Ajay M.Patel & Ors vs Aarohi Polymers Pvt.Ltd & Ors

[Arising out of Order dated 27th November, 2018 passed by the National Company Law Tribunal, New Delhi Bench in CP-159(ND)2017]

IN THE MATTER OF:

1. Ajay M. Patel, 511, Dilnawaz Apartment, Lalubhai Park Road, Andheri (West), Mumbai - 400 058.

2. Bhavik Ajay Patel, 511, Dilnawaz Apartment, Lalubhai Park Road, Andheri (West), Mumbai - 400 058.

3. Apoorva Patel, Jalshree, Flat No.501, 5th Floor, Jalshree Presidency Society, N S Road, 7, JVPD Scheme, Vile Parle (West), Mumbai - 400 049.

4. Sonal Apoorva Patel, Jalshree, Flat No.501, 5th Floor, Jalshree Presidency Society, N S Road, 7, JVPD Scheme, Vile Parle (West), Mumbai - 400 049. ...Appellants

Vs

1. Aarohi Polymers Pvt. Ltd., With its registered office at 1/1291-93, Naiwala, Karol Bagh, New Delhi - 110 005. -2-

2. Mahesh Madanlal Shah, Director of Respondent No. 1 204, Purnima Apartment, Near Anand Balwadi, Amarkunj Extention, Vadodara - 390 023. Gujarat.

3. Dinesh Khandelwal Kumar, Director of Respondent No. 1 85, 28, Tehsil Pachpahad, District Jhalawar, Bhawani Mandi - 326 502, Rajasthan.

4. Hara Estates & Capital Pvt. Ltd., 602, Janki Centre, Off Veerai Desai Raod, Andheri (West) Mumbai - 400 053.

5. Finhelp Investments & Consultants Pvt. Ltd., with its registered office at 1, Mistri Nagar, Pandurang Naik Marg, Shivaji Park, Mumbai - 400 016.

6. Mr. Jyotindra S. Patel, 31, Anand Nagar Society, Productivity Road, Baroda - 390 007.

7. Multidimensional Holdings & Consultants Pvt. Ltd. 8/A, Shree Nagar Society, Akota Road, Baroda - 390 020. Gujarat.

8. Mr. Sanjay S. Patel, 31, Anand Nagar Society, Productivity Road, Baroda - 390 007.

Company Appeal (AT) No. 32 of 2019 -3-

9. Rajesh Chandubhai Patel, 4, Prabhu Park Society No. 2, Near Anand Balwadi, Amarkunj Extention, Baroda - 390 023.

10. Shilpa Rajesh Patel, 4, Prabhu Park Society No. 2, Near Anand Balwadi, Amarkunj Extention, Baroda - 390 023.

11. Nita S. Patel, 31, Anand Nagar Society, Productivity Road, Baroda - 390 007

12. Meeta Ajay Patel, 511, Dilnawaz Apartment, Lalubhai Park Road, Andheri (West), Mumbai - 400 058. ....Respondents

Present: For Appellants: Mr. Raju Ramachandran, Sr. Advocate with Mr. Rishad A. Showdhury, Ms. Madhurika Ray and Mr. Ishwar Mohanty, Advocates.

For Respondents: Dr. U. K. Chaudhary, Sr. Advocate with Mr. Dhruv Gupta, Mr. Sanjeet Ranjan and Mr. Nakul Gandhi, Advocate for R-1 to 3.

Mr. Darpan Wadhwa, Sr. Advocate for R-7 and R-8.

Mr. Manu Agarwal, Advocate for R-5, 6, 9, 10 & 11.

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BANSI LAL BHAT, J.

