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A.M.P. Arunachalam Vs. Sri Krishna Tiles and Potteries (Madras) Private Limited and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Reported in(1985)2MLJ506
AppellantA.M.P. Arunachalam
RespondentSri Krishna Tiles and Potteries (Madras) Private Limited and ors.
Cases ReferredHowrah Trading Co. v. Income Tax Commissioner
Excerpt:
.....only recognised what has been provided in section 109. besides, it had enlarged the rights of the legal representatives of the deceased member. further before the legal representatives could finally obtain their entitlement to the membership the board of management might bring a total disaster to the company. it is essential to notice that the company law board took into consideration the relevant materials and ought to have been satisfied that it is a fit case where authority should be granted to the deceased member. it is thus unquestionable that the proceeding under section 398 is to save the company from disaster by virtue of the alleged mismanagement complained of by the petitioner. , the notice of the company's dissolution) may, if satisfied that the company was at the time of the..........petitioner passed away on 9.12.1983 leaving behind the five applicants in this application as his legal representatives. in this application, the applicants claim the relief that they should be brought on record and that they should be permitted to continue the proceedings in the place of the petitioner.2. the application is stoutly resisted on the ground that the cause of action in a petition under section 397 or 398 is personal and does not survive the death of the sole petitioner and that the applicants 2 to 6 are not competent to continue the said proceeding initiated by the deceased. although the petitioner passed away on 9.12.1983, the shares held by him had not been transferred to the applicants, nor have they applied for registration of the shares in their names and.....
Judgment:
ORDER

K. Shanmukham, J.

1. O.P. No. 44 of 1978 came to be instituted by A.M.P. Arunachalam under Sections 397 and 398 of the Companies Act (for short, the Act). As respondents 2 to 5 hold among themselves and their close relatives an over-whelming majority of shares in the 1st respondent-company Sri Krishna Tiles and Potteries (Madras) Private Limited, it was practically impossible for any other shareholders, particularly the petitioner to secure the concurrence of members holding 10% of the issued capital of the company to enable the petitioner to present a petition under Sections 397 and 398 of the Act. He therefore applied to the Company Law Board in terms of Section 399 (4) of the Act seeking an authorisation to pursue the application under Sections 397 and 398 of the Act. The Company Law Board by order dated 13.4.1977 authorised the said petitioner to institute the said proceeding in relation to the 1st respondent-company. The petition was pending for some time. It so happened that the petitioner passed away on 9.12.1983 leaving behind the five applicants in this application as his legal representatives. In this application, the applicants claim the relief that they should be brought on record and that they should be permitted to continue the proceedings in the place of the petitioner.

2. The application is stoutly resisted on the ground that the cause of action in a petition under Section 397 or 398 is personal and does not survive the death of the sole petitioner and that the applicants 2 to 6 are not competent to continue the said proceeding initiated by the deceased. Although the petitioner passed away on 9.12.1983, the shares held by him had not been transferred to the applicants, nor have they applied for registration of the shares in their names and consequently, neither they are members nor have an inherent right to become members. The authorisation granted by the Company Law Board only enabled the deceased to move the Court under Sections 397 and 398 of the Act and that the said authorisation lapsed with the death of the said petitioner. In other words, the proceeding in C.P. No. 44 of 1978 had abated once and for all. The maxim actio personalis moritur cum persona, is attracted to the facts of this case.

3. Thus two points arise for determination viz., (i) whether the applicants are members of the company and (ii) whether the applicants are entitled to continue the proceeding initiated by the deceased.

4. It is convenient to examine both the points together.

5. At the outset, it is necessary to notice Section 41, because Mr. Habibullah Basha, learned Counsel for the respondents was very emphatic in his submission that unless the applicants are members within the meaning of Section 41, they have no locus standi to substitute themselves in the place of the deceased and to continue the said proceeding. Section 41 provides as follows:

Section 41. Definition of 'member' (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company.

