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Joseph Michael and anr. Vs. Travancore Rubber and Tea Co. Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKerala High Court
Decided On
Case NumberMFA Nos. 466 of 1982 and 38 to 47, 50 to 56, 66, 67 and 75 to 77 of 1983
Judge
Reported in[1986]59CompCas898(Ker)
ActsCompanies Act, 1956 - Sections 173 and 173(2)
AppellantJoseph Michael and anr.
RespondentTravancore Rubber and Tea Co. Ltd. and anr.
Appellant Advocate Mani J. Meenattoor, Adv.
Respondent Advocate M. Pathrose Mathai, Adv.
DispositionAppeal dismissed
Cases ReferredRamachandra v. Ramalingam
Excerpt:
.....there is no scope for an elaborate enquiry by us, at this distance of time, as to whether the articles of association are void or voidable in a proceeding under section 155, however much enlarged the scope of the enquiry under the said section is now after the amendment of the act in 1960. we have no doubt that in collateral proceedings under section 155, it would not be expedient for the court to enter a finding on such a basic question as to whether the amended or substituted articles are void or voidable, much more so when it has to be borne in mind that the transferor himself not having been entitled to do so in a suit, which would have been clearly barred by limitation, to circumvent the provisions of the limitation act through the backdoor by the transferee approaching the..........hours. '6. the explanatory note itself was in the following terms :'as you know, this is a company registered under the travancore companies act (ix of 1114 me), which has been superseded by the companies act, 1956, which has brought into force far reaching changes in the law relating to companies. further, the existing articles of the company were framed with a view to have the company managed only by managing agents. there are no managing agents at present, and it is desirable to take power in the articles for the management of the company by any type of management permitted under the companies act. it has, therefore, been considered necessary and desirable that the existing articles of association of the company framed under the old travancore companies act (ix of 1114 me).....
Judgment:

Bhaskaran, Actg. C.J.

1. These are appeals under Sub-section (4) of Section 155 of the Companies Act, 1956 ('the Act'), directed against the decision by our learned brother, M.P. Menon J., in C.P. Nos. 8 to 30 of 1980, which were petitions under Section 155 of the Act and Rule 9 of the Companies (Court) Rules, 1959 ('the Rules'), for rectification of the register of members of the first respondent company (the Travancore Rubber and Tea Co. Ltd.) by removing the name of the second respondent in the respective petitions from the register of members in respect of equity shares alleged to have been purchased by the respective petitioner from the second respondent in the respective petitions at the prevailing market rate through brokers and in respect of which, share transfer deeds duly executed by the transferors and the transferees, together with the share certificate relating to the said shares, were forwarded to the registered office of the company for registering the transfers and duly entering the names of the respective petitioners in the register of members of the company as the holders of those shares. It has been averred that the company instead of registering the said transfers of shares and entering the names of the respective petitioners as the owners of the said shares, by its letter dated January 29, 1980, informed the respective petitioners that the transfer applications were considered by the board of directors of the company at its meeting; and that the board has declined to register the transfer of shares in exercise of the powers conferred on the board under Article 24 of the Articles of association of the first respondent company read with Section 111 of the Act; in consequence, the first respondent company returned the share certificates relating to the said shares to the petitioners.

2. Issues Nos. 1 and 2 formulated for trial by the learned judge (issues Nos. 3 to 6 not being relevant for our present purpose) read as follows :

' (1) Are the petitioners competent to challenge the validity of Article 24 (as amended in 1965) of the first respondent-company's Articles of association in these proceedings and

(2) If so, is Article 24 (as amended in 1965) invalid as alleged '

3. The first respondent-company was incorporated under the Travancore Companies Act (IX of 1114 ME). Exhibit A-1 contains the Articles of association of the company as it stood prior to 1965; and regulation 20 thereof was in the following terms :

'20. The directors may refuse to register any transfer of a partly paid share (a) where the company has a lien on the share ; or (b) where it is not proved to their satisfaction that the proposed transferee is a responsible person ; or (c) where the directors are of opinion that the proposed transferee (not being already a member) is not a desirable person to admit to membership, but the directors shall not be bound to state their reason for refusing to register any transfer. Notice of refusal to transfer shall be given to both parties to the deed or application for transfer within two months after the decision of the board of directors is made.'

