decide whether permission may or may not be granted. The Act makes it its exclusive privilege and function. No other authority is vested with any power nor may it assume to itself the power to decide the question whether permission may or may not be granted or whether it ought or ought not to have been granted. The question may not be permitted to be raised either directly or collaterally before any Court. The Reserve Bank of India was not guilty of any malafides in granting permission to the Caparo Group of companies. Nor was it guilty of non-application of mind.
9. There was a total and signal failure on the part of Punjab National Bank in the discharge of their duties as authorised dealers.

Court asked RBI to look into matter and gave them power to take actions against Punjab National Bank as they think are necessary.

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Facts:

• WPIPL, is a private company partly owned by WPI Group (43.75%), Mr. Viviek Dhir (43.75%)and Mr. Pankaj Patel (12.5%).
• On 22^nd September, the shares of Mr. Pankaj Patel were transferred to Mr. Vivek Dhir and his wife, Mrs. Malini Dhi, who was also appointed as an Additional Director.
• On 31^st October, in the Board Meeting, the Board of Directors of the company passed a resolution approving a rights issue of 1,49,303 equity shares in accordance with the Articles of the company. Mr. Aditya Ahluwalia had not been present for this meeting as he had not been in the country at that time.
• The result of this transfer of shares was that the chairman of WPI Group, Mr. Aditya Ahluwalia was now a minority stakeholder in the company.
• He, therefore, challenge the validity of the board meeting on the grounds of Clause 6.2 of the JVA entered between the Board Members giving an affirmative vote to Mr. Aditya Ahluwalia in all matters.

Issue:

• Whether the provisions of an agreement, that are not inconsistent with the Act, but are also not part of the AoA, can be said to be applicable?

Analysis:

• The legal position is that where the AoA is silent on the existence of an affirmative vote, it will not be possible to hold that a clause in an agreement between the shareholders would be binding without being incorporated in the AoA.
• In the present case, although the JVA was entered into in 1999 itself, there was no move made by Mr. Aditya Ahluwalia or WPIGI to have the AoA amended at any point in time to incorporate the affirmative vote provided to WPIGI under Clause 6.2 of the JVA.

Holding:

• The court held that even a provision in the Shareholders’ Agreement which is not contrary to the Articles of Association or the Companies Act, 1956 cannot be enforced against the company if it is not mentioned in the AoA.

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Articles of Association

Facts: Family consisting of two brothers Baluswamy Naidu and Guruviah Naidu owning a Private company being the sole shareholders of the company, with equal distribution of shares among them. They entered into an oral agreement , that each of the branches of the family would always continue to hold equal number of shares and that if any member in either of the branches wished to sell his shares, he would give the first option of purchase to the members of that branch and only if the offer so made was declined, the shares would be sold to others. There was a restriction on transfer of shares by way of a right of pre-emption which were not stated in the agreement. The restrictions are in the latter event the shares of the deceased member shall be first distributed among the existing members equally and if they are to be transferred to any new member, it would be done so with the consent of the majority of the existing members.

One of the son’s of Baluswamy Naidu sold the shares to sons of Guruviah Naidu . Hence the plaintiffs who are the other son’s of Baluswamy’s filed the present suit for :

(i)         a declaration that the said sale was void and not binding upon the plaintiffs

(ii)        an order directing defendants to transfer the said shares to the plaintiffs

(iii)       a permanent injunction restraining defendants from applying for registering the said shares in their names and from acting adversely to the interests of the plaintiffs on the basis of the transfer of the said shares.

Issue:

 Whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company.

Ratio:

The Articles of Association are the regulations of the company binding on the company and its shareholders and that the shares are a movable property and their transfer is regulated by the Articles of Association of the company.

“Whether under the Companies Act or Transfer of Property Act, the shares are, therefore, transferable like any other movable property. The only restriction on the transfer of the shares of a company is as laid down in its Articles, if any.  A restriction which is not specified in the Articles is, therefore, not binding either on the company or on the shareholders.  The vendee of the shares cannot be denied the registration of the shares purchased by him on a ground other than that stated in Articles.”

Judgement: The Trial Court holds that the sale of the said shares was invalid and not binding on the plaintiffs , and directed the defendants  to transfer the said shares to the plaintiffs, and granted permanent injunction . High Court Reversed the decision by Trial Court and held that

(i)         the sale of the shares by the defendant in favour of other two defendants was valid and the plaintiffs are not entitled to purchase the said shares.

(ii)        the agreement was not binding on the company and the shareholders.

(iii)       the company was not bound in law to register the said shares in the plaintiffs’ names.

The oral agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article. Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member’s right to transfer his shares which are contrary to the agreement. They are, therefore, not binding either on the shareholders or on the company.

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This case is a U.K company law case which concerns its issues relating to the enforceability of a company’s constitution and the nature of the company’s share.

