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PAVAN KUMAR BUDHIA & ANOTHER V/S JAY BEE PROPERTIES (P.) LTD. & OTHERS, decided on Friday, May 23, 2014.
[ In the Company Law Board Eastern Region Bench Calcutta, CA No. 95 of 2009 in CP No. 23 (Kol) of 2009. ] 23/05/2014
Judge(s) : A. BANDOPADHYAY (MEMBER)
Advocate(s) : S.N. Mookherjee, Sr. , (Ratnanko Banerjee, Manoj Kr. Banthia, Priyanka Jaiswal, Prantik Garai, Joy Saha, S.M. Gupta & Subhojit Saha.
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    In this order I am considering the company application being CA No.95 of 2009 filed by Jay Bee Properties (P.) Ltd. respondent-company and respondent Nos.2 and 3 in main CP No.23(Kol) of 2009 seeking vacation of ex parte ad interim order dated 20th August 2009 passed by Company Law Board ('CLB') and dismissal of the main petition along with other consequential reliefs.2. The main company petition being CP No.23(Kol) of 2009 has been filed by the petitioners viz. Shri Pawan Kumar Budhia and Padmavati Properties & Trusts (P.) Ltd. under section 397/398 of the Companies Act 1956 ('the Act') alleging various acts of oppression and mismanagement in the affairs of the respondent-company i.e. Jay Bee Properties (P.) Ltd. and seeking various reliefs against the respondent-company as well as other respondents. The petitioners have primarily challenged the issue and allotment of 11 91 500 equity shares in the respondent-company in favour of some of the respondents by virtue of which the petitioners have been reduced from a majority shareholding of 50.004 per cent to a hopeless minority of 14.84 per cent. It has been alleged that the said issue and allotment of shares has been without any basis and in violation of the provisions of the Act and has been solely for the purpose of reducing the petitioners from majority shareholding in the company to the position of a minority. An ad interim order was passed by CLB on 20t August 2009 which is still subsisting. During the pendency of the petition the respondents have filed an application being CA No.95 of 2009 challenging the maintainability of the petition and asking for recalling of the interim order and/or vacation of the said order.3. Briefly stated the facts of the case are that petitioner No.l holds 20 shares in the company. Calcutta Capital (P.) Ltd. held 2 40 000 shares in the company and the said company being one of the transferor company along with other transferor companies viz. Arcee Tower (P.) Ltd. Carat Investment (P.) Ltd. Auto Exports (P.) Ltd. and Avon Overseas Ltd. in terms of the order of hon'ble High Court of Calcutta dated 11th March 2003 got merged with Krupa Agencies (P.) Ltd. (transferee-company). By virtue of the said transfer all the properties and assets of transferor-companies including 2 40 000 shares held by Calcutta Capital (P.) Ltd. in the respondent-company with effect from the transfer date i.e. 1st April 2002 stood transferred and vested without any further act or deed in the transferee company i.e. Krupa Agencies (P.) Ltd.4. Subsequently by another scheme of amalgamation the said Krupa Agencies (P.) Ltd. (transferor-company) along with other transferor-companies viz. Aarcee Exports (P.) Ltd. and Aarcee Holdings (P.) Ltd. in terms of the order of hon'ble High Court at Calcutta dated 3rd March 2008 got merged with Padmavati Properties & Trusts Ltd. (transferee-company). All the properties and assets of the transferor companies (including 2 40 000 shares in the respondent-company vested in Krupa Agencies (P.) Ltd. by virtue of the earlier scheme with effect from the transfer date i.e. 1st April 2007) stood transferred and got vested without any further act or deed in the transferee-company viz. Padmavati Properties & Trusts Ltd. The said company being the successor-in-interest of 2 40 000 shares in the respondent-company has filed the present petition along with petitioner No.l. Neither Krupa Agencies (P.) Ltd. ('Krupa') being the first successor-in-interest of the said 2 40 000 shares nor petitioner No.2 viz. Padmavati Properties & Trusts Ltd. (Padmavati) has ever applied to the company for transmission of the said shares in its name.5. In the light of the above facts the only question of law which is under consideration in this application is as to whether Padmavati the successor-in-interest of the said 2 40 000 shares in the company and whose name is not entered in the register of members of the company can maintain a petition under section 397/398 of the Act.6. Shri Joy Saha learned counsel of the applicants has submitted that neither Krupa nor Padmavati are recorded as members in the register of members of the company. Accordingly the said Padmavati fails to satisfy the criteria laid down in section 399 of the Act. He has further submitted that in terms of section 41 of the Act besides the subscribers to the memorandum it is only such person who agrees in writing to become a member of the company and whose name is entered in the register of members shall be a member of the company. It is an admitted position that neither Krupa nor Padmavati has ever applied to the company for transmission of the said 2 40 000 equity shares of and in the company in their name. Further the annual return of the company filed for the years 2008 2009 and 2010 do not contain the name of either Krupa or