Satish Chand Sanwalka And Others v. Tinplate Dealers Association Pvt. Ltd. And Others.

1. In this petition filed under sections 397/398 and 111(4) of the Companies Act, 1956 (“the Act”), in the matter of Tinplate Dealers Association Private Limited, we passed an order on October 30, 1996, incorporating therein the terms of settlement between the parties and disposed of the petition as withdrawn. However, later, respondent No. 9 sought for recalling the order on the ground that even though she was a party to the proceedings, her consent was not obtained and incorporated in the consent terms in our order and that the terms of consent, if implemented, would prejudicially affect her. Having found that the terms of compromise did affect her rights and that she was not a party to the consent terms, we recalled that order and reopened the petition for hearing on the merits.

2. When the petition was taken up for hearing, counsel appearing for the respondents raised certain preliminary issues relating to the maintainability of the petition and counsel for the petitioners also argued as to how the petition was maintainable and according to him even the question about the maintainability cannot be decided without going through the petition. When the arguments on the maintainability were concluded, we formed a prima facie opinion that the preliminary issues could not be decided in isolation of the facts of the case since the issue raised involved a mix of questions of law and facts. In view of this, we recorded an order on July 23, 1997, in the presence of all the parties as follows:

“Arguments concluded on maintainability. The matter on the merits will be heard on November 10, and 11, 1997, at 10.30 a.m each day”.

3. This order was recorded in the presence of counsel and some of the counsel also noted the order by signing the order sheet. At that time, none of the counsel made any prayer that we should issue an order on the maintainability before proceeding with the main petition. Later, it transpired that respondent No. 9 had taken this order on appeal to the Calcutta High Court which has passed an order that we should issue an order on the maintainability before proceeding with the matter. Accordingly, this order is being issued.

4. When the petition was taken up for hearing, Shri Sarkar appearing for respondent No. 9 raised the following preliminary objections relating to the maintainability of the petition.

(i) Petitioners Nos. 4 and 5 were never registered as shareholders of the company and even allotment of shares to petitioners Nos. 1 to 3 was against the provisions of article 5 of the articles of association of the company and as such none could be considered to be a shareholder of the company, thus not qualified to apply under section 397/398 in terms of section 399 of the Act.

(ii) Even assuming that the petitioners were shareholders, since their shares were forfeited due to non-payment of calls, on the date of filing, they were not shareholders of the company.

(iii) Even otherwise since the shares held by the petitioners were partly paid and since certain calls were already made on the shares, which remained unpaid, they are not qualified under section 399.

5. In view of the above objections, Shri Sarkar submitted that the petition should be dismissed in limine and if the petitioners were aggrieved against their removal as members, then they have to seek remedies in different proceedings for restoration of their names in the register of members before coming before the Company Law Board under section 398/399. Elaborating the above point, he submitted that any allotment in contravention of the articles is void and for this proposition he relied on Palmer's Company Law, 24th Edition, page 398. Since, as per article 5 of the company, shares could be allotted only to those who are registered stockholders as appointed by the Iron and Steel Controller and since the petitioners were not registered as such, the allotment of such shares to the petitioners is void. If that is so, then the petitioners have no locus standi to present the petition. Further, he submitted, that, as per section 164 of the Companies Act, the register of members shall be prima facie evidence of their being members of the company and since their names are not in the register of members consequent on forfeiture of the shares, they cannot maintain this petition. As far as forfeiture of the shares is concerned, he submitted that since the petitioners failed to pay the calls, the board had acted in accordance with article 15 of the company, by forfeiting the shares. Relying on the decision of the Gujarat High Court in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel, [1977] 47 Comp Cas 151, he submitted that the petitioner's, if they so desire to maintain the petition, should first get the matter relating to shares resolved in a section 111 petition and then come before the Company Law Board under section 397/398. According to him, the rectification of the register of members or enquiring into whether the shares were forfeited properly, etc., cannot be agitated in a section 397/398 petition. Under these circumstances, he prayed that the petition should be dismissed as not maintainable.

6. Shri Atul Sharma, appearing for respondent No. 1, while adopting the arguments of Shri Sarkar, reiterated that allotment made against the provisions of articles cannot be enforced as decided by the Supreme Court in V.B Rangaraj v. V.B Gopalakrishnan, [1992] 73 Comp Cas 201. He further stated that the shares were forfeited due to an order of attachment passed by a civil court against the shares.

7. Respondent No. 2 who argued in person adopted the arguments of Shri Sarkar as also Shri Kapoor, advocate, appearing for respondent No. 5.

