Topic: Kinetic Engineering Ltd. v. Sadhana Gadia
Company Law Board - Kinetic Engineering Ltd. vs Sadhana Gadia And Ors. on 14 October, 1991 - Bench: S Upasani, C Mehta
1. This matter arises out of four references filed by Kinetic Engineering Limited (hereinafter referred to as "the company") in pursuance of the provisions of Clause (c) of Sub-section (4) of Section 22A of the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as "the SCR Act"), seeking confirmation by this Bench in regard to the opinion formed by the board of directors of the company in its meeting held on April 14, 1989, to refuse the registration of transfer of shares in favour of various transferees as detailed in annexure "A". Since a common question of law is involved, all the above four references are being disposed of by this common order.
2. Mr. Rakeshkumar Malani, Mrs. Shashi Malani, Mr. Damodar Prasad Malani and Mrs. Manju Malani are holders of 50 equity shares of the company and, out of the said 50 shares, eight equity shares are proposed to be transferred to the various transferees as mentioned in annexure "A". The board noted that the transferees in the above group are not holding any shares at present. The board, after having considered the matter in detail, came to the conclusion that acceptance of an application for transfer of less than 50 equity shares of the company, unless it is covered by one of the exceptions mentioned in Article 47A of the articles of association of the company, is not in the interest of the company as the cost of service to such shareholder would far exceed the amount of dividend payable on such shares and such costs are disproportionate to the face value and the present market value of the shares. The board also viewed that such transfers are also not in the interest of the investor as it would create odd lots for which the market quotations are less than the normal quotations and hence such transfers are also not in the bona fide interest of the investors and appears to be with ulterior motive. The board also noted that the Government and stock exchanges have prescribed a minimum lot of 50 equity shares for shares having a face value of Rs. 10 each ; in refusing such transfers, the balance of convenience is in favour of the company. The board also noted that the provisions of Section 36 of the Companies Act, 1956, according to which the articles constitute an agreement between the members and the company and the provisions of the same are binding on the transferees of shares also. The board of directors having considered all the above facts formed an opinion in good faith that the approval of the board would be contrary to the provisions of Article 47A of the articles of association ; and hence contrary to law and, accordingly, decided to refuse the transfer.
3. Respondent No. 1, in her written submissions, has submitted that the securities were lodged with the petitioner-company on January 27, 1989, which have been duly received by the company on February 1, 1989, and the company ought to have filed the reference under Section 22A(4)(c) on or before April 1, 1989 ; whereas the company has filed the reference only on May 15, 1989, which is after a period of about three and half months from the date of lodgment of the securities and the same is much beyond the period of two months prescribed in Section 22A(4) of thfr SCR Act and hence the petition should be rejected by this Bench as not maintainable and as time-barred. It is further submitted that the transfer of securities is not in contravention of any of the provisions of law though the company ought to have complied with the provisions of the listing agreement executed by it with the Stock Exchange, Bombay, and transfer effected within one month of the date of its lodgment. It is further submitted that the petitioner-company has amended its articles without the prior approval of the stock exchange and hence the altered Article 47A in contravention of the said agreement, is void ab initio. The definition of "member" under the Companies Act, 1956, does not require that each member should hold a certain minimum number of shares nor does the said Act prohibit any person from holding one or more shares which are less than market lot. It is further submitted that the transactions for spot delivery could be entered into without the assistance of the members of stock exchange and hence even if the rules, regulations and byelaws provide for any number as market lot, the same will not apply to any such transactions. The securities are goods, as defined in the Sale of Goods Act and are, therefore, movable properties. It is the fundamental right of every citizen of India to deal with movable property as he wishes. It is further submitted that the costs incurred in servicing the shareholders are insignificant when compared with the total revenue of the company. As to what is in the interest of the investors, the investor himself is the best judge and not the board of directors.
4. Respondent No. 4 in his written submissions has pointed out that a listed company cannot refuse transfer of shares even if it is below the specified limit prescribed under the articles of association in violation of the stock exchange listing requirements, according to the pronouncement of various stock exchanges in similar cases. It is further represented that as per the order passed by the Bombay High Court in A.C. Shah v. Stock Exchange (O. O. C. J. Appeal No. 914 of 1985 in W. P. No. 1723 of 1985), it was held that the resolution passed by the company lays down restrictions on trading units and not on transfer of shares.
5. Mr. A.R. Amin, advocate and partner of Kanga and Co., advocates, solicitors and notary, accompanied by Shri T.N. Subramanian and R. Vaidya, advocates along with Shri R. Loonker, secretary of the company, appeared on behalf of the petitioner-company and brought to the notice of the Bench the provisions of Article 47A of the articles of association of the company which reads as under :
"47A. The directors shall not accept an application for transfer of less than 50 equity shares of the company provided, however, that this condition shall not apply to--
(i) The transfer of equity shares made in pursuance of any statutory provisions or an order of the court of law ;
(ii) The transfer of the entire equity shares by a shareholder holding less than 50 equity shares by a single transfer to a single or joint names;
(iii) The transfer of equity shares of shareholders holding less than 50 shares to one or more transferees, whose holding in the company will not be less than 50 shares each after the said transfer."
6. During the course of hearing, Mr. Amin submitted that the constitutional validity of the provisions of Section 22A of the SCR Act has already been challenged by way of Writ Petition No. 484 of 1990 in the case of Bajaj Tempo Ltd. and as such it would be more appropriate that the court's verdict on the subject-matter may be awaited. It was pointed out to him that since there is no specific provision under the rules to keep aside the case or stay the proceedings till the outcome of the case pending before the court, the matter should be proceeded with accordingly. Mr. Amin clarified that the shares which were lodged on February 1, 1989, were duly returned to the transferees on February 24, 1989, pointing out the provisions of Article 47A of the articles of association and the same were relodged on March 11, 1989, and the same were duly considered in the Board meeting held on April 14, 1989, and reference was duly filed on May 15, 1989, before the Company Law Board.