Padmavati as shareholders of the company. In absence of Padmavati's name being included in the register of members of the company it cannot be deemed to be a member/shareholder of the company and as such cannot maintain the petition under section 397/398 of the Act.7. He has also argued that in terms of section 108 of the Act a company shall not register a transfer of shares unless a proper instrument of transfer duly stamped and executed by the transferor and transferee has been delivered to the company along with share certificate. There is no instrument of transfer executed between Calcutta Capital (P.) Ltd. and Krupa as also between Krupa and Padmavati and as such the claim of petitioner No.2 to be the shareholder of 2 40 000 shares is contrary to and inconsistent with specific provisions of section 108(1) of the Act. Shri Saha has further stated that both the orders of hon'ble High Court dated 11th March 2003 and 3rd March 2008 do not mention about the said 2 40 000 shares of the respondent-company being vested or transferred to Padmavati. Shri Saha has relied on the following judgments in order to substantiate his contentions :(i) Smt. Claude Lila Parulekar v. Sakai Papers (P.) Ltd. [2005] 11 SCC 73 to show that non-compliance of section 108 is not a technicality and for the purposes of registration of transfer the instrument of transfer must be executed.(ii) Dove Investments (P.) Ltd. v. Gujarat Industrial Investment Corporation [2006] 2 SCC 629 to show than an applicant cannot bind the company to effect the transfer unless he complies with all the formalities for registration to transfer provided in section 108 of the Act.(iii) Peerless General Finance & Investment Co. Ltd. v. Poddar Projects Ltd. [2007] 2 SCC 431.(iv) Morgan Ventures Ltd. v. Blue Coast Hotels & Resorts Ltd. [2010] 155 Comp Cas 431 (CLB) to show that till the name of the transferee is entered in the register of members all the rights in respect of the transferred shares would continue to be enjoyed by the transferor and that when a person files a petition under section 397 he has to be necessarily a member of the company.(v) Speer Mohamed v. S M Mohideen Alnned Shaw [2010] 153 Comp Cas 24 (CLB) to show that the requirements stipulated in section 399(1) being statutory are not directory in nature non-fulfilment of which cannot be waived.(vi) Spice Communications Ltd. In re. [2011] 4 Comp LJ 23 (Del.) to show that if some permission is required under separate statute or licence then the same should be obtained.8. Shri S.N Mookherjee senior advocate appearing on behalf of the petitioners has submitted that the present petition being CP No.23(Kol)/2009 has been filed by Padmavati along with other petitioners alleging gross acts of oppression and mismanagement. It is an admitted position that the said Calcutta Capital (P.) Ltd. under scheme of amalgamation got merged with Krupa in terms of the order of hon'ble High Court at Calcutta dated 11th March 2003 and thereafter the said Krupa under scheme of amalgamation got merged with Padmavati in terms of the order of hon'ble High Court at Calcutta dated 3rd March 2008. By virtue of such amalgamation the said 2 40 000 shares stood transferred to and vested in Padmavati. Section 394 of the Act empowers a court inter alia to provide for transfer and vesting of properties of the transferor companies into the transferee-company and upon such order by the hon'ble High Court the transfer and vesting of properties take place by operation of law without any further act or deed. He has cited the decisions in the case of Hargopal v. Peoples Bank of Northern India Ltd. AIR 1934 Lahore 515(1) to demonstrate that an order passed by hon'ble High Court under section 391 read with section 394 is a judgment in rem and is binding in the entire world. He has also cited the orders of Division Bench of Calcutta High Court in New Central jute Mills Co. Ltd. v. Rivers Steam Navigation Co. Ltd. AIR 1959 Cal. 352 and Madhu Intro Ltd. v. Registrar of Companies 130 Comp Cas 510 to state that the transfer of assets and liabilities from transferor companies to the transferee-company takes place by virtue of sub-section (2) of section 394 without any act or deed. He has further emphasised that section 108 cannot have any application in case of transfer and vesting of shares by operation of law pursuant to an order passed by hon'ble High Court in relation to a scheme of amalgamation and no transfer deed is either necessary or can be executed by the transferor-companies because the Boards of directors of the transferor-companies get dissolved upon the scheme being effective. He has also referred to second proviso to section 108(1) of the Act which clearly states that the requirements of section 108(1) i.e. execution of transfer deeds etc. are not applicable in cases of transmission by operation of law. It has been further stated that by virtue of section 391 read with section 394 of the Act the subject shares stood transferred to and vested in Padmavati who has ultimately become the owner of the said shares and it has indefeasible right to the same. As a successor-in-interest in whom all right and title of the subject shares has got vested the petitioner No.2 is entitled to institute proceeding under section 397/398 of the Act even though its name is not on the register of