Appellants claiming to be shareholders holding an equity of 21.99% in

Respondent No. 1 Company styled as 'M/s Aarohi Polymers Pvt. Ltd.' are

aggrieved of impugned order dated 27th November, 2018 passed by National

Company Law Tribunal, New Delhi Bench (hereinafter referred to as

'Tribunal") in CP-159(ND)2017 by virtue whereof Appellant's petition under

Section 241-242 of the Companies Act, 2013 (hereinafter referred to as "the

Act") alleging oppression and mismanagement at the hands of Respondents

No. 2 and 3 being in-charge of the affairs of business operations of

Respondent No. 1 as Directors came to be dismissed primarily on the

ground that neither did the transfer of shares inter-se the members require

prior approval of the Board of Directors nor option of purchase to all existing

members prior to effecting of such transfer was required. The impugned

order is assailed on the ground that the preemptive right of having notice of

proposed transfer of shares incorporated in Article 7 of the 'Articles of

Association' (hereinafter referred to as 'AOA') vested in the Shareholders is

not diluted by the provision engrafted in Article 8 of 'AOA' which operates in

a different field and comes into operation only after exercise or non-exercise

of the preemptive right by the shareholders. The impugned order is also

assailed on the ground that the preemptive right vested in the existing

shareholders does not only serve the purpose of regulating the entry of

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outsiders in the Company as held by the Tribunal but is also designed to

protect the balance of power in closely held/ family run Companies.

2. For better understanding of the controversy inter-se the parties a brief

reference to the factual matrix is inevitable. The authorized, issued and

paid up capital of Respondent No. 1 Company is Rs.1,00,000 divided into

10,000 shares of Rs.10 each. Number of respective shares with percentage

is given in the impugned order. Appellants alleged before the Tribunal that

though Respondent No. 1 Company comprised of a closely held group of

members, Respondents No. 2 and 3 being at the helm of affairs as Directors

managing the affairs of the Company ignored the Appellants and did not

keep them informed of the developments in regard to affairs of the Company.

It was alleged that the financial statements and statutory records were

withheld and notices of meetings were not effected on the Appellants.

Communications from Appellants in this regard were attended to partially

and no intimation of AGM was given to the Appellants for annual year 2014-

15. Subsequently, in the AGM scheduled for 19.09.2015 decision to

transfer the shares of Respondent No. 7 'M/s Multidimensional Holdings

and Consultants Pvt. Ltd.' to Respondent No. 5 and 6 viz. 'Finhelp

Investment and Consultants (Mumbai) Pvt. Ltd.' and 'Mr. Jyotindra

Shantilal Patel' was ratified. According to Appellants, this was done in utter

disregard of the Article 7 of AOA, which provides for sale of shares by a

member only after notifying the proposed sale to the Board of Directors

which must offer to the other shareholders such shares at a fair value and

Company Appeal (AT) No. 32 of 2019 -6-

only upon such offer being not accepted the member proposing the transfer

of shares would be entitled to sell and transfer the shares to any person

other than the Shareholders. The Appellants contended before the Tribunal

that denial of opportunity to exercise their preemptive right of purchase of

shares violated Article 7 of AOA and ratification of the sale on 19.09.2015

was a mere subterfuge as the transfer of shares had already been approved

by the Board of Directors on 20.12.2014. The stand taken by the

Respondents before the Tribunal was that the transfer of shares in question

was governed by Article 8(1) of the AOA and not by Article 7 as it was a

transfer inter-se the members.

3. Admittedly, Respondent No. 1 is a private company. Section 2(68) of

the Act defines a private company as a company having a prescribed

minimum paid up share capital which, by its Articles restricts the right to

transfer its shares and limits the number of its members to 200 except in

case of one person company. The private company, by its Articles prohibits

any invitation to the public to subscribe for any securities of the company

which includes shares and debentures. It is well settled by now that the

'Articles of Association' of a private company are in the nature of a contract

between such company and its members/ shareholders and also inter-se

the members/shareholders. It is not in dispute that in the case in hand

'Articles of Association' of Respondent No. 1 restrict the right to transfer its

shares and the controversy dealt with by the Tribunal in terms of the

impugned order assailed before this Appellate Tribunal pertains to the true

Company Appeal (AT) No. 32 of 2019 -7-

import, scope and interpretation of the relevant Articles dealing with

restriction on transfer of shareholding. The relevant of the 'Articles of

Association' are reproduced hereunder:-

"Article 7. Any member desiring to sell any of his

shares must notify in writing to the Board of Directors of

the number share, the fair value and the name of the

proposed transferee and the Board of Directors must offer

to the other shareholders, the shares offered at the fair

value and if the offer is accepted, the shares shall be

transferred to the acceptor and if the shares or any of

them are not so accepted within one month from the date

of notice to the Board, the member proposing transfer

shall, at any time within three month afterwards, be at

liberty, subject of Articles 8 & 9 thereof, to sell and

transfer the shares to any person at the same or at higher

price.