7. Mr. Amin further argued that, in terms of Section 36 of the Companies 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, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles. He emphasized that in view of the specific provisions under the Companies Act, the provisions of the articles of association are binding on all its members and as such the company has rightly refused the transfer and registration of shares which put restriction for transfer of shares below, but for the circumstances indicated in the article itself. He further argued that, under Article 13(3)(a) of the Constitution of India, "law" includes any Ordinance, Order, bye law, rule, regulation, notification, custom or usage having in the territory of India the force of law. According to Mr. Amin, the articles of association which is an agreement between the company and its members is a contract and is binding on all the parties concerned which relates to regulation of the affairs of the company and, therefore, in terms of the aforesaid Article 13(3)(a) of the Constitution of India, the articles of association would assume the force of law and would be binding on all concerned parties. He further argued that, accordingly, the petitioner company's case is covered under Clause (b) of Sub-section (3) of Section 22A of the SCR Act namely "that the transfer of the security is in contravention of any law". He further submitted that the transfer of shares is for mala fide purpose and not for bona fide investment. He further argued that, having considered all the facts and circumstances of the case, the board of directors of the company, in the interest of the company and its members, have rightly formed an opinion in good faith that such transfer ought to be refused on the grounds mentioned in Clause (b) of Sub-section (3) of Section 22A of the SCR Act and submitted that the board's opinion formed in good faith and in accordance with law should be confirmed.
8. Mr. Kishore Nagda, company secretary, appearing for respondent No. 1, while reiterating the written submissions referred to earlier, argued that the provisions of Section 22A of the SCR Act which provides for free transferability and registration of transfers of listed securities of companies would override the provisions of articles of association of the company. Any provision which is contrary to such provisions is not binding on the company or its members and, accordingly, submitted that there is no force in the contentions puts forth by the company that all the shares to be traded on stock exchanges should be in marketable lots and the articles of association which put reasonable restrictions on the transfer of shares is not violative of the provisions of Section 22A of the SCR Act. He concluded his arguments stating that the shares ought to have been transferred in favour of transferees and the Company Law Board should issue directions to the petitioner-company to register the impugned shares.
9. The question for consideration is whether the articles of association can have the force of law within the meaning of Article 13(3)(a) of the Constitution of India and would give power to the board of directors of the company to refuse the transfer of shares irrespective of the specific provisions of Section 22A of the SCR Act regarding free transferability and registration of shares or securities. The provisions of the articles are binding on the company with reference to members and vice versa to the extent they have signed the contract. But the question arises whether any provision in the articles which is violative of the provisions of any statute can be enforced. Every incorporated company has its own memorandum and articles of association. The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. These are the conditions introduced for the benefit of the creditors, and the outside public, as well as of the shareholders. The articles are for the internal regulations of the company. Articles cannot alter or vary that which would be the result of the memorandum standing alone. The memorandum must prevail where its object is clear and the articles should not be so construed as to nullify a provision in the memorandum. Bye-laws of a company are framed in order to carry out the provisions contained in the articles of association themselves. Bye-laws are subordinate to the articles of association and the articles of association are subordinate to the memorandum. Memorandum and articles of association are statutory terms of a contract governing the relationship between the company and the shareholders. Articles of association are not only a contract between the company and its members but they also constitute a contract between the members to regulate their rights inter se. However, this does not mean that either the articles of association or the memorandum have the force of law and will be binding on every member of the society. Articles of association are essential for internal management of the company and the memorandum defines the powers of the company as well as those of the directors. In view of this, it is very clear that if any provision of the articles or the memorandum is contrary to any provisions of any law, it will be invalid ab initio. Moreover, in Co-operative. Central Bank Ltd. v. Additional Industrial Tribunal  40 Comp Cas 206 ; AIR 1970 SC 245, it has been held that bye-laws that can be framed by co-operative societies, under the Co-operative Societies Act are similar in nature to the articles of association of a company incorporated under the Companies Act and such articles of association have never been held to have force of law or statute. Thus, we do not accept the contention of learned advocate that the articles of association can be treated on par with the provisions of the law and the company was right in rejecting the registration of transfer of shares on the basis of provisions in the articles of association though they were contrary to the provisions applicable to listed companies under Section 22A of the Securities Contracts (Regulation) Act. Section 22A of the SCR Act provides for free transferability and registration of the shares or the listed securities of companies and the board of directors can refuse registration of transfer of shares only on any of the three grounds enumerated in Clauses (b), (c) and (d) of Sub-section (3) of Section 22A of SCR Act. The petitioner-company's case is that since transfer of less than 50 shares under circumstances other than those enumerated in Article 47A of the articles of association is prohibited, the board of directors have rightly refused the registration of transfer of shares. Since there is a specific provision which seeks free transferability and registration of transfers of listed securities, according to us any provisions which puts any restriction on the free transferability of shares would be a negation of the expressed provisions of law and would be self-defeating.
10. In view of the foregoing, we hereby direct pursuant to the provisions of Sub-section (7)(a) of Section 22A of the SCR Act, that the transfer of shares involved in these four references, which are the subject-matter of this order, shall be registered by Kinetic Engineering Limited within ten days from the date of receipt of this order.
11. No orders as to costs.