8. Shri Haksar, appearing for the petitioners, submitted that the petitioners were the legal owners of the shares as evident from the share scrips available with them and when the names were illegally removed, that itself is an act of oppression. He submitted that there is variance in the stand taken by the respondents in relation to the forfeiture. On the one hand, it is stated that the shares were forfeited due to non-payment of calls, on the other hand, it is stated that the shares were forfeited due to an attachment order by a civil court. The very fact that the company had not issued any notice to the petitioner before forfeiture of the shares, such forfeiture is irregular. He also stated that even though the articles provided that the shares were to be allotted to those registered with Iron and Steel Controller, yet the said office now stands abolished and such provisions of this article cannot be given effect to. On this proposition, he relied on AIR 1958 SC 638 (sic). He further submitted that whether the petitioners were liable to pay the call money or the original shareholders were liable is a question to be decided which can be done only after going through the petition in full and not at the initial stage. According to him, as decided in Rashmi Seth v. Tillsoil Farms Pvt. Ltd., [1995] 82 Comp Cas 409 (CLB), enquiries regarding rectification can be made in a section 397/398 petition. He also submitted, that, after the shares were forfeited, they were allotted to someone else without notice to the petitioner as contemplated under section 110 of the Companies Act, 1956. He submitted that since the entire issue on the maintainability relates to the shareholding of the petitioner which is one of the main issues in the petition, the same cannot be decided without hearing the petition.

9. We have considered the arguments of counsel. In this petition the petitioners claim to hold collectively among themselves 4,132 ordinary shares. Even though they admit that shares are partly paid, yet according to them, no notice for payment of the balance due on the shares had been received by them. It is the contention of the company that they are not shareholders since the shares had been forfeited and that even otherwise since they have not paid the calls on shares in spite of the notice, they cannot maintain this petition in terms of section 399. Additionally, respondent has also raised an objection that the original allotment of these shares to the petitioners was against the provisions of the articles. To maintain a petition under section 397/398, the pre-condition is that the petitioners should be shareholders and that there are no arrears of calls made on the shares. The petitioners are in possession of the share certificates in their name, thus, establishing that they are members of the company. Normally, shares are cancelled in the case of forfeiture, which has not happened in this case. Further, while the respondent asserts that calls were made, the petitioners deny the same. Another aspect brought out by the respondent is that the allotment of the shares to the petitioners itself is in violation of the articles. While, according to the petitioners, the articles cannot be given effect at all for the reasons already put forth by counsel for the petitioners, there is also a dispute as to whether petitioner No. 5 is a shareholder or not even though we find share certiticates in his name.

10. Section 84 of the Companies Act, reads as follows:

“A certificate, under the common seal of the company, specifying any shares held by any member shall be prima facie evidence of the title of the members to such shares”.

11. In the present case, the petitioners are in possession of the share certificates issued in their name collectively indicating that they are holders of 4,132 partly paid shares. Thus, the first limb of section 399 is prima facie established that they are members of the company, notwithstanding their names having been omitted from the register of members. Even though Shri Sarkar contended that, as per section 164, the register of members is prima facie evidence of matters contained therein, yet, as per section 84, the share certificate is prima facie evidence of title of a shareholder to the shares indicated therein. We are of the view that, in the normal circumstances, the provisions of both the sections can go together, but, when a dispute arises, the prima facie evidence through share certificates under section 84 gets precedence over the prima facie evidence of the register of members under section 164, for the reason that the register of members, being under the control of the company, is susceptible to manipulations.

12. The second limb of section 399 is that there should not be any arrears on calls made on the shares. There is a dispute as to whether any call was made and who is liable to pay on the calls. Further, there is variance in the stand of the company as to why the shares were forfeited. Further, we are not aware, in the absence of details, whether any shares had been allotted at any time to anyone else in violation of article 5, as is contended by the respondents in relation to the shares allotted to the petitioners. Normally, when the maintainability of a petition is questioned in terms of section 399, especially as a preliminary issue, there should be enough material available before us, without having to go through the pleadings in detail to decide the issue. In the present case, the issues like whether the articles had been violated, whether there were calls due and whether the petitioners failed to pay the calls, whether notice of forfeiture was issued to the petitioners, etc., are complicated questions of law and fact requiring a detailed enquiry.

13. Therefore, we are of the firm view that the complicated questions of law and fact cannot be decided at the preliminary stage without going through the pleadings and hearing arguments. Accordingly, the maintainability of the petition will be decided after hearing of the petition and afterwards if we hold that the petitioners do not satisfy the requirements of section 399, we shall pass orders only on the maintainability. In case we hold that the petition is maintainable, then a comprehensive order will be issued both in terms of maintainability as well as on the merits of the case.

14. Since the pleadings are complete, the petition will be heard on April 30, 1998, at 10.30 a.m