Sub-section (1) of Section 41 is confined to the subscribers of the memorandum of the company and therefore, it has to be ruled out of consideration. The plain meaning of Sub-section (2) shows that it relates to a living person, but not to the legal representative of the deceased. For that person should have agreed in writing to become a member of the company and his name should have been entered in the register of members. Thus, I am to reiterate that Section 41 does not visualise a case of the legal representatives of deceased member. After the demise of a member whose name is entered in the register of members, can a notice be issued to him. It is impossible. The entry of the name of the deceased member in the register of members thus loses its efficacy. In other words, the entry in the register has no relevance in ascertaining the rights vis-a-vis the company. Therefore, I am thoroughly convinced that Section 41 does not deal with the rights of the legal representative of the deceased member. So, the resistance based on Section 41 fails.

6. Section 9 of the Act provides:

Section 9. Act to override Memorandum, Articles, etc.- Save as otherwise expressly provided in the Act - (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and

(b) any provisions contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.

Though there is no provision in the Act save Section 109 as to the right accrued to the legal representatives of the deceased member, the articles of association of this company do contain provisions in this behalf. Under the caption 'Transfer and Transmission of Shares' Articles 36 and 45 are placed. Article 44 runs thus:

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

According to this article, the only disability suffered by the legal representatives of the deceased member till their names are registered in the register of members is that they shall not exercise any right conferred by membership in relation to meetings of the company. It further declares that the legal representatives shall not be entitled to the same dividends and other advantages to which they would be entitled if they were the registered holders of the shares. The immediate point is, what does the expression 'other advantages' convey? Learned Counsel for the respondents would submit that it related only to monetary rights and advantages, but would not confer the other rights of the member such as to initiate proceedings under the Act or to continue the proceedings initiated by the deceased member. Further, it is pointed out by the learned Counsel for the respondents that by virtue of Article 43, the Board had the discretion to refuse the transmission of shares. According to the learned Counsel, by virtue of the demise of the deceased member, the shares came to be transmitted to his legal representatives. Such an argument overlooks the import of Article 40 (h) read with Article 43 and also the significance of Article 44 being placed after Article 43. Under Article 40 (h), any shares of a deceased member may be retransferred by his executors or administrators to any of the specified relatives of such deceased member. Such transfer is subject to Article 43. It is relevant to notice that it postulates a case where the executors or the administrators of the deceased member are not registered as members in the register of members. It is in that situation, the Article envisages a case where the executors or administrators of the deceased member are enabled to transfer the shares of the deceased to any of the specified relatives of such deceased member. Though there is a transfer by his executors or administrators, the relatives of such deceased member acquire the right to shares by virtue of the directions of the deceased. It is significant to notice that there is no bar to the executors or administrators of the deceased member transferring the shares to his relatives, notwithstanding that the said executors or administrators are not shown as members in the register of members. It would immediately establish that the Board cannot refuse to recognise the transfer by the executors or administrators if they are not shown as members in the register of members. It would immediately establish that the Board cannot refuse to recognise the transfer by the executors or administrators of the deceased member of the shares to relatives of such deceased member. In other words, the Board of Directors had no discretion at all to refuse the right of the executors or administrators of the deceased member to effect a transfer. On the other hand, the discretion will arise only when after the transfer is made by the executors or administrators of the deceased member, the specified relatives can apply to the Board for registration for effecting the transfer in the register of members. But, that is not the case here. It is apposite at this juncture to notice Section 109 :

Section 109. Transfer by legal representative. A transfer of the share or other interest in a company of a deceased member thereof made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of execution of the instrument of transfer.

