2003 Supreme(SC) 709

2003(6) Supreme 39
Supreme Court of India
(From Kerala High Court)
Mrs. Ruma Pal & B.N. Srikrishna, JJ.
M.S. Madhusoodhanan & Anr. —Appellants
versus
Kerala Kaumudi Pvt. Ltd. & Ors. —Respondents
Civil Appeal Nos. 3253-58 of 1991
With
C.A. Nos. 3260, 3259, 3261 of 1991
Decided on 1-8-2003
Counsel for the Parties :
For the Appellants : A.T.M. Rangaramanujan, Sr. Advocate, Gopal Jain , Prateek Jalan, Ms. Nandini Gore, Ashish Jha, Jasmine D., R.N. Karan­jawala, Ms. Manik Karanjawala, Advocates.
For the Respondents : L. Nageshwar Rao, T.L.V. Iyer, P.P. Rao, Sr. Advocates, Fazlin Anam, E.M.S. Anam and P.A. Ahmed, Advocates.

Important point
Agreement for transfer of company shares is not void for uncertainty only because the consideration for the transfer has not been agreed upon and no consideration has been paid.

Headnote:(i) Companies Act, 1956—Section 108—Transfer of shares—Determination of consideration for transfer to be mutually agreed on—Transfer of shares challenged as invalid—This being a dispute between members of a family relating to controlling interests in companies—Consideration for transfer had not been agreed upon—Whether it was a valid transfer of shares—(Yes)—An agreement which provides for future fixation of price is capable of being cer­tain and is not invalid—Sale of Goods Act, 1930—Sections 3, 2(10) and 9.

       Held : Section 4 read with Section 2(10) of the Sale of Goods Act, 1930 require that the contract of sale must provide for the payment of money as a consideration for the transfer of goods, or to put it differently, that a price must be paid. But Section 9 of the 1930 Act allows the parties not to fix the price at the time of the transfer and to leave the determination of the amount of consideration to a later date. An agreement which provides for the future fixation of price either by the parties themselves or by a third party is capable of being made certain and is not invalid as provided under Section 29 of the Contract Act, 1872 [See : illustration (e)]. In view of such categoric and clear statutory provisions, the submission of learned counsel representing Mani that such a contract is void for uncertainty because the price was not fixed, is unacceptable. (Para 28)

       We have already held that the relevant share transfer forms must be taken to have been duly executed. Although Mani and Madhusoodhanan had agreed to determine the actual consideration later, clearly some consideration was agreed to be shown on the share transfer forms. As noted, Exhibit R.18 produced by Mani’s group is a voucher for the cost of share transfer stamps. The stamps must have been purchased on the basis of the consideration which was shown on the share transfer forms at the prescribed percentage under the Stamp Act. But it is also clear from the evidence on record that this was not the “actual” price which was to be determined consensually by Mani and Madhusoodhanan. (Paras 68 and 69)

       Madhusoodhanan has claimed that he in fact paid Rs. 10 lakhs to Mani. In his letter dated 28-7-86 written to Srinivasan. Madhusood­hanan had asserted (Exhibit P.11) that he had paid Rs. 5 lakhs to M.S. Mani as part payment for his shares which had been purchased by Madhusoodhanan and that this brought the total payment made on this account to Rs. 10 lakhs. Mani contended that there was a total failure of consideration, a contention which was accepted by the Appellate Court. The truth appears to lie somewhere in between. There is no dispute that the machines were in fact lifted by Mani, pursuant to Ex P.134. Exhibit R-14 evidences payment by Kerala Kaumudi of Rs. 3 lakhs to Madhu­soodhanan for, ostensibly purchasing property at Cochin for Kerala Kaumudi.The Division Bench holds that “it is this money that is utilised for payment to Mani as part consideration of the shares to be transferred by Mani and his group.” However the Division Bench discounts this payment because “The very transaction itself may be open to serious challenge. The money of the company cannot be appropriated for a personal purpose of a person having a fiduciary capacity vis-a-vis the company”. As a statement of law this is a doubtful ­proposition. Be that as it may, it is apparent that Mani received some consideration for the transfers although the considera­tion may have moved from Kerala Kaumudi to Mani. To sum up – the trans­fers by Mani and his children were effected validly to Madhusoodhan­an. (Paras 73 and 74)

