Madhusudan Securities Limited vs Sebi

Date of Decision : 09.09.2019

Appeal No. 360 of 2017

Madhusudan Securities Limited 37, National Storage Building, Plot No. 42 B, Nr. Johnson & Johnson Bldg., SB Road, Mahim (West), Mumbai - 400 060. ..... Appellant Versus BSE Limited 14th Floor, P J Towers, Dalal Street, Fort, Mumbai - 400 001. .... Respondent

Mr. Shyam Mehta, Senior Advocate with Mr. Joby Mathew and Mr. Mit Shroff, Advocate i/b Joby Mathew & Associates for the Appellant.

Mr. P.N. Modi, Senior Advocate with Vivek Shah, Advocate i/b ELP for the Respondent.

CORAM : Justice Tarun Agarwala, Presiding Officer Dr. C.K.G. Nair, Member

Per : Justice Tarun Agarwala, Presiding Officer

1.

We have heard Shri Shyam Mehta, the learned senior

counsel along with Shri Joby Mathew for the appellant. The 2

appellant is a Company registered under the Companies Act,

1956 and is a listed Company. The appellant is engaged in the

business of investments. On February 4, 2011 the appellant

entered into a Business Transfer Agreement ('BTA' for short)

with one Primus Retail Private Limited ('Primus' for short)

wherein Primus agreed to transfer their business undertaking

including the assets and liabilities as well as the trademarks

and licenses to the appellant for a total consideration of Rs.

100 crore. Based on the aforesaid agreement certain payments

were made by the appellant and further on May 16, 2011,

61,42,857 equity shares of Rs. 10 each at a premium of Rs. 60

per share was allotted in favour of Primus for consideration

other than cash.

2. It is alleged that Primus failed to perform its obligation

under the BTA and in the meanwhile one of the creditors of

the Primus filed a Company Petition before the High Court of

Karnataka, based on which the Karnataka High Court passed

an order of winding up of the said Company on October 8,

2012 and appointed an Official Liquidator.

3. Since the obligations under the BTA could not be

fulfilled by Primus the appellant vide their letter dated 3

November 2, 2012 intimated Primus that the BTA had been

rendered void and thereafter the appellant passed a resolution

by the Board of Directors on October 17, 2014 forfeiting the

said shares allotted to Primus and further directed to reissue

them to other parties in due course subject to statutory

approvals and compliances.

4. Based on the aforesaid resolution the appellant filed an

application dated February 5, 2015 before the BSE Limited

('BSE' for short) for recognizing the forfeiture of the shares

by the appellant Company pursuant to the resolution of the

Board of Directors. By an application dated July 3, 2015 the

appellant again made a request to the BSE for recognizing the

forfeiture of the shares allotted to Primus and prayed that

approval may be granted for delisting the forfeited shares.

5. By e-mail dated November 10, 2015 BSE informed that

there is no request received from the Official Liquidator with

regard to the cancellation of shares and that it is not known

whether the Official Liquidator was aware of the forfeiture of

the shares and the subsequent application made by the

appellant to BSE. BSE further informed that the delisting

cannot be done through forfeiture of the shares and can only 4

be done in accordance with the Companies Act by a scheme

of arrangement etc.

6. Subsequently, by the impugned order dated July 21,

2017 the application of the appellant for forfeiture of

61,42,847 equity shares held by Primus was rejected. BSE

found that the forfeiture of the shares was not in accordance

with the Articles of Association of the Company. Further

there was no provision in the BTA for forfeiture of shares

allotted to Primus on account of non performance of the

obligation by Primus. By the impugned order, BSE advised

the appellant to adopt the scheme for reduction of the share

capital for delisting of the shares.

7. The appellant Company being aggrieved by the said

decision of the BSE has filed the present appeal.

8. The Articles of Association of the appellant Company

provides for forfeiture of the shares subject to certain

compliances. For facility, Clause 53 and 59 of the Articles of

Association of the Company are extracted below:-

"53. If by the terms of issue of any share or otherwise any amount is payable at any fixed time or by installments at fixed times. Whether on account of the nominal amount 5

of the share or by way of premium every such amount or installment shall be payable as if it were a call duly made by Directors and payable on the date on which by the terms of issue such sum becomes payable and of which due notice has been given. In case of non-payment of such sum, all the relevant provisions herein contained as to payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had become payable by virtue of a call duly made and verified.

