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1999 DIGILAW 528 (KAR)

M. RATNAVARMA PADIVAL v. KARNATAKA THEATRES LTD.

1999-10-01

M.F.SALDANHA

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M. F. SALDANHA, J. ( 1 ) THE petitioner is a shareholder of respondent No. 1 company namely the Karnataka Theatres ltd. The dispute raised in this petition is within a very narrow ambit in so far as the petitioner contends that he had obtained an overdraft facility from the South Indian Bank Ltd. , Mangalore, in the year 1976 and that as a security for the overdraft, the petitioner had transferred 360 equity shares belonging to the petitioner in respondent No. 1 company to the bank and the company had registered the transfer on March 21, 1976 and entered the name of the third respondent in the register of members of the company. In January, 1987, the third respondent released the security of 360 equity shares in the company and executed three instruments of transfer dated January 14, 1987, transferring the 360 shares in favour of the petitioner. The petitioner lodged with respondent No. 1 company the three instruments of transfer dated January 14, 1987, accompanied by the eighteen share certificates on January 15, 1987, along with the petitioner's letter of the same date together with a cheque for Rs. 6 on account of the transfer fees. By letter dated March 16, 1987, the company refused to transfer the 360 equity shares in the name of the petitioner and the reason given by the company for such refusal was based on the legal advice obtained by the company dated March 6, 1987. The ground on which the transfer was refused was that the petitioner already holds 500 shares and that therefore, he cannot hold another 360 shares. The legal opinion was based on Article 15 of the company's articles of association whereunder no member whether singly or jointly shall at any time hold shares exceeding in the aggregate one-tenth of the total number or value of shares then issued by the company. The legal opinion stated that the total number of shares of the company including forfeited shares disposed of by the company is 5016 which means that no member can hold more than 501 shares. Article 15 of the company's articles of association is extracted below : "no member whether singly or jointly shall at any time hold shares exceeding in the aggregate one-tenth of the total number or value of shares then issued by the company. Article 15 of the company's articles of association is extracted below : "no member whether singly or jointly shall at any time hold shares exceeding in the aggregate one-tenth of the total number or value of shares then issued by the company. If any shareholder should chance to hold shares above the aforesaid aggregate the excess shall not be counted for purposes of voting. " ( 2 ) THROUGH the present petition, the petitioner has challenged the action namely refusal to transfer 360 shares and I need to mention that this is a petition under the Companies Act and the only relief that is asked for is that the register of members be rectified by entering the name of the petitioner as holder of the 360 shares in question. I am referring to this aspect of the case because the relief asked for is extremely limited in so far as only corrective action has been prayed for. There are averments in the petition that Article 15 is untenable and not valid in law but, there is no relief asked for from this court by way of either a declaration that the article is bad in law or that it should be struck down. Furthermore, the prayer clause itself is restrictive in so far as the only relief prayed for is what has been reproduced by me above but I shall take a charitable and a broad view of prayer (a) in so far as I shall assume that the relief asked for is that the shares should be transferred to the petitioner's name as otherwise, there can be no question of entering the name of the petitioner in the register of members as holder of 360 shares. I have pointed out this aspect of the case because it narrows down the controversy immensely in so far as the short question which the court will have to look into is as to whether the relief can be granted assuming Article 15 continues to form part and parcel of the memorandum and articles of association of the company. I have pointed out this aspect of the case because it narrows down the controversy immensely in so far as the short question which the court will have to look into is as to whether the relief can be granted assuming Article 15 continues to form part and parcel of the memorandum and articles of association of the company. ( 3 ) THE petitioner's learned counsel submitted that the action of the company is defenceless and he relied on an earlier decision of this court reported in the case of Karnataka Theatres Ltd. v. S. Venkatesan [1998] 93 Comp Cas 433, which is an earlier proceeding between the same parties wherein this court upheld the contention that if the action is essentially wrong a legal opinion is no defence. Secondly, learned counsel submitted before me that the respondents' submission that the alternate remedy be availed of by way of an appeal to the Government is also unnecessary because the option is left with the petitioner and that even the head of delay and laches is not sustainable again in view of the observations contained in the aforesaid judgment. There can be no two opinions about the fact that the present petition is very much maintainable and furthermore that in the light of the aforesaid decision, all that this court is required to consider is as to whether in the light of Article 15 this court can direct the transfer to be effected or not. Learned counsel submitted that in view of the ratio laid down in Lallan Prasad v. Rahmat Ali, AIR1967 SC 1322 , [1967 ]2 SCR233 and Shatzadi Begum Saheba v. Girdharilal Sanghi, AIR1976 AP 273 , the residuary interest in the shares always continued with the petitioner in so far as the shares were only pledged to the bank as and when by way of collateral security for the overdraft, that the interest of the petitioner in the shares was never extinguished and that therefore, the retransfer to his name is a mere formality. This last argument is fallacious because the respondents, learned advocate is right when he points out that once the petitioner had executed the documents of transfer in favour of the bank and the company had given effect to the transfer, irrespective of the nature of the transaction between the petitioner and the bank, that there can be no two opinions about the fact that it was a clean, clear-cut complete transfer and that no residuary interest survived with the petitioner. ( 4 ) ON behalf of the respondent-company, what was submitted by learned counsel was that Article 15 is perfectly valid and that the petitioner's contention that it is repugnant to the provisions of the Companies Act and is therefore null and void is baseless. Learned counsel demonstrated to me that as long as the petitioner is a shareholder of the company, he is bound