Important points
1. The principle that a Court will not interfere in the affairs of the Company if the defect complained of can be cured would apply if the defect is a technicality and is curable. The non compliance of Section 108 of the Companies Act is not a technicality and this violation could not be ratified by the Board of Directors.
2. The share register of the Company cannot be directed to be rectified in respect of the shares, the impugned transfer of which took place more than 20 years ago and when there has been a sea change in the factual scenario.

Headnote:Companies Act, 1956—Section 155 (as it stood in 1986)—Proceedings under—Claim of pre-emptive right in transfer of shares—Transfer of shares in the Company belonging to estate of husband of appellant by three of four executors of his Will—Executors named in the Will were appellant, respondent 2, respondent 3 and respondent 4—Appellant also challenged transfer of 93 shares by respondents 3 and 4 in the company—Basis of claim of appellant with regard to 3417 and 93 shares was the failure to allow appellants to exercise their undisputed right of preemption in respect of shares—Issue of 17,666 shares and their allotment to Pawar Group also challenged by appellants—Notices issued in respect of 93 and 3417 shares were not in accordance with the Articles—It was not open to respondents 2, 3 and 4 to have sold the shares to Pawar Group without issuing such notices—Whether appellants can be granted relief of rectification of shares as claimed—Should the share register of Company be directed to be rectified now in respect of shares, the impugned transfer of which took place more than 20 years ago.
       Held : The narration of facts starts with the will of Dr. Parulekar by which he appointed the four Executors, viz. Shanta and the respondents 2, 3 and 4 as Executors and Trustees of the will. The will inter alia empowered the Executors and Trustees to sell or to postpone the sale from time to time of all the properties vested in them by the will for payment of estate duty and to invest the same as the Executors and Trustees thought fit. After providing for specific legacies, the Executors and Trustees were directed to hold the rest and residue of the estate on trust (1) for the spread of education through newspapers, magazines and periodicals (2) for effecting improvement of the quality and standard of journalism and training of personnel in journalism (3) for purchase of shares of concerns, firms, companies or from persons or persons interested in or concerned with newspapers, magazines, periodicals and otherwise in journalism (4) for publication of books and literature for masses at low and reasonable prices, and (5) for such other objects and acts that may be necessary to bring about improvement of information amongst the masses and also which may be incidental or conducive to the above objects. The trust was to be known as “Sakal Papers Trust”. Although the probate of the will had been granted in 1975 to the four Executors and all four of them had been entered in the register of members of the company as joint shareholders of the 3417 shares belonging to the estate of late Dr. Parulekar on 26.4.1977, no steps were taken by the Executors to convert the shares into money till 1984. (Para II.1)
       In our opinion the entire transaction of sale is riddled with illegalities. The notices issued in respect of the 93 and 3417 shares were not in keeping with the Articles as far as Articles 58 to 63 were concerned. As we have already observed, notices to willing members or to selected persons under Article 58 must succeed and not precede the actual operation of Article 57-A. The notices issued by the respondent Nos. 2, 3 and 4 also did not constitute the Directors as the transferor’s agents for the purposes of selling the shares in terms of Article 59. There was, in the circumstances, no question of the transferors selling their shares to any 3rd party under Article 63 unless proper notice had been issued to the 2nd and 3rd category of persons if any. There was also no question of the transferor invoking Article 61 bypassing the right of a willing member or selectee, if any, to negotiate a fair price. (Paras IV.1 and IV.1.1.)
       The respondents contended that the relief of cancellation of 17,666 shares cannot be granted in a petition under Section 155 petition as any reduction of capital must be made strictly in accordance with Sections 100 to 104 or Section 402 of the Companies Act. The issue need not detain us as there was no such prayer made by the appellants. They have asked only for rectification of the share register by deletion of the names of the Pawar Group as shareholders in the company. The learned Single Judge merely directed the Board of Directors to dispose of the fresh shares, one can only assume, in accordance with the Articles of the Company and the Act. Having effectively held on all issues in favour of the appellant the question remains as to whether we should, in exercise of our discretion under Section 155, grant the appellant the relief of rectification of the shares as claimed. Although the logical conclusion of our findings would be to set aside the transfers and restore the status quo ante, the question is should the share register of the company be directed to be rectified now in respect of shares, the impugned transfer of which took place more than 20 years ago? (Paras VI.1, VI.2 and VI.3)
       There has been a sea change in the factual scenario. Shantha has died. The company has become a public limited company. The respondents have been at the helm of the company more than two decades during the legal struggle. Many decisions must of necessity have been taken and implemented. The situation cannot now be unscrambled. It is a course of action which would make the company disfunctional harming the interests of the whole body of share holders, affect company’s employees, its creditors and customers. It is not as if we are able to grant any relief directly to the appellant except to the extent of setting aside the transfer. The appellant will still have to pursue her remedies for effective relief in the two pending suits in the District Court of Pune in which the appellant has prayed for specific performance of the contracts for sale of the shares. The outcome of the suits is uncertain. What is certain is that whatever the outcome of the litigation it will be another long round of litigation. Yet another factor to be borne in mind is that the appellant had her own role to play in contributing to the situation which she had to face eventually. Admittedly, Shanta and the appellant ultimately accepted the Chartered Accountant’s report. As we have noted, no reason whatsoever was given for the sudden change of attitude. If they could agree subsequently to pay the price they could have done so earlier, paid the price and then challenged the value. Further, the Single Judge also gave the appellant and Shanta an opportunity of paying the share price into the Court within a period of six weeks. Had the appellant and Shanta done so, they might have been in a stronger position vis-a-vis the Pawars in the appeal Court. (Para VI.3)
       In these circumstances and weighing in the balance the comparative advantages and disadvantages of granting the appellant the relief of rectification, we are of the view that it would not be appropriate at this stage to exercise our discretion to grant the relief of rectification. However, the fact remains that the appellant has been wronged and she is entitled to be compensated. Section 155 of the Companies Act, allows the giving of damages in addition to or in lieu of rectification. In the pending suits, the appellant has put forward alternative prayers for payment of compensation of Rs. 3 crores on account of the 3417 shares and Rs. 1 crore for the transfer of the 93 shares in the event specific performance of the contracts was not grantable. It was pointed out by some of the respondents’ counsel, without prejudice to their contentions on merits, that the figure specified in the plaint, though on the higher side, could form a rough and ready basis to quantify the compensation. Having due regard to these submissions and in order to give a quietus to the litigation we are of the view that the ends of justice would be met by directing that the appellant should be compensated with an amount of Rs. 3 crores to be paid by the company to the appellant in full and final settlement of the appellant’s claims in respect of the 3417 and 93 shares. Additionally, the company will also allot shares to the appellant out of the 17,666 shares on par proportionate with the appellant’s present share holding. We are told that the appellant is at present employed by the company and is also a Director of the company. The appellant shall continue in this capacity for the appellant’s life time. (Para VI.4)