4. M/s. Aspinwall & Co. (Travancore) Ltd. were originally the managing agents of the company ; and it appears that some time prior to 1965, that arrangement was terminated. This change in regard to the managing agency and the far reaching changes brought about in the company law by the Companies Act, 1956, made the directors think that the Articles of association as a whole had to be recast and replaced by a new set of articles. Accordingly, they gave notice of the following special resolution for the 21st annual general meeting of the company held on June 24, 1965 :

'Resolved that the regulations contained in the printed document submitted to this meeting and for purposes of identification signed by the chairman of the meeting, be and are hereby approved and that such regulations be and are hereby adopted as the Articles of association of the company for and to the exclusion of all existing articles. '

5. The notice also stated :

'An explanatory statement under Section 173 of the Companies Act in respect of the above items of business and a copy of the proposed new set of Articles are attached hereto. Copies of the existing memorandum and Articles of association of the company are available for inspection at the company's registered office during business hours. '

6. The explanatory note itself was in the following terms :

'As you know, this is a company registered under the Travancore Companies Act (IX of 1114 ME), which has been superseded by the Companies Act, 1956, which has brought into force far reaching changes in the law relating to companies. Further, the existing Articles of the company were framed with a view to have the company managed only by managing agents. There are no managing agents at present, and it is desirable to take power in the Articles for the management of the company by any type of management permitted under the Companies Act. It has, therefore, been considered necessary and desirable that the existing Articles of association of the company framed under the old Travancore Companies Act (IX of 1114 ME) should be amended to make suitable provisions for the aforesaid purposes.

In view of the large number of amendments required, it has been considered more convenient to frame a completely new set of Articles and to adopt the same in substitution for and to the exclusion of the existing articles. Under the Companies Act, 1956, Articles can be altered by special resolution. The special resolution notified is for the purpose of approving and adopting the new articles. '

7. The annual general meeting passed the resolution and adopted the new set of Articles with some modifications; and exhibit A-4 contains these articles. Regulation 24 in exhibit A-4 reads as follows :

'The board may, in their absolute discretion and without assigning any reason, decline to register :

(a) the transfer of a share to a person of whom they do not approve; or

(b) any transfer of shares on which the company has a lien. '

8. The substantial difference between old regulation 20 and new regulation 24 is that whereas under the former, the directors could have refused transfers only in respect of partly paid shares, under the new regulation 24 they could refuse transfers of fully paid shares also. The petitioners are transferees of fully paid shares and, therefore, if the amendments made in 1965 were to be held invalid and inoperative, the refusal on the part of directors to register the transfer of shares in these cases could not obviously be justified. The only ground raised in the petitions against the validity of the amendments is that the explanatory statement under Section 173(2) to the notice of the special resolution for the 21st annual general meeting of the company held on June 24, 1965, at which the new regulations are stated to have been considered and adopted, fell short of the statutory requirements. Our learned brother, M.P. Menon J., dealt with the explanatory statement under Section 173(2) at some length without, however, deciding issue No. 2 touching the validity of Article 24 in exhibit A-4. In the light of the decision on issue No. 1, that the petitioners were not competent to challenge the validity of Article 24 in exhibit A-4 Articles of association in the proceedings before the company court, the company petitions were dismissed by a combined order challenged in these appeals.

9. Section 31 of the Act permits a company, by special resolution, to alter its Articles of association subject to the provisions of the Act and the conditions contained in the memorandum. Section 36 provides :

'36. Effect of memorandum and articles.--(1) Subject to the provisions of this Act, the memorandum and Articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, andcontained covenants on its and his part, to observe all the provisions of the memorandum and of the articles.'