Section 109 provides, a transfer of the share or other interest in a company of a deceased member thereof made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of execution of the instrument of transfer. This provision enables the legal representatives to effect a transfer of the shares, although the legal representatives are not themselves members. In other words, for the purpose of effecting a transfer, the legal representatives are deemed to be members of the company. If in the background of Section 109, Article 44 were to be read and understood, it would clearly establish that Article 44 only recognised what has been provided in Section 109. Besides, it had enlarged the rights of the legal representatives of the deceased member. It is needless to state that Articles of a Company are binding the company and its members - See Section 36 of the Act. It is further pertinent to notice that Article 44 does not run counter to any of the provisions in the Act. I have already pointed out that Section 41 does not cover a case where the shares devolve in law on the legal representatives of the deceased member. So too, I have just pointed out that Article 43 is not concerned with a case where the rights of a member devolve on his legal representatives on his demise and that it would only cover a case where there is a transfer by the executors or administrators of the deceased member to any of his specified relatives. Article 43 is confined to a case of transfer, while Article 44 relates to the rights of a member by devolution in law. This will point out that the Board's intervention is limited to a transfer as in Article 43 read with Article 40 but not to a devolution in law visualised in Article 44. The combined force of Section 109 and Article 44 points out indisputably that the legal representatives are deemed to be members of the company notwithstanding that they are not yet registered in the register of members and that the only right that is snapped from them till they were so registered as members in the register of members is that they shall not exercise any right as such members in relation to the meetings of the company as can be exercised by the legal representatives of the deceased member. Thus, I find that the expression 'other advantages' found in Article 44 will embrace all the powers of a member except the right to exercise in relation to the meetings of the company. It would therefore follow that the right to apply to the Court under the Act or to continue the proceeding of the deceased member are therefore made available to the legal representatives of the deceased member under the said Article 44. I will immediately demonstrate as to how the respondents' argument that the Directors had the right to refuse to register the legal representatives of the deceased member as member in the register of members and that under Article 40, they had the right to compel the legal representatives to sell the share to the purchaser named by them, is most untenable. Under Section 109, the legal representatives are entitled to transfer the shares notwithstanding that they are not registered as such members in the register of members. To interpret that such a content is contained in Article 43 read with Article 44 as submitted by the learned Counsel for the respondents, would mean that the Articles are repugnant to Section 109 and therefore void in the teeth of Section 9 of the Act. Thus, in my view, the legal representatives shall be deemed to be members of the company so as to enable them to pursue their remedy under Sections 397 and 398 of the Act.

7. My above approach alone will advance justice. For if the legal representatives were to be denied to exercise their rights as members, any arbitrary refusal by the Board to record them as members in the register of members will necessarily drive the legal representatives to first establish such a right as members and only thereafter would they be enabled to seek remedy under the Act. This Would mean that the Board will be in a position to have as undue advantage over the legal representatives of a deceased member, though there is a prima facie case under Sections 397 and 398 or both. Further before the legal representatives could finally obtain their entitlement to the membership the Board of Management might bring a total disaster to the company. In such a case, the rights of the legal representatives of the deceased member would become frustrated.

8. No doubt, sanction was accorded to the deceased petitioner by the Company Law Board. It seems to me that the contention that the said authorisation lapsed with the death of Mr. Arunachalam cannot be countenanced. Section 399(4) provides:

The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Court under Sections 397 and 398, notwithstanding that the requirements of Clause (a) or Clause (b), as the case may be, of Sub-section (1) are not fulfilled.

It is also necessary to refer to Sections 400 and 401 of the Act:

Section 400. Notice to be given to Central Government of applications under Sections 397 and 398. The Court shall give notice of every application made to it under Sections 397 and 398 to the Central Government and shall take into consideration the representations, if any, made to it by the Government before passing a final order under that section.

Section 401. Right of Central Government to apply under Sections 397 and 398. The Central Government may itself apply to the Court for an order under Section 397 or 398 or cause an application to be made to the Court for such an order by any person authorised by it in this behalf.

It is essential to notice that the Company Law Board took into consideration the relevant materials and ought to have been satisfied that it is a fit case where authority should be granted to the deceased member. Such permission is granted not to foster the individual interest of a member, but to protect the interests of the company at large. As a matter of fact, under Section 401, the Central Government had the right to apply to the Court under Sections 397 and 398 or cause an application to be made to the Court by any person authorised by it in this behalf. Again, Section 400 mandates that notice shall be sent to the Central Government and that the Court shall take into consideration the representations if any made to it by the Central Government before passing any final order on the said petition. The object behind these provisions is to protect the interests of the company at large. Above all, it is equally important to notice that the cause of action to sustain a petition under Section 398 is that the affairs of the company are being conducted or are likely to be conducted in a manner prejudicial to the interests of the company. It is thus unquestionable that the proceeding under Section 398 is to save the company from disaster by virtue of the alleged mismanagement complained of by the petitioner. Can it then be said that the action under Section 398, is 'actio personalis moritur cum persona'. My unhesitating answer is in the negative. The proper approach is not to find out whether a right to sue survives, but whether the legal representatives of the deceased member are entitled to continue the proceeding under the Act. Further, it is relevant to notice that there is no prohibition in the Act or Companies Court Rules for bidding the legal representatives of the deceased member to continue the proceeding initiated by such deceased member. As per Rule 6 of the Companies Court Rules:

Save as provided by the Act or by these rules the practice and procedure of the Court and the provisions of the Code so far as applicable, shall apply to all proceedings under the Act and these rules....