Judgement Key Points

Based on the provided legal document, here are the key points regarding the case Smt. Claude-Lila Parulekar vs. M/s. Sakal Papers Pvt. Ltd. & Ors.:

1. Procedural Jurisdiction and Preliminary Objections * The Court rejected the preliminary objection that the matter required a complex civil suit rather than relief under Section 155 of the Companies Act, 1956. It held that the Company Court had the exclusive jurisdiction under Section 155 read with Section 2(11) and Section 10 (!) . * Even if jurisdiction were concurrent, turning the appellants away to pursue an alternative remedy after 18 years of litigation would be grossly inequitable (!) . * The Court clarified that Section 155 does not allow an application for the transfer of shares to an applicant whose title is yet to be established; such applicants must file a separate suit. The appellants correctly reserved their right to file suits for specific performance (!) (!) .

2. Validity of Transfer of 3,417 and 93 Shares (Preemptive Rights and Articles) * Conclusion of Contract: The Court held that a concluded contract for the sale of shares existed upon the acceptance of the offer by the appellants under Article 57-A of the Articles of Association. The contract is concluded upon acceptance, not upon the payment of the price or the fixing of the valuation (!) (!) . * Repudiation: There was no repudiation of the contract by the appellants. Challenging the auditor's valuation was a questioning of the mode of performance, not a refusal to perform. The appellants offered to deposit money as earnest, proving their bonafide interest (!) (!) . * Time Being of Essence: Stipulations as to time are not deemed to be of the essence unless a different intention appears. No time was fixed under Article 57-A or the offer letters, so the appellants could not be forced to pay within an arbitrarily fixed period (!) (!) . * Violation of Articles: The notices issued by the executors were not in keeping with Articles 58 to 63. Notices under Article 58 must succeed, not precede, the operation of Article 57-A. The transfer was invalid because proper notice to other members was not given in accordance with the hierarchy of purchasers (!) (!) .

3. Violation of Section 108 of the Companies Act * Mandatory Compliance: Section 108 requires all joint shareholders to execute the instrument of transfer. The transfer was executed by only three of the four executors; the fourth (Shanta) did not sign. This non-compliance is mandatory and not a technicality that can be cured (!) (!) (!) . * Inability to Ratify: The violation of Section 108 could not be ratified by the Board of Directors because the Board lacked the legal capacity to direct the registration of shares invalidly transferred under the Act (!) .