10. Sub-section (2) of Section 189 of the Act is to the following effect:

' (2) A resolution shall be a special resolution when-

(a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution ;

(b) the notice required under this Act has been duly given of the general meeting; and

(c) the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting. '

11. In our view, the dismissal of the company petitions, which has given rise to these appeals, on the basis of the decision on Issue No. 1 that the petitioners (appellants) were not competent to question the validity of regulation 24 of the new regulations (A-4 Articles of association) could not be assailed on the ground that regulation 24 is null and void. '

12. Gore-Browne in his Handbook on Joint Stock Companies, 41st edition, at page 51, has stated as follows :

' Even when Articles have not been formally altered, the court may have regard to a long course of practice, and recognise as valid Articles which have been used for many years, although not regularly adopted, and may also act upon a distribution of assets not in strict accordance with Articles if there has been a general adoption of the method of distributing. Moreover, where an article is one which the company has power to adopt, the fact that there has been a defect in the procedure of its adoption will not prevent a person dealing with the company on the faith of the article from insisting that it shall be treated as binding on the company, and the company can equally insist upon such article where it has been made the basis of a contract with a stranger.

The court will not at the instance of the company rectify mistakes in the articles. Even where rectification is sought by one or more of the signatories of the articles, and it is proved that the Articles do not give effect to the agreement between them, the court has no jurisdiction to order rectification.'

13. It is true, as held by the Gujarat High Court in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas777, Section 173 enacts a provision which is mandatory, not directory. Subsection (2) of Section 173 of the Act reads as follows :

' Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. '

14. Whether the statement annexed to the notice of the meeting contains full and frank disclosure of the material facts concerning each item of business must essentially depend upon the facts of each case. The learned judge, though it might not have been strictly necessary in view of the decision taken under issue No. 1, pointed out some of the defects noticed in the explanatory statement under Section 173(2) of the Act, which might lead to a conclusion that it could not be said that there was a full and fair disclosure of all the full material facts concerning various items of business to be transacted in the annual general meeting. Apart from the fact that if, as correctly pointed out by the learned judge, the petitioner was not entitled to question the validity of regulation 24 of the Articles of association (as amended in 1965), there was no purpose in conducting a postmortem on the process of amendment which took place in 1965. The learned judge has guardedly refrained from entering a definite finding on issue No. 2. We are not also persuaded to hold that the Articles of association registered with the Registrar of Companies in 1965, substituting the earlier Articles of association are ex facie void. A very minor defect arising out of strict non-confirmity with the provisions contained in Section 173(2) might not render the amendment null and void. In any event, in our opinion, there is no scope for an elaborate enquiry by us, at this distance of time, as to whether the Articles of association are void or voidable in a proceeding under Section 155, however much enlarged the scope of the enquiry under the said section is now after the amendment of the Act in 1960. We have no doubt that in collateral proceedings under Section 155, it would not be expedient for the court to enter a finding on such a basic question as to whether the amended or substituted Articles are void or voidable, much more so when it has to be borne in mind that the transferor himself not having been entitled to do so in a suit, which would have been clearly barred by limitation, to circumvent the provisions of the Limitation Act through the backdoor by the transferee approaching the company court under Section 155, when he is told that the Articles by which the transferor was bound, authorised the board of directors to decline to register the transfer. Section 155 of the Act, provides as follows:

' 155. Power of court to rectify register of members.--(1) If--(a) the name of any person-

(i) is without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register, is, without sufficient cause, omitted therefrom; or

(iii) default is made, or unnecessary delay takes place, in entering on the register the fact that any person having become, or ceased to be a member; the person aggrieved, or any member of the company or the company, may apply to the court for rectification of the register.

(2) the court may either reject the application or order rectification of the register; and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved.

In either case, the court in its discretion may make such order as to costs as it thinks fit.

(3) On an application under this section, the court-

(a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members, or alleged members, or between members or alleged members on the one hand and the company on the other hand ; and

(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.'

15. We do not think it expedient or necessary for the company court on an application made by a person, who is said to have purchased shares in 1979, to decide whether an amendment to the Articles of association made as early as in the year 1965 was void or voidable, particularly in the light of the fact that the amended provisions were binding on the shareholders from whom he purchased the shares. Be that as it may, regulation 24 is one of the regulations in the Articles of association registered with the Registrar of Companies, which is binding on the company and the shareholders ; and it authorises the directors to decline to register the transfer of shares without assigning any reason whatsoever. The scope of the question to be decided in an enquiry under Section 155 of the Act at the instance of a transferee of shares, in our opinion, would not extend to the scrutiny of matters which could not have been agitated by the transferor of the shares in a suit on account of limitation. The scope of the enquiry under Section 155 has to be understood from the nature of the relief that the applicant could expect from the various clauses in Sub-section (1) of Section 155.