I had already pointed out that neither in the Act nor in the rules, is there any provision as regards the rights of the legal representatives of the deceased member vis-a-vis the company. If so, there is no difficulty in applying Order 22, Rule 10 of the Code of Civil Procedure. According to that provision, in case of devolution of any interest during the pendency of any proceeding such proceeding may by leave of Court be continued by or against the person to or upon whom such interest has come or devolved. The wife of the deceased member had sworn to an affidavit in support of this application. She had asserted that applicants 2 to 6 are the legal representatives of the deceased. Applicants 3 to 6 are sons and daughters of the deceased. The respondents do not dispute such assertion made by the said deponent. Then, I have no hesitation to find that the shares of the deceased member devolved on the applicants.

9. From the foregoing assessment, the application has to be accepted.

10. It may be useful to refer to some of the authorities cited by the Bar. I must at once point out that save the two English decisions, the decisions of High Courts in India had no occasion to consider this question, though there are observations supporting my view. In Bays-water Trading Co. Ltd., In re (1970) 1 All E.R. 608, Buckley, J., held:

On the true construction of Section 353-(6) of the Companies Act, 1948, the personal representative of a member although not on the register of shareholders may present a petition that the company's name be restored to the register, and the words 'any member' in Section 353 (6) must be construed accordingly.

I may refer to Section 353 (6) quoted in the said judgment:

If a company or any member or creditor thereof feels aggrieved by the company having been struck off the register, the Court on an application made by the company or member or creditor before the expiration of twenty years from the publication in the Gazette of the notice aforesaid (i.e., the notice of the company's dissolution) may, if satisfied that the company was at the time of the striking off carrying on business or its operation, or otherwise that it is just that the company be restored to the register, order the name of the company to be restored to the register, and upon an office copy of the order being delivered to the register for registration the company shall be deemed to have continued in existence as if its name had not been struck off ....

In Jermyn Street Turkish Baths Ltd. In re (1970) 3 All E.R. 57, the principle is stated thus:

Even if the petitioners were not registered as members of the company, personal representatives of a deceased member must be regarded as members of the company for the purposes of Section 210.

It is useful to notice that Section 210 is in substance Section 397 of our Act. The decision of the Supreme Court reported in Howrah Trading Co. v. Income Tax Commissioner : [1959]36ITR215(SC) is relied on by both the learned Counsel. While the learned Counsel for the respondents would place reliance on the following, 'has his name registered in the register', learned Counsel for the applicants would quote the following:

That benefit can only go to the person who, both in law and in equity, is to be regarded as the owner of the shares and between whom and the company exists the bond of membership and ownership of a share in the share capital of the company.

Mr. Chellaswamy, learned Counsel for the applicants would submit that in this case, not only the equitable interests but also the legal interest devolved on the applicants and that there exists between the company and the applicants the bond of membership and the ownership in the share capital of the company. In the teeth of Section 109 where the legal representatives of the deceased member are deemed to be members for the purpose of effecting the transfer of shares of the deceased member and in the teeth of Article, 44 discussed by me above, the argument of the learned Counsel for the respondents relying upon the passage 'has his name registered in the register' will hardly be of any assistance to the respondents. In Killick Nixon Ltd. v. flank of India (1982) Tax. L.R. 2547 : (1982) 3 C.L.J. 229, a Division Bench of the Bombay High Court observed that:

In fact some privileges of, the membership have been extended to the legal representatives of a deceased member.

though the question as such did not arise for consideration. Thus, the observations of the Bombay High Court and the dictum laid down by the two English decisions do support my view.

11. In the result, the application succeeds and is ordered with cost of Rs. 500/-


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