members of the respondent-company. In this regard the decision in the case of Worldwide Agencies (P.) Ltd. v. Margaret T Desor AIR 1990 SC 737 has been relied upon to substantiate his arguments. In this case the Supreme Court has held that the legal representative of deceased member whose name is still on the register of members is entitled to petition under section 397/398 of the Act and any insistence to first put the name of the legal representative in place of deceased member before initiating action under section 397/398 could be wrong and frustrate the very purpose of the necessity of such action.9. It has also been contended that the test in determining the locus of a petitioner to institute a proceeding under section 397/398 of the Act is either a person has an indefeasible right to the shares and thereby he is entitled or has a right to be a member of the company. To support this contention learned counsel of the petitioners has cited the decision of Gujarat High Court in the case of Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1977] 47 Comp Cas 151 (Guj.). He has finally stated that the reliance by the respondents on section 41(2) for the purpose of definition of a member in the context of proceedings under section 397/398 is misconceived. For the purpose of section 399 the definition of member has been held to be very wide relying on section 2(27) and not section 41(2) alone. In this regard he has placed reliance in the judgment of Bombay High Court dated 8th June 2009 in the case of Dr. Bais Surgical Medical Institute (P.) Ltd. v. Dhananjay Pande.10. In continuation of the above arguments Shri Ratnanko Banerjee learned counsel of the petitioners has drawn my attention to the relevant portion of the amalgamation order wherein it has been mentioned that all the properties rights and privileges of the transferor-companies stood transferred to and vested in transferee-company without any further act or deed and also to the schedule of assets of transferor-companies attached to the amalgamation order wherein the investment in shares has also been mentioned and therefore it has been argued that since the investment in shares had been transferred and vested with petitioner No.2 without any further act or deed petitioner No.2 along with other petitioner is entitled to maintain the petition under section 397/398 of the Act even though its name is not appearing on the register of members of the respondent-company. He has also pointed out that consequent upon amalgamation the transferor-companies and the Board got dissolved and hence all the shares held and rights in respect thereof cannot remain in limbo and shall be exercised by the transferee-company in whose name they ultimately got transferred and vested in pursuant to the orders of hon'ble High Court. In addition to the judgments cited by Shri Mookherjee the following judgments have been further relied upon to re-enforce the case of the petitioners :(i) Unreported decision of Calcutta High Court in the case of Patwari Exports Pvt. Ltd. APOT No.579 of 2007 dated 11th December 2007 to show that qualification under section 399 is met not only by person who are on the register of members but also by persons whose names may not be on the register but who are entitled to have their names on the register.(ii) Sri Balaji Textile Mills (P.) Ltd. [1989] 3 Comp LJ 322 (Kar.) to show that the word 'member' under sections 397 and 398 of the Act will have to be construed in the light of section 2(27) of the Act and not with reference to section 41(2) of the Act.(iiii) Unreported decision of hon'ble Justice I P Mukherji of Calcutta High Court in the case of Shaw Wallace & Co. Ltd. v. Kishore Rajaram Chhabria dated 25th June 2012 to show that there is devolution of interest arising out of schemes of mergers and demergers between companies.11. Shri Saha learned counsel of the respondents in his reply has tried to distinguish the judgments cited by learned counsels of the petitioners i.e. Mr. Mookherjee and Mr. Banerjee. He has also advanced one more argument that in terms of section 84 of the Act the share certificates are prima facie evidence of the title of such shares. Since the share certificates did not contain the name of petitioner No.2 it could not have any right attached to the shares of the respondent-company. Countering the said arguments Mr. Banerjee has submitted that the claim of the petitioners is that it has become entitled to be the shareholder of the company by operation of law and by reason of devolution of interest arising out of scheme of merger between companies. The petitioners have never claimed that any share certificates have been issued to them and such prima facie evidence of title to shares does not arise to institute a company petition.12. I have considered the pleadings in the case written submissions and arguments of the rival parties along with judgments cited by both of them. Before proceeding further for proper appreciation of the issues involved I would like to reproduce section 399 of the Act which read as under :399. Right to apply under sections 397 and 398- (1) The following members of a company shall have the right to apply under section 397 or 398(a) in the case of a company having a share capital not less than one hundred members of the company or not less than