       (ii) Companies Act, 1956—Sections 108, 161 and 194—Transfer of shares —Validity—Disputes between members of a family relating to controlling interests in Companies—Transfer deeds relating to trans­fer of shares placed before the Board—Transfer of shareholdings of M and his children ­admittedly entered in Company’s Share Certificate Ledger—Share transfer forms which were placed before the Board had been executed and were duly completed—In the list of shareholders of the Company, there is no mention of transferor M or either of his children—No protest made —Transfer of shares by M and his children in favour of appellant brother held valid.

       Held : This was again done in the Annual Return of Kerala Kaumudi filed under the signature of Ravi and Srinivasan dated 28th July 1987 (Ex.P.131(a)). Madhu­soodhanan is shown as holding 612 shares and Mani is shown as holding only one share. Under section 164 of the Companies Act, 1956, the annual returns, the certificates and statements there­in, “shall be prima facie evidence of any matters directed or autho­rised to be inserted therein” under the Act. The explanation given by Mani that he did not respond to the statutory declarations although they did not show his name or the names of his children as shareholders of Kerala Kaumudi because there was an agreement to transfer the shares and because of the close relationship between parties, is specious. According to Mani’s evi­dence, he had not agreed to transfer his shares at all because the consideration had not been fixed. Furthermore, the relationship be­tween the parties was anything but cordial. It was only after Madhu­soodhanan had initiated proceedings in 1986, that Mani, more than two years after the transfer for shares filed the application for rectifi­cation of the share register. (Paras 38 and 39)

       If the transfer by Mani and his children of their entire shareholding in Kerala Kaumudi to Madhusoodhanan had not been effected, there was no question of “admitting” Mani to the membership of the company. The minutes of the meeting held on 26 August, 1986 which have been admitted by Srinivasan and the affidavits of Madhavi and Mani thus prove that Mani and his family held no shares in the company until the single share was transferred by Ravi to Mani under Article 24(a) on 26th August, 1986. (Para 45)

       Furthermore, under Section 194 of the Companies Act , 1956, minutes of meetings kept in accordance with the provisions of Section 193 shall be evidence of the proceedings recorded therein and, unless the contrary is proved, it shall be presumed under Section 195 that the meeting of the Board of Directors was duly called and held and all proceedings thereat to have duly taken place. The onus was on Mani to disprove that the transfers had not taken place as recorded in the minutes of the Board meeting held on 21 May, 1985, an onus that he has singularly failed to discharge. (Para 47)

       The fact that all the parties, including Ravi, Srinivasan and Mani himself, hardened businessmen all, not only proceeded on the basis that there was effective transfer of Mani and his childrens’ shareholding to Madhu­soodhanan but also certified the same to the Registrar of Companies, and additionally affirmed that such transfer had taken place on oath in their affidavits can only lead to the conclusion that the transfer had been legally effected on the basis of duly executed share transfer forms in compliance with the provisions of the Compa­nies Act, 1956. (Para 52)

       (iii) Companies Act, 1956—Sections 31(1), 189—Removal of Managing Director—Requirements of law—Appellant had been working as Managing Director of Company for 11 years as on that date—There was unanimous resolution to appoint appellant as Managing Director and Editor of company for life—Decision to so appoint appellant was secured by proposing an amendment to Articles of Association of the Company—No notice effected on appel­lant or any other shareholder in his group of Extraordinary General meeting or any ordinary general meeting where a special resolution was to be passed—No notice issued with ­regard to allotment of additional shares.

