Case: V. B. Rangaraj Vs. V. B. Gopalakrishnan &amp; Others

is a private limited company which all along had a total shareholding of 50. Before the joint family of the plaintiffs and defendants came to hold all the 50 shares of the company, the family was a minority shareholder holding 13 shares, the rest 37 shares being held by outsiders. In course of time, the family acquired the rest 37 shares and became the sole shareholder of the company. The family consisted of Baluswamy Naidu and Guruviah Naidu who were brothersand each of the brothers held 25 shares in the company. The plaintiffs and defendants1 and 2 and one Selvaraj are the sons of Baluswamy Naidu and defendants 4 to 6 are the sons of Guruviah Naidu. Baluswamy Naidu died on February 5,and Guruviah Naidu died on January 10, 1970. The plaintiffs alleged that in 1951 there was an oral agreement between Baluswamy Naidu and Guruviah Naidu that each of the branches of the family would always continue to hold equal number of shares, viz., 25 and that if any member in either of the branches wished to sell his share/shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. Although on behalf of, it wasdisputed that there was any such agreement entered into between the two brothers, the finding recorded by all the courts below is against the defendants. It is not in dispute that theon of the company were not amended to bring them in conformity with the saidContrary to the said agreement, thei.e., son of Baluswamysold the shares to defendants4 to 6 who are the sons of Guruviah Naidu.the plaintiffs who are Baluswamys sons filed the present suit for (i) a declaration that the said sale was void and not binding upon the plaintiffs and the second defendant (who is also the son of Baluswamy Naidu but was joined as a pro forma defendant) and for (ii) an order directing defendants1 and 4 to 6 to transfer the said shares to the plaintiffs and the second defendant and for (iii) a permanent injunction restraining defendants4 to 6 from applying for registering the said shares in their names and from acting adversely to the interests of the plaintiffs and theon the basis of the transfer of the saidt decreed the suit by holding that the sale of the said shares was invalid and not binding on the plaintiffs and the second defendantand directed both the first defendant and defendantsand defendants 4 to 6to transfer the said shares to the plaintiffs, and granteda permanent injunctionas prayed for. The appeals filed by thedefendant 1 anddefendants 4 to 6were dismissed. In the second appeals filed by them the High Court held that the courts below had proceeded on a wrong basis. According to the High Court the suit was in effect one to enforce the agreement providing forand the court was entitled to mould the reliefs on the facts proved in the case, the High Courtmodified the decree by directing substitution of the plaintiffs as shareholders in place ofdefendants 4 tothe High Courtin terms held that (i) the sale of the shares byin favour ofdefendants 4 towas invalid and hence the plaintiffs andsecond defendant became entitled to purchase the said shares, (ii) the agreement was binding on the company, and (iii) the company was bound in law to register the said shares in the plaintiffs

Reasoning: basis of the judgment and decree ofthe High Courtand of the judgments and decrees of the courts below is the alleged invalidity of the sale of the shares. Ittherefore, necessary to understand the true position of law in this behalf. Section 3(iii) of the Companies Act (hereinafter referred to as the Act) definesa private companyto mean a company which by itsrestricts the right to transfer its shares, if any, and limits the number of its shares to 50 (excepting employees andwho were and are members of the company) and prohibits anyon to the public to subscribe for any shares in, or debentures of, the company. Section 26 of the Act provides that in the case ofa private companylimited by shares, such as they, there shall be registered with theion signed by the subscribers of theprescribing regulations for the company. Section 28 provides that theon of a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule Ithe Act. Section 31 provides forles by a specialof the company.Section 36 states that when the Memorandum and Articles of Association are registered, they bind the company and the members thereof. Section 39 provides for supply of the copies ofand Articles of Association to a member. Section 40 makes it mandatory to incorporate any changes in the Articles of Association in every copy of the Articles of Association. Section 82 defines the nature of shares and states that the shares or other interests of any member in a company shall be movable property transferable in the manner provided by theon of thecle in effect consists of three parts. The first part states that no new member shall be admitted except with the consent of the majority of the members. The second part states that on the death of any member, his heir or heirs or nominee/s shall be admitted asThe third partthat if such heir or heirs or nominee/s is/are unwilling to become member/s, the share capital of the deceased member shall be distributed among the existing members equally or transferred to any new member with the consent of the majority of the members. It is, therefore, clear that even a new member can be admitted provided the majority of the members are agreeable to do so. It also appears from the word "nominee" that a living member has a right to nominate even a third party to succeedhim as a member on his death.the restriction on transfer by way of a right ofwhich is incorporated in the third part of theis only in respect of the shareholding of the deceased member and not of a living member. Whereas the heirs/nominees are asmatter of right entitled to become members if they are willing to do so, the restriction on the transfer of shares steps in only when they are unwilling to become members. The restriction states that in the latter event the shares of the deceased member shall be first distributed among the existing members equally and if they are to be transferred to any new member, it would be done so with the consent of the majority of the existing members. It may be noticed from this restriction, that firstly there is no limitation on the transfer of his shares by a living member either to the existing member or to a new member. The only condition is that when the transfer is made to a new member, it will have to be approved by the majority of the members. The transfer may be to any existing member whether he belongs to one or the other branch of the family and in such case there is no needconsent of the majority of the members. Thein fact envisages theof the shareholding of the deceased member(and not of the living member) equally among the members of both branches of the family and not of any one of the branches only. Even the shares of the deceased member can be transferred to any new member when his heirs/nominees are not willing to become members. However, this can be done only with the consent of the majority of theHence, the private agreement which is relied upon by the plaintiffs whereunder there is a restriction on a living member to transfer his shareholding only to the branch of family to which he belongs in terms imposes two restrictions which are not stipulated in theFirstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the members right to transfer his shares which are contrary to the provisions ofArticle 13. They are, therefore, not binding either on the shareholders or on the company. In view of this legal position, the finding recorded by the courts below that the sale by the first defendant of his shares tois invalid as it is in breach of the agreement, is erroneous in law. In view of our above finding, it is unnecessary to go into the question whetherthe High Courtwas justified in directing the transfer of shares by6 tothe plaintiffs even if its finding that the sale was invalid was correct