one-tenth of the total number of its members whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company provided that the applicant or applicants have paid all calls and other sums due on their shares ;(b) in the case of a company not having a share capital not less than one-fifth of the total number of its members.This section confers right on requisite number of members or a member or members holding requisite percentage of issued share capital of the company to apply under section 397/398 of the Act. It is a settled law that this requirement is mandatory in nature and its non-compliance is fatal to the survival of any petition under section 397/398 of the Act.13. According to the facts of the case Calcutta Capital (P.) Ltd. in whose name the shares are entered in the register of members of the respondent-company got merged with one Krupa Agencies (P.) Ltd. by an order of hon'ble High Court at Calcutta dated 27th March 2003 and thereafter the said Krupa by another order of hon'ble High Court at Calcutta dated 3rd March 2008 was merged with one Padmavati Agencies & Trusts (P.) Ltd. The 2 40 000 shares of the respondent-company pursuant to the orders of hon'ble High Court at Calcutta got transferred to and vested in Padmavati without any further act or deed. These facts are available in the pleadings and are not in doubt. However Padmavati (petitioner No.2) has shown a completely casual attitude by not taking steps for getting the shares transmitted in its name. In 2009 without its name being on the register of members but because of vesting of 2 40 000 shares in it pursuant to the orders of hon'ble High Court at Calcutta petitioner No.2 along with petitioner No.l filed the petition before CLB alleging oppression and mismanagement against respondent No.l company and other respondents.14. No doubt the petitioner should have taken adequate steps for getting its name registered on the register of members nevertheless in an equitable jurisdiction as envisaged in section 397/398 of the Act I do not consider it proper to allow sheer technicalities to become mischief towards lodging of the petition. It has not been controverted that by way of two sets of amalgamation 2 40 000 shares originally held by Calcutta Capital (P.) Ltd. in respondent-company got transferred to and vested in Padmavati Agencies & Trusts (P.) Ltd. being petitioner No.2. Mr. Saha learned counsel of the respondents has contended that the amalgamation orders do not specifically mention or disclose about 2 40 000 shares in the schedule of assets of the transferor-companies. In fact a perusal of the amalgamation orders would reveal that except the immovable properties the schedule of assets only indicate the broad heads of assets such as investments loans and advances etc. It does not give full and complete details of each and every asset or liability which are sought to be transferred and vested. It is a settled law that when the scheme provides for transfer of all assets and liabilities of the transferor-companies even if any asset or liability is omitted to be mentioned in the schedule of assets yet it would get transferred to and vested in the transferee-company without any further act or deed. The petitioners have averred that they are successor-in-interest in respect of the said 2 40 000 shares and have explained the manner in which the said 2 40 000 shares have devolved upon them consequent upon amalgamation. The respondents have not brought on record any other materials to disprove the case of the petitioners. I therefore have no reason to disbelieve the petitioners at this stage. Whether the shares have actually got transferred to and vested in the transferee-company at each stage of amalgamation can be verified from the balance sheets of the transferor's and transferee-companies during the course of proceedings under section 397/398.15. Section 394(1) of the Act empowers the High Court to pass order sanctioning the merger/demerger provision for transfer to the transferee-company of all the properties and liabilities of any transferor-company. Section 394(2) of the Act states that where order provides for transfer of asset or liability that asset or liability shall be transferred to and vested in the transferee-company. Thus the transfer and vesting of property takes place by an order of the court without any further act or deed and is binding on all concerns. Further the scheme provides for dissolution of the Board of the transferor-company immediately upon merger being effective. In several High Courts the order of dissolution of the transferor-company is simultaneously passed with the order of merger which means that the transferor-company or its Board ceases to exist upon merger becoming effective and therefore it becomes impossible for any transfer deed to be executed by any transferor-company which does not even exist after the amalgamation has become effective. Since the order under section 391/394 of the Act is a judgment in rem- Hargopal (supra) consequential transmission of shares is by operation of law and therefore execution of transfer deed is not required or possible because transferor-company ceases to exist. In fact the transfer and vesting takes place by virtue of section 394(2) of the Act without any further act or deed as has been held in Madhu Intra Ltd. (supra). Because