In case of any dispute, regarding the fair value of the

share it shall be decided and fixed by the company's

Auditors whose decision shall be final."

Article 8. 1. No transfer of shares shall be made

or registered without the previous sanction of the Directors,

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except when the transfer is made by any member of the

Company to another member or to a member's spouse or

child or children or his/her heirs and the Directors may

decline to give such sanction without assigning any

reason, subject to Section 111 of the Act."

4. According to learned counsel for Appellants, the right to preemption

couched in broad and unambiguous terms within the ambit of Article 7 is

not limited to transfers to non-members/ outsiders but it applies to all

transfers irrespective of the status of transferee. It is contended that the

Tribunal erred in holding that the only objective of such Article was to

regulate the entry of outsiders into the company. It is further contended

that the transfer of shares must be strictly in accordance with the Articles

and any transfer effected without allowing the preemptive clause to operate

would be violative of the 'Articles of Association' and would be construed as

an act of oppression.

5. Per contra, it is argued on behalf of Respondents that in case shares

are proposed to be sold to a person outside the existing nucleus, the

transfer is required to be made in terms of Article 7 but in case the shares

are proposed to be sold to a person within the existing nucleus of the

company, the transfers can be made under Article 8 without the sanction of

the Board of Directors. It is further submitted that the exception in Article

8(i) exempts sale of shares inter-se members from previous sanction of

Company Appeal (AT) No. 32 of 2019 -9-

Board of Directors and no offer is required to be made to the Board for its

previous sanction in terms of provisions of Article 7.

6. We have perused the record and given our anxious consideration to

the arguments advanced at the Bar. It appears that identical Articles 7 and

8 fell for consideration of the Hon'ble Karnataka High Court in the Case of

"Mukundlal Manchanda Vs. Prakash Roadlines Ltd., reported in 1991

SCConlineKar 131" . Learned Single Judge interpreted the Articles as

under:-

"4. ....x....x...x....The object of Article 7 is to preserve the

shareholding to the members of the family and to the

existing shareholders. Suppose, a shareholder wants to

sell 3 or 4 shares to another shareholder and all other

shareholders offer to purchase the same at the market

price, how to effect the transfer by selling the share to

other shareholders is not forthcoming in Article 7. The

shares cannot be divided in proportion to the shareholding

of different shareholders who are willing to purchase the

same. Further, what is the purpose of preventing one

shareholder form purchasing the share of another is also

not clear. The purposes behind Article 7 is clear when it is

compared with Article 8. Article 8 states that shares shall

not be transferred without the previous sanction of the

Company Appeal (AT) No. 32 of 2019 -10-

Directors except when transfer is made by one member to

another or to a member's wife or child etc. In other words,

Article 8 does not bar the transfer of the share by one

shareholder to another shareholder or to the relatives

stated therein for which purpose sanction of the Directors

is not necessary. Previous sanction of the Directors is not

at all necessary for transfer of the shares by one

shareholder to another falling within the enumerated

clause in Article 8. Transfer includes sale. In fact, Article

7 also uses the word 'sell' of 'transfer'. Article 8 should

have an independent operation and Article 7 also should

have an independent operation. Both Articles can have

full play provided their para-makers are understood. The

sale or transfer of one shareholder to another shareholder

or to the relatives mentioned in Article 8, is excluded

from the operation of Article 7. Both Articles can act

independently of each other. Further, nowhere Article 8

say, it is subject to the provision of Article 7. Therefore,

it is clear that the transfer of shares in favour of the

existing shareholders does not require to be effected after

following the procedure stated in Article 7."