by the provisions of the memorandum and articles of association and furthermore, that there is a valid justification for providing for such a restriction with regard to the number of shares that a member/shareholder can hold. The argument proceeded on the footing that such a restriction is not unknown to law in so far as there is no direct prohibition in the Companies Act whereunder such a provision is either contra indicated or barred, and that it is open to a company to prescribe limitations that are necessary for its own well being and survival. Learned counsel demonstrated to me that the greatest danger faced by most companies arises from situations whereby a shareholder begins to corner the shares of the company and it is such "corporate raiders" who have been responsible for the destruction of some of the best companies in the country. Oftentimes, the modus operandi employed is to acquire shares in the names of nominees and to corner the majority holding in a company and then take it over or paralyse the operation. I do see considerable justification in this submission and consequently, in the absence of any definite challenge which is capable of being upheld, Article 15 will have to be construed as being valid. I do see considerable justification in this submission and consequently, in the absence of any definite challenge which is capable of being upheld, Article 15 will have to be construed as being valid. ( 5 ) THE real difficulty has arisen because whereas the first part of Article 15 prescribes a limitation whereunder there is a prohibition on any shareholder acquiring or holding more than 10 per cent, of the shares, the latter part of Article 15 clearly prescribes that if such a person holds more than the prescribed number that the only disqualification would be that the party would not be entitled to voting rights in respect of those shares. As far as this Article is concerned, what learned counsel submitted before me on the basis of a decision of the House of lords reported in the case of Forbes v. GIT [1922] 1 AC 256, is that where there is repugnancy between two parts of. a provision and where they cannot be reconciled, that the part which can be enforced must prevail. In this connection, learned counsel relied on Crates on Statue Law page 263 and the decision of the Supreme Court reported in the case of Lachmi Narain v. Union of India, AIR1976 SC 714 , (1976 )2 SCC953 , [1976 ]2 SCR785 , [1976 ]37 STC267 (SC ), para. 66, in support of his argument that the negative provision is enforceable. Reliance was also placed on the dictionary meaning of the term "irreconcilable" which really means one part cannot exist with the other and the submission was therefore that it is not permissible for the petitioner to insist that the second part of Article 15 be given effect to without the first part. What learned counsel was really driving at was that by virtue of the provisions of Sections 87 and 89 of the Companies Act, 1956, a shareholder has the right to exercise voting rights in respect of the shares held and his submission therefore is that whereas the petitioner insists that under this provision the shares must not only be transferred but that he be permitted to exercise voting rights in respect of the 360 shares, in actual fact it would constitute a negation of the Article and that consequently, the petitioner is not entitled to any reliefs. Learned counsel pointed out to me that by virtue of the decision of the Supreme Court reported in the case of Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR1971 SC 422 , [1971 ]41 Compcas51 (SC ), (1971 )1 SCC50 , [1971 ]2 SCR483 , the articles of association are a contract between the company and a shareholder and are binding on the shareholder. In this background, it was submitted that the only rational interpretation of Article 15 would be that the petitioner cannot hold more than 501 shares and since he is already holding of that number, that the 360 shares cannot be transferred to him. ( 6 ) I do not dispute that Article 15 is worded rather peculiarly and that it would normally appear that the two parts of it cannot be reconciled. The rules of interpretation however require that wherever possible, a harmonious interpretation must be looked for by the court in order to avoid a deadlock or absurdity. While the first part of Article 15 prescribes an absolute bar, the second part of it which follows the first part waters down that bar. It therefore means that normally a limitation has been set at 10 per cent, but that in a given instance it would be permissible to hold shares in excess of 10 per cent, subject to certain disqualification. That disqualification is that if the shareholder insists on holding shares beyond 10 per cent, then the voting rights will be still limited to 10 per cent, and in respect of the number of shares beyond 10 per cent, the shareholder incurs a disqualification and therefore would not be eligible to exercise voting rights to the extent of the excess number of shares exceeding 10 per cent. I do concede that this represents a rather unsatisfactory state of affairs because normally, if a person holds shares the voting rights are synonyms but as indicated by me earlier, it is not unknown to law as long as there is no express prohibition in the Companies Act, for a necessary protective mechanism to be provided for by the company. Therefore, a shareholder with his eyes open and being aware of the fact that in law he is bound by the provisions of the Article still holds the excess shares, then the only inference is that those excess shares will he held subject to the disqualification. Therefore, a shareholder with his eyes open and being aware of the fact that in law he is bound by the provisions of the Article still holds the excess shares, then the only inference is that those excess shares will he held subject to the disqualification. This would only mean that the petitioner would be estopped from claiming voting rights in respect of the number of shares that exceed the limit of 10 per cent, as provided for in Article 15. ( 7 ) THE two learned counsel have gone into various other aspects of the law which to my mind do not require to be reassessed by me as the point for decision is within a narrow compass. e. the interpretation and effect of Article 15 and whether or not the petitioner is entitled to a relief. ( 8 ) IN the aforesaid circumstances, the petitioner is entitled to succeed but to a limited extent. Respondent No. 1 company is directed to transfer the 360 shares to the name of the petitioner within an outer limit of ninety days from today on the petitioner complying with the requisite transfer formalities but this transfer will be subject to the limitation that if the petitioner holds shares in excess of the limit prescribed by Article 15, the petitioner will be estopped from claiming voting rights in respect of the excess number of shares. The company petition succeeds to this extent and is allowed. In the circumstances of the case, there shall be no order as to costs.