16. It is not disputed before us that the owners of the shares, from whom the petitioners purchased the shares, had they continued to be the owners of the shares, without the transfer taking effect, would not have had the right to challenge the validity of the new regulations (exhibit A-4, Articles of association) in a suit, as it would have became hopelessly barred by limitation on the date of the filing of the company petitions. If that be the position with respect to the right of the transferor of the shares, it would not be reasonable to hold that the transferee of the shares from such a shareholder would have had a better right to challenge the validity of the amendment when that right was not available to the transferor by the operation of law, namely, the law of limitation.

17. If a person in whose name the shares stood in 1965, at the time of the amendment to the Articles of association, comes to court, it is quite possible that he would have been confronted with such questions as to whether he had not participated in the deliberations at the annual general meeting which adopted the amendment to the concerned regulation, and whether he had then raised any objection to the proceedings on account of the failure to comply with the provisions of Section 173(2) of the Act, in so far as it related to the explanatory statement to be annexed to the notice. It might have been also possible for the company to contend for the position that, even if there was no full and fair disclosure of the impact of the amendment proposed on the company and the shareholders, the shareholder had participated at the deliberations of the annual general meeting and he having raised no objection to the resolution being carried, he had waived his right with respect to the strict formalities under Section 173(2) of the Act.

18. Strong reliance was placed by the counsel for the appellant-petitioners on the decision of the Bombay High Court in Maneckji's case, AIR 1931 Bom 354. Having gone through the facts of the case, we do not think the observations contained in that decision could be applied to the facts of the present case. That was a case in which a company was incorporated in 1876 and its Articles of association which were then registered having become out of date, the directors desired to substitute them with a new set of up-to-date articles. At the same time, the managing agents of the company, who had acted as such for 50 years without any agreement, desired to have an agreement with the company, fixing the duration of the agency and defining their powers. The directors convened an extraordinary general meeting of the shareholders to pass the necessary resolutions for carrying out the said purpose. The notice convening the meeting set out necessaryresolutions and was accompanied by a circular, but sufficient particulars regarding important changes to be effected were not set out. The resolutions were passed and confirmed. In a suit by a shareholder suing on behalf of himself and other shareholders for a declaration that the resolutions were inoperative on the ground of insufficiency of notice and for injunction, the court held that the notice should have given sufficiently fully and frank disclosures of the facts and the effect of the resolutions arid agreement, and consequently, the resolutions were inoperative and not binding upon the company.

19. Reliance was also placed on the decision of the Calcutta High Court in Bimal Singh v. Muir Mills Co. [1952] 32 Comp Cas 248 Cal. That was a case in which there was no disclosure of particulars of the proposed changes in the Articles of association. Inasmuch as a notice of a proposed meeting of a company at Kanpur for adopting certain new 'articles of association in substitution for and to the exclusion of all existing articles', and for the appointment of managing agents were merely accompanied by a circular stating that copies of the proposed new Articles and of the managing agency agreement were available for inspection at the office, certain shareholders who received the notice at Calcutta applied to the High Court at Calcutta, to set aside the resolutions made pursuant to the notice alleging that they did not attend the meeting being misled by the notice that no radical change would be made. On the facts and circumstances stated above, the High Court held that the notice did not disclose fully and frankly the facts upon which the shareholders were asked to vote and deliberately withheld material facts from the knowledge of the shareholders. It was really a tricky notice of concealing the real object and amplitude of the amendments for adopting new Articles of association in substitution and to the exclusion of the existing articles. This decision also is not applicable to the facts of the case. Further, it has to be noticed that, as in the case of the Maneckji's case, AIR 1931 Bom 354, in this case also, the decision was rendered in a suit, not in proceedings before the company court in a proceeding under Section 155 of the Act.

20. Another decision cited on behalf of the appellants-petitioners was the one in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1 (SC). This decision too, in our view, does not advance the case of the appellant-petitioners. That decision was rendered in an appeal against the order of the Company Law Board. In the last paragraph, at page 6 of the report, it is stated as follows :

' If the Articles permit the directors to decline to register transfer of shares without stating the reasons, the court would not draw unfavourable inferences against the directors because they did not give reasons. Inother words, the court will assume that the directors acted reasonably and bona fide and those who allege to the contrary would have to prove and establish the same by evidence.'