of the aforesaid reasons I do not agree with the contention of the learned counsel of the respondents that in cases of transfer and vesting of shares by operation of law execution of transfer deed would be necessary. I am of the view that 2 40 000 shares of the respondent-company stood transferred to and vested in petitioner No.2 by virtue of order of hon'ble High Court at Calcutta and no further act or deed is necessary in such case.16. As regards maintainability of the petition by a person whose name is not yet entered in the register of members but in whose name shares have been vested pursuant to merger by operation of law the following provisions of the Act need to be examined :Section 2(27) of the Act states that 'member' in relation to a company does not include a bearer of a share-warrant of the company issued in pursuance of section 114 of the Act.Section 41 of the Act provides as follows :(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.17. The distinction between the above two provisions of the Act defining a 'member' has been noted in several decisions by the courts. In the context of section 399 of the Act learned counsel of the petitioners has relied on the judgment of Bombay High Court dated 8th June 2009 in the case of Dr. Bais Surgical & Medical Institute (P.) Ltd. (supra); wherein it has been stated :When proceedings under section 397 are found genuine and not vexatious it is clear that section 41(2) loses its relevance and one has to fall back upon section 2(27) of the Act contained in definition clause of Companies Act which defines 'member' very widely. It is clear that section 41 does not in any way dilute the sweep of section 2(27) and in proper circumstances to advance the remedy said section 2(27) needs to be resorted to. Section 41 needs to be considered only when it is found that interests of company are being jeopardised by some busy body claiming to be subsequent purchaser of shares.It has been further observed that :Wide definition as contained in section 2(27) is more suited to the object of suppression of mischief and advancing the cause of introduction of section 397 of the Act. It is also more than apparent in this case that once the petitioner before CLB is held to be shareholder or member he satisfies the requirement of section 399 of the Act.The Karnataka High Court in the case of Shri Bajaji Textile Mills (P.) Ltd. v. Ashok Kavle [1980] 3 Comp LJ 322 (Kar.) while dealing with this issue was of the following view :'A combined reading of sections 397 398 and 399 of the Act makes it clear that the meaning of the word member of a company should be understood in the context in which it is used and that meaning cannot be tagged on to the membership clause in section 41(2) of the Act. The clause which is applicable to test whether a member satisfies the requirements of sections 397 and 398 of the Act would be section 2(27) of the Act and not the provisions of section 41(2) of the Act.'Thus it is clear that for the purposes of sections 397 398 and 399 of the Act the word 'member' should be understood in its widest import resorting to section 2(27) of the Act rather section 41(2) of the Act. It includes not only persons who have agreed to be members in writing or whose names have been entered in the register of members but also the persons who have an indefeasible right to the shares and are entitled to have their names on the register of members. In this regard the judgment of hon'ble Gujarat High Court in the case of Gulabrai Kalidas Naik (supra) is quite relevant wherein it has been held :In a given case the petitioners invoking court's jurisdiction under sections 397 and 398 are in a position to show that even though their names are not to be found in the register of members of the company yet they have such an indisputable and unchallengeable title to the membership of the company the court may entertain a petition at their instance.Section 397/398 is an equitable jurisdiction and when it is otherwise clear that a person is entitled to and has indefeasible rights to the shares he would be 'member' for the purposes of sections 397 398 and 399 of the Act even if his name is no entered on the register of members as decided in the above mentioned cases relied upon by the learned counsel of the petitioners.18. In case of amalgamation the properties or assets get transferred and vested in the transferee-company by operation of law without any further act or deed. Since there is devolution of interest in favour of the transferee-company by operation of law such transferee-company should be permitted to act for the transferor-company which has ceased to exist. Therefore I am of the view that the right by way of entitlement to subject shares has devolved on Padmavati i.e. petitioner No.2 by way of two amalgamation orders already mentioned above. As a result Padmavati i.e. petitioner No.2 is entitled to and has an indefeasible right to be a member of the respondent-company and therefore it is entitled to institute the petition under section 397/398 of the Act even though its name is not appearing in the register of members.19. In view of the aforesaid facts and circumstances of the case and the reasons highlighted above the application being CA No.95/2009 is not maintainable and accordingly is dismissed.No order as to costs.