       Madhavi, as Chairman, proposed “that an extraordinary general meeting of the company be convened to remove Sri M.S. Madhusoodhanan from the directorship of the company for his actions against the interest of the company and his misconduct”. Madhusoodhanan objected and said that this could not be done without amending the Articles of Association. The minutes go on to record that Madhavi pointed out that Article 74 of the Articles of Association had already been deleted at an extraordinary general meeting of the company held for that purpose and also that the legal opinion was that the Board of the prescribed number of members could convene a general body meeting for removal of a Director in exercise of the powers under section 284 of Companies Act, even if a person be appointed a Director for life. A resolution was then taken to convene an extraordinary general meeting on 25th September 1986. (Para 82)

       Coming now to the facts of this case, it is apparent that none of the three preconditions for effecting an alteration in the Articles of Kerala Kaumudi by deleting Article 74 were fulfilled. It may be recalled that at the Board meeting held on 23rd July 1986 [Ex. P. 62 (K)] in connection with Madhu­soodhanan’s functioning as a Managing ­Director, only a limited resolution was taken, namely, that Madhavi “shall assume the executive powers of the Managing Director with immediate effect for effective running of the Organisation”. The resolution that an extraordinary general body meeting be convened at a date suitable for the Chairman “to discuss and take decisions on matters arising out of the above decisions” was therefore confined to this limited resolution. (Para 88)

       There was no earlier extraordinary general meeting deleting Article 74 as Madhavi had claimed in the meeting dated 23-7-1986. Furthermore it shows that the special resolution which was proposed in the notice was not the resolution which was ultimately passed. In the garb of ratifying the resolution taken by the Board of Directors on 23-7-1986, what was in fact “ratified” was not only the proposal to remove Madhusoodhanan as Director but also the immediate deletion of Article 74 of the Articles of Association of the Company. The expression of intention in the notice under section 81(1) (corresponding to Section 189 (2)(a) of the 1956 Act) should be sufficiently specific so as to effectively inform each member of the company of the actual resolution sought to be passed in the general meeting. The notice must be frank, open, clear and satisfactory. If it is not, the notice is bad and the special resolution vitiated and cannot be acted upon. “If any attempt is made by the directors to get the sanction of the shareholders, it must be made on a fair and reasonably full statement of the facts upon which the directors are asking the shareholders to vote and special resolutions obtained by means of a notice which did not substantially put the shareholders in the position­ to know what they were voting about cannot be supported”. (Para 91)

       Since the further resolution to delete Article 74 formed no part of the notice of the Extraordinary General Meeting, which in all fairness it should have, we have no doubt in our minds that the special resolution on the basis of such defective notice is insupportable in law and cannot be given effect to. This finding is sufficient to hold that the deletion of article 74 of the Articles of the company was invalid and that therefore Madhusoodhanan continued to be the managing director of Kerala Kaumudi as claimed by him. (Para 92)

       (iv) Companies Act, 1956—Sections 53 and 81—Issue of additional shares—Minimum period of notice for a general body meeting—There should be a clear interval of 21 days—In computing the period date of the meeting and date of service of notice is to be excluded. (Para 97)

       (v) Companies Act, 1956—Sections 53 and 81—Issue of additional shares to increase share capital of company—Notice to existing share­holders to apply for shares and for Board meeting—Dispatch of notice under certificate of posting—Presumption of service rebuttable—Burden of proof placed on person against whom presumption operates for disproving it—Certificate of posting being suspect—It is not conclusive proof of service of notice—Evidence Act, 1872—Section 16 and 114. (Paras 104 and 123)

       (vi) Specific Relief Act, 1963—Sections 10, 16 and 20—Specific performance—Agreement between family members to record partition of assets by mutual consent—Appellant’s claim for specific performance limited to that part of Karar (agreement) which provides for division of shares of his parents in percentage of 50:25:25 between appellant and his two brothers on his mother’s death—Four brothers were each given majority shareholding in different companies as mentioned in the Karar, should not be lightly interfered with—However, Karar held specifically enforceable.