21. In this case, it is not the case of the appellants-petitioners that the directors while declining to register the transfer of shares had given any reasons which they were able to establish by evidence as being made without reasonableness and bona fides.

22. The decision in Shaligram Jhajharia v. National Co. Ltd. [1965] 35 Comp Cas 706, Maharaj Singh v. Vulcan Insurance Co. Ltd, [1973] 43 Comp Cas 177 and Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1978] 48 Comp Cas 438 also have been cited, in support of the contentions put forward by the appellant-petitioners. It is true that all these decisions reiterated the principles laid down by the Bombay High Court in Maneckji's case, AIR 1931 Bom 354. , However, it has to be remembered that the question as to whether there was a full, fair, complete and frank disclosure in the explanatory statement annexed to the notice or whether the notice is a tricky notice would depend upon the facts and circumstances disclosed in each case. The facts of the present case could not be compared to those in the cases referred to above. The decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1978] 48 Comp Cas 438, has been cited to contend for the position that the jurisdiction of the company court under Section 155 of the Act is analogous to that of a civil court in a suit. The learned judge has taken note of the expanded scope of the enquiry under Section 155 of the Act before the company court. Even then, the finding by the learned judge was that in the present case, it was not necessary or expedient to enter a finding on Issue No. 2 for reasons already stated.

23. These appeals have been filed under Sub-section (4) of Section 155 of the Act. That sub-section provides as follows:

' 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 grounds mentioned in Section 100 of the Code of Civil Procedure, 1908 ;

(a) if the order be passed by a District Court, to the High Court;

(b) if the order be passed by a single judge of a High Court consisting of three or more judges, to a Bench of that High Court.'

24. The scope of the appeal, therefore, is analogous to that of a second appeal under Section 100 of the Code of Civil Procedure. It is well established that a finding of fact recorded by a court of first appeal could be reversed by the High Court in second appeal only if it finds that it is vitiated by substantial error or defect in procedure or if it is not supported by any evidence or in other words it is not based on a material defect or Sub-stantial error within the meaning of Section 100(1)(c) of the Code, as laid down by the Supreme Court in Ramachandra v. Ramalingam, AIR 1963 SC 302. In the light of the dictum laid down by the Supreme Court in the above case, it could be seen that no case for interference with the decision of our learned brother, M. P. Menon J., has been made out.

25. It has also to be borne in mind that an order, although void in law, remains for many purposes effective and operative until it is challenged and its invalidity is declared by a competent body or court. In the present case, if the shareholder felt aggrieved by the substitution of the Articles in 1965, it was open to him to get the amendment declared null and void in appropriate proceedings at the appropriate stage. It is not open to him or the transferee to ignore the amendment which was registered before the competent authority, namely, the Registrar of Companies, solely on the ground that the amendment was according to him null and void, or to resist all consequences flowing from it. As pointed out by H.W.R. Wade in his Administrative Law, 5th edition, at page 299 :

' The correct conclusion is probably that there can be no hard and fast rule for determining when the court may or may not allow collateral challenge. In some situations, it will be suitable and in others, it will be unsuitable, and no classification of the cases is likely to prove exhaustive.'

26. The same author has also stated that a void order when quashed is deprived of all legal effect right from its inception, whereas a voidable order remains valid even when it is quashed for the period of its operation. The distinction between the jurisdictional error and errors within jurisdiction also has to be borne in mind.

27. For about twenty years, several transactions might have taken place on the basis of Ext. A-4 Articles of association, and at this distance of time, if we declare that Ext. A-4 Articles of association, with particular reference to regulation 24, are null and void, the result would be that all the transactions entered into by and with the company would be rendered ineffective and unenforceable in law. Viewed from this angle also, it is not expedient or necessary for the company court to enter a rinding on issue No. 2.

28. For the foregoing reasons, we find that the appeals are without merit, and, therefore, they are dismissed, however, in the circumstances of the case, without any order as to costs.

29. Immediately, after the judgment was pronounced, the counsel for the appellants made an oral request for leave to appeal to the Supreme Court. We do not consider that this matter involves any substantial question of general importance which in our opinion requires to be settled by the Supreme Court and hence the leave requested for is declined.


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