4. Invalidity of Board Meeting and Issue of 17,666 Shares * Notice Defects: The notice for the Annual General Meeting where the decision to issue 17,666 shares was taken did not specify the business to be transacted (increase in share capital), violating Article 93 (!) (!) . * Special Business Requirements: Increasing share capital is "special business" under Article 94. The notice failed to annex a statement of material facts concerning the nature and extent of the interest, violating Article 94 (!) (!) . * Procedural Violation: No offer was made to existing shareholders in proportion to their capital paid-up as required by Article 15. The shares were allotted immediately without waiting for the statutory 15-day offer period (!) (!) .

5. Final Relief Granted * Discretion on Rectification: Although the transfers were legally flawed, the Court exercised its discretion under Section 155 not to grant rectification of the share register. This was due to the "sea change" in the factual scenario (Shanta's death, company becoming public, 20+ years elapsed) and the potential dysfunction it would cause to the company (!) (!) . * Compensation: Instead of rectification, the Court directed the company to compensate the appellant with Rs. 3 crores as full and final settlement of her claims regarding the 3,417 and 93 shares (!) . * Allotment of Fresh Shares: The company was directed to allot shares to the appellant out of the 17,666 shares on a par proportionate basis with her present shareholding (!) . * Continuation of Employment: The appellant, being an employee and Director, was to continue in that capacity for her lifetime (!) .

Judgment

Ruma Pal, J.—In 1933 Dr. N.B. Parulekar and his wife Shanta, started a Newspaper called Sakal. In 1948, Dr. Parulekar and Shanta promoted a company known as M/s. Sakal Papers Pvt. Limited, which is the respondent No.1 and is referred to hereafter as ‘the company’. Dr. Parulekar died in 1973. Shanta died during the pendency of the appeal before this Court. The appeal which is now being prosecuted by the daughter of Dr. Parulekar and Shanta, arises out of proceedings initiated by Shanta and the appellant under Section 155 (as it stood in 1986) of the Companies Act, 1956 (referred to hereafter as ‘the Act’) in the Bombay High Court.

2. The appellant was brought on record as Shanta’s only legal heir and representative. As Shanta was alive during the proceedings before the High Court, to avoid unnecessary verbiage, the appellant and Shanta are referred to hereafter as ‘the appellants’.

3. One of the matters in dispute in this appeal relates to the transfer of 3417 shares in the company belonging to the estate of late Dr. Parulekar by three of the four executors of the will of Dr. Parulekar. The executors named in the will were Shanta, the respondent No.2, the respondent No.3 and the respondent No.4. There is also a challenge to the transfer of 93 shares by the respondent Nos. 3 and 4 in the company. The basis of the claim of the appellant and Shanta with regard to the 3417 and 93 shares was the failure to allow the appellants to exercise their undisputed right of preemption in respect of the shares. The second branch of the appellants’ grievance pertains to the issue and allotment of 17,666/- shares of the company. The beneficiary of these transfers/allotments is the respondent No.5 and his group represented by the respondents Nos. 6 to 16 (hereafter referred to collectively as the Pawar Group). According to all the respondents briefly speaking, the appellants were precluded from exercising any right of preemption and had in any event failed to exercise their right of preemption in respect of the 3417 and 93 shares. As far as the issue of 17,666/- shares are concerned it is submitted that it was validly done and the allotment of the shares was duly made to the Pawar group.

4. The learned Single Judge held that the transfer of the 3417 shares was made contrary to the appellants rights of preemption. He also held that the transfers had been made in violation of the provisions of the Section 108 of the Companies Act, 1956 and the Articles of Association of the Company. It was held that the respondent No.5 and his group were not bonafide purchasers of the shares as they were aware of the preemptive right of the appellants to the shares. On the issue and allotment of 17,666/- shares the Trial Court held that they were invalid. Having effectively held in favour of the appellants on merits, the Trial Court did not set aside the transfer of the 3417 and 93 shares but set aside the transfer of 3417 and 93 shares to the respondent No.5 and his group conditional upon the appellants depositing a sum or Rs. 80,73,000/- in the Court within a period of six weeks. As far as the 17,666/- shares were concerned, it was directed that they should be allotted to such persons or persons at such price as the Board of Directors may decide. The Company was directed to pay back the Pawar group a sum of Rs. 17,66,600/- in respect of the 17,666 shares. It was then said that in the event the appellants did not deposit a sum of Rs. 79,86,110/- within six weeks the entire petition filed by the appellants would stand dismissed. The appellants filed an appeal from this order in so far as it was made conditional on the deposit of the sum of Rs.79,86,110/-. They also filed an application for extension of time for depositing the amount in terms of the Trial Court’s order before the Trial Court. The application was dismissed.

5. In the meanwhile the Appellants filed two suits being CS 225 and 226 of 1988 before the Court in Pune against the respondents seeking spec

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2005 Supreme(SC) 506

Cases Referred (10)