Facts:

• Mr Borland was a shareholder. He turned bankrupt and the company he was working for had a pre-emption rule that upon a shareholder’s bankruptcy, his shares would be transferred to the manager or the directors at the fair value price and not at the current value price.
• The current value price is the current true value of the share which is above par to the fair value price.
• Borland’s trustee argued that the article which was imposed by the company upon a shareholders bankruptcy was invalid and fraud as a shareholder upon turning bankrupt was forced to part his shares at a value below the current value and it went against the bankruptcy laws of the state.
• He requested an injunction against the article of parting shares or share transfer at anything below the current value.
• He argued against Steel Brothers limited on two major grounds. They are
• 1) Absolute Ownership
• 2) Rule Against Perpetuity
• Rule Against Perpetuity – The rule basically says any interests that may be vested in a particular share or property is forbidden in the future. Thus he states that since his shares are transferred to the manager or the director of the company, his future rights are taken away in the share or the property and this is the sole reason he frames his second argument on.

Issues:

• The issue, in this case, was whether the pre-emption rule created by the company relating to a shareholders bankruptcy went against the bankruptcy laws and was eventually void?

Judgment

• The judge, in this case, Farwell J rejected the argument put forward by Borland’s Trustee and held that the article was valid.
• The grounds on which the judge held its decision was that
• 1) The transfer could be made because the contract engendered in the articles of association is always prior to the rights contained in a share or the shareholder.
• Also, he held that this rule was fair and it was a fair agreement for the business of the company. They were binding equally on all shareholders and there was nothing put forward by any other shareholder about such a fraudulent rule of a share transfer and thus nothing against the bankruptcy laws.

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Facts:

• At an Extraordinary General Meeting of the shareholders of the United India Life Assurance Company Ltd., a resolution was passed, among other matters sanctioning a donation of Rs. 2 lakhs from out of the Share.
• On July 1, 1956, the Life Insurance Corporation Act came into force by the provisions of which on the appointed day all the assets and liabilities appertaining to the controlled business of an insurer vested in the Life Insurance Corporation.
• BY s. 15(l)(a) of the Life Insurance Corporation Act power was given to the Corporation to apply to the Tribunal for relief in respect of payments made by the insurers, during the five years preceding the date of vesting, not reasonably necessary for the purpose of the controlled business.
• The Corporation applied to the Tribunal for relief in respect of the payments of Rs. 2 lakhs by the Company to the appellants on the ground that the said payment was ultra vires the powers of the company and was not reasonably necessary for the purpose of the controlled business. The Tribunal ordered the appellants to restore the sum of Rs. 2 lakhs to the Corporation.
• Then a special leave application was filed to the Supreme Court in appeal of the matter decided in the tribunal.

 Issues:

• Whether the plaintiff consented to the subletting of parts of the demised premises and if so, when and to what effect ?

Holding:

• An act of the company is ultra vires, if it is not:
  • Essential for the fulfilment of the objects stated in the Memorandum
  • Incidental or consequential to the attainment of its objects
  • Which the company is authorized to do by the company Act, in course of its business.
  • Where a company does an act which is ultra vires, no legal relationship or effect ensues therefrom. Such an act is absolutely void and cannot be ratified even if all shareholders agree.
  • The bearers of the company who were responsible for passing the resolution ultra vires the company are personally liable to make good, the amount belonging to the company which was unlawfully disbursed in pursuance of the resolution.
  • Section 13 of the Company Act (1956), required to specify the main object of the company and object ancillary to the attainment of the main object.
  • It was held that the Memorandum of Association of a company must be read fairly and its import derived from a reasonable interpretation of the language which its employs. Where a particular act has not been provided for in the Memorandum of Association, the directors cannot seek recourse to the Articles of Association to imply that such business falls within its objects.
  • The Memorandum of Association has to be read with the Articles of Association, where the terms are ambiguous or silent. This process may explain the provisions of the Memorandum itself but cannot extend to the scope.

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Facts:

• In this case the objects set out in the company’s memorandum were “to make and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery and rolling stock; to carry on the business of mechanical engineers and general contractors; to purchase, lease, work and sell mines, minerals, land and buildings; to purchase and sell as merchants, timber, coal, metals, or other materials, and to buy any such materials on commission or as agents.” The Directors of the Company entered into a contract with Riches for financing a construction of a railway line in Belgium. The Contract was ratified by all the members of the company, but later on it was repudiated by the Company. Riche sued the company for the breach of contract.

Issue:

• Whether the contract was valid and if not, whether it could be ratified by the members of the company?

Held:

• The contract was beyond the objects as defined in the objects clause of memorandum and therefore it was void, and
• The Company had no capacity to ratify the Contract.
• The contract of employment with Mr Riche was ultra vires for the words in the objects clause
• ‘to make sell or lend on hire….. all kinds of railway plant …. to carry on the business of  mechanical engineers and general contractors’ DID NOT extend to the construction of an actual railway line.
• An ultra vires act or contract is void because the Company lacks the capacity to make such contract, how can they have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be permitting to do the Act which Parliament is prohibiting to do so.
• The Company incorporated under the Companies Act has power to do only those things which are authorized by its object clause of its memorandum and anything not so authorized (expressly or impliedly) is ultra vires the company and cannot be ratified or made effective even by unanimous agreement of the members.
• The Directors were made personally liable.

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