59. If calls or installment not paid notices may be given:

If a member fails to pay and call, or installment of a call, on or before the date appointed for payment of the same, the Directors may at any time thereafter during such time as the call or installment remains unpaid, serve a notice on such member requiring him to pay the same together with any interest that may be accrued and all expenses that may have been incurred by Company by reason of such non-payment."

9. In this regard we may refer to Clause 29, 30 and 31 of

Schedule I of Table A of the Companies Act which relates to

forfeiture of shares. For facility, the said provisions are

extracted here under:-

"Forfeiture of shares

29. If a member fails to pay any call, or instalment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or 6

instalment as is unpaid, together with any interest which may have accrued.

30. The notice aforesaid shall -

(a) name a further day (not being earlier than the expiry of fourteen days from the date of service of the notice) on or before which the payment required by the notice is to be made; and

(b) state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited.

31. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect."

10. From the aforesaid, it is apparently clear that a notice is

required to be given to the shareholder giving him an

opportunity for payment of the call money. Thus, before any

forfeiture can be made an appropriate service of notice is a

condition precedent to be fulfilled. Therefore, if there is any,

irregularity either in the contents of the notice or in the

service of notice as required under Clause (30) the same

would be fatal to the validity to the forfeiture. The Supreme

Court in Public Passenger Service Ltd. vs. M.A. Khadar

(1967) 36 Comp Cas 1 held that a defective notice of 7

forfeiture of shares renders the subsequent forfeiture invalid.

Similar view was reiterated by the Andhra Pradesh High

Court in Bhagwandas Garg vs. Canara Bank Ltd. (1981) 51

Comp Cas 38. In Kanduri Lakshmiah Chetty vs The Adoni

Electric Supply Co., Ltd. AIR 1944 Mad 322 wherein it was

held that if there is a slight irregularity it would be fatal to the

forfeiture.

11. Thus, BSE had rightly held that the forfeiture of shares

made by the appellant Company was not in accordance with

the provisions of the Articles of Association of the Company.

Nothing has been indicated by the learned counsel as to how

the finding of the BSE is incorrect. We find that under Clause

29 and 30 of Schedule I of Table A of the Companies Act

read with Clause 53 and 59 of the Articles of Association the

forfeiture of shares can only happen when a member fails to

pay sum / calls. Further, due notice has to be given to the

member before any forfeiture could be done by the Company.

In the instant case, there is nothing to indicate that due notice

was given to Primus or to the Official Liquidator before the

resolution was passed by the Board of Directors of the

appellant Company.

8

12. Thus, if the forfeiture is not validly made, the same

would become invalid. In the instant case, we do not find

anything to indicate that condition relating to forfeiture was

duly complied with by the appellant. We are further of the

opinion that once shares are allotted and registered in the

name of Primus the appellant Company has no power to

forfeit the shares on the ground of failure of consideration and

the remedy available is only to obtain appropriate relief by a

suit as held in Kotah Transport Ltd., Kotah vs. State of

Rajasthan AIR 1966 Raj 136.

13. We further find that the BTA also does not provide any

provision for forfeiture of shares allotted to Primus on

account of non-performance of the obligation by Primus.

14. In the light of the aforesaid, the contention of the

appellant that since much water has flown and no objection

has been raised by Primus with regard to forfeiture of shares

the appellant may be permitted to file a fresh application for

delisting of the shares cannot be accepted as the same is

misconceived in as much as it is not known whether the

appellant Company or the Official Liquidator are aware of 9

such alleged forfeiture made by the appellant Company. In

any case, we are of the opinion that the decision of the

appellant to forfeit the shares allotted to Primus was wholly

vitiated and was not in accordance with the Articles of

Association and Clause 29, 30 and 31 of Schedule I of Table

A of the Companies Act. Even otherwise, once the shares are

allotted the shares cannot be forfeited by a resolution made by

the appellant Company.

15. Consequently, for the reasons stated aforesaid we do not

find any error in the order passed by the BSE. The appeal

fails and is dismissed. In the circumstances, there shall be no

order on costs.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Dr. C.K.G. Nair Member

09.09.2019 Prepared & Compared by MSB/PTM