       Held : It is settled law that shares are movable properties and are transferable. As far as private companies like Kerala Kaumudi are concerned, the Articles of association restrict the shareholder’s right to transfer shares and prohibit any invitations to the public to subscribe for any shares in, or debentures of, the company. This is how a “private company” is now defined in section 3 (1) (iii) of the Companies Act, 1956 and how it was defined in section 2 (13) of the 1913 Act. Subject to this restriction, a holder of shares in a private company may agree to sell his shares to a person of his choice. Such agreements are specifically enforceable under section 10 of the Specific Relief Act, 1963, which corresponds to section 12 of the Specific Relief Act, 1877. The section provides that specific performance of such contracts may be enforced when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done, or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. In the case of a contract to transfer movable property, normally specific performance is not granted except in circumstances specified in the Explanation to section 10. One of the exceptions is where the property is “of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market”. It has been held by a long line of authority that shares in a private limited company would come within the phrase “not easily obtainable in the market”. (Paras 138 and 139)

       It may be noted at the outset that there is a distinction between the issue of new shares by a company and the transfer of shares already issued by a shareholder. In the first case, it is the company which issues and allots the new shares. In the second, the transaction is a private arrangement and the company comes into the picture only for the purposes of recognition of the transferee as the new shareholder. Therefore, while it is imperative that the company should be a party to any agreement relating to the allotment of new shares, before such an agreement can be enforced, it is not necessary for the company to be a party in any agreement relating to the transfers of issued shares for such agreement to be specifically enforced between the parties to the transfer. (Para 140)

       There is no such restriction on the transferability of shares in the Karar. It was an agreement between particular shareholders relating to the transfer of specified shares namely those inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for the company or the other shareholders to be a party to the agreement. As provided in clause 10 of the Karar. Exhibits R-59 and R-60 did not obviate compliance with the Karar. Both Ex. R-59 and R-60 were executed on 15-7-1985 several months prior to the Karar. The parties who had consciously entered into the agreement regarding the transfer of their parents shares are therefore obliged to act in terms of the Karar. The defence of Ravi and Srinivasan based on Ex. R-59 and R-60 should not, in the circumstances, have been accepted by the Division Bench. Having regard to the nature of the shareholding, on the basis of the law as enunciated by the Federal Court and Privy Council in the decisions noted above, it must be held that the Karar was specifically performable. (Para 143)

       Finally, the exercise of discretion by the Division Bench purportedly under section 20 of the Specific Relief Act was contrary to the terms of the section itself. Guidelines for the exercise of the Court’s discretion to decree specific performance of an agreement have been statutorily laid down in sub-section (2). The Division Bench appears to have relied on clause (a) of section 20(2) to deny specific performance of the Karar by holding that Madhusoodhanan had obtained an unfair advantage over others under the Karar because he had been allotted the more ‘substantial’ companies. This logic files in the face of clause (a) of sub-section (2) to section 20 and the explanation thereto. (Para 148)

       This section is an instance of such legislative clarity that it needs no paraphrasing to highlight its intent. The Division Bench was clearly wrong in its foray into the question of the value of the assets allotted under the Karar. It has, despite Explanation 1 to Section 20(2) refused specific performance of the Karar on one of the excluded grounds viz., inadequacy of consideration. The parties are at loggerheads and it is unlikely that they will mutually agree to a price to be paid for the 390 transferred shares or the ‘inherited shares’ as envisaged at the meeting held on 23rd April, 1985 Ex. P.62(b) or to a mutually acceptable third party in terms of clause 11 of the Karar dated 16th January, 1980 (Ex.P-3). The solution to this impasse is available under sub Section 9(2) of the Sale of Goods Act, 1930 read with Article 25 of the Articles of Association of Kerala Kaumudi. Under the first if the price is not fixed in the manner agreed to in the contract of sale the buyer shall pay the seller a reasonable price and what would be a reasonable price would be dependent on the circumstances of the case. Article 24 of the Articles of Association of the company speaks of the ‘fixed price’ and the ‘fair price’. Both of these relate to the ostensible price shown on the transfer deeds. (Paras 149 and 150)

       (vii) Companies Act, 1956—Section 155—Rectification of share regis­ter—Application for—All necessary documents had been duly executed to effect transfers of shareholding as approved in the meeting—Per­missibility of allowing rectification. (Paras 154 to 167)