7. The decision rendered by the Hon'ble Single Judge was upheld by a

Division Bench of the Hon'ble Karnataka High Court in appeal titled

Company Appeal (AT) No. 32 of 2019 -11-

"Mukundlal Manchanda Vs. Prakash Roadlines Ltd. & Ors., reported

in (1996) 87 Compcas 102 (kar)", relevant whereof is reproduced

hereinbelow:-

"28. ....x....x...x....The scheme and the object behind

articles 7 and 8 appear to be to prevent an outsider from

purchasing the shares of the respondent-company by way

of sale or otherwise and in that direction the provisions of

articles 7 and 8 envisage that before the third party, i.e., a

non-member can be allowed to purchase shares of the

company, the option to purchase the said shares must first

be given to the existing members. It is only when the

existing members decline to purchase shares offered for

sale, that an outsiders should be allowed to purchase the

same. To this scheme however, article 8 provides an

exception, i.e., in case the transfer in intended to be made

in favour of an existing member or a member's wife,

children or legal heir, the previous sanction of the directors

is not required. In other words, if the sale takes place

within the existing family of members of company or their

legal heirs or children or spouses, there is no requirement

of previous sanction from the board of directors. This

exception to us appears to be logical for the entire object

behind articles 7 and 8 being to prevent an outsider

Company Appeal (AT) No. 32 of 2019 -12-

purchasing the shares without the existing members

exercising their rights, is achieved by making such an

exception. It is significant in this connection to mention

that article 7 refers only to parties other than existing

shareholder. Similarly, the term "transfer" appearing in

article 8 appears to us to be a term wide enough to include

a transfer by way of sale also. In other words, article 8

would apply even to a situation where the transfer is being

made by way of a sale by one member of the company in

favour of another member, his spouse or children. In any

such situation, the right of pre-emption as envisaged by

article 7 would not be applicable for the sale is being made

either to an existing member or his legal heir or children."

8. From the aforesaid interpretation of identical Articles 7 and 8, it is

abundantly clear that these provisions are intended to block an outsider

from purchasing the shares of a private company through the mode of sale

or transfer by any other mode and for achieving this objective these Articles

envisage that a stranger/ third party may be allowed to purchase the shares

of the company only after the existing shareholders have been given the

option to purchase the shares intended to be sold and the existing

shareholders/ members have declined to purchase the shares offered for

sale. This is the general principle. However, an exception is carved out

under Article 8 by providing that previous sanction from Board of Directors

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would not be required if the sale of shares is made in favour of an existing

member/ members, their spouses, children or legal heirs. Article 8 thus

dispenses with the issuance of notice for allowing the members to exercise

their right of pre-emption/ prior purchase in respect of the shares offered for

sale to the existing members, their spouses, children or legal heirs as the

transfer of share by any mode including the sale would not induct any third

party/ stranger in the nucleus of members/ shareholders. It can be stated

without any amount of ambiguity that the settled position of law divests the

members/ shareholders of a private company of right of pre-emption/ prior

purchase of shares transferred/ sold by a member to an existing

member/members, their spouses, children or legal heirs. Admittedly, this

case falls within the aforesaid exception. Further, that the alteration of

balance of power as a sequel to the transfer of shareholding by a member in

favour of an existing member would be a concept alien to the true scope and

ambit of these Articles. This is apart from the fact that on facts the Tribunal

has not found any material alteration on the aspect of balance of power and

such finding is not shown to be erroneous, much less perverse.

9. For the foregoing reasons, we find that the impugned order does not

suffer from any legal infirmity or factual frailty. The interpretation placed on

the language of Article 7 and 8 of the 'Articles of Association' of Respondent

No. 1 Company by the Tribunal is perfectly in consonance with the settled

position of law. Since, the Appellant fails to succeed on the primary issue

raised in this appeal, we refrain from making any comment on the conduct

Company Appeal (AT) No. 32 of 2019 -14-

of the Appellant in a similar transfer of shareholding in past where the

Appellant himself is stated to have been a beneficiary. There being no merit

in the instant appeal, it is accordingly dismissed.

[Justice Bansi Lal Bhat] Member (Judicial)

[Balvinder Singh] Member (Technical)

NEW DELHI

3rd July, 2019

AM

Company Appeal (AT) No. 32 of 2019