Case: Darius Rutton Kavasmaneck Vs. Gharda Chemicals Ltd.

2. First respondent company is carrying on the business ofchemical process, knowhow and of manufacturing dyes, chemicals and textileetc. It all started as a family firm in the year 1962 known as M/s. Gardha Chemicals Industries. The above-mentioned partnership was created by (1) the mother of the first appellant, (2) the husband of the first appellant, (3) a sister of the first appellant and the second respondent - the brother of the first appellant. The partnership deed contained a clause that none of the partners could sell his/her respective share in the firm without offering it first to the other partners.3. On 6th March, 1967, a private limited company was incorporated with the principal object of taking over the assets and liabilities of the above-mentioned partnership as a going concern. Article 57 of the Articles of Association contained restrictions on the rights of all the shareholders to transfer their shares. Any shareholder desiring to sell his shares must offer his shares to the other shareholders of the company pro rata to the holding of each of such other members respectively at a fair value. [57. Save as aforesaid the following provisions shall apply to the transfer of sharesmember of the company may transfer a share to his lineal descendent, but save as aforesaid no share shall be transferred to a person who is not a member of the company so long as any member is willing to purchase the same at the fair value as hereinafter provided.The member proposing to transfer any shares (hereinafter called the proposing transferor) shall give notice in writing (hereinafter called a transfer notice) to the Company that he desires to transfer the same;Within the period of seven days from the receipt of a transfer notice as aforesaid the Company shall offer to each of the existing members of the company respectively such number of the shares included in the transfer notice as a pro rata or as nearly as may be to the holding of each member respectively on the footing that if he desires to purchase any or all of such members of the said shares at the fair value he shall within fifteen days of the offer be entitled to apply for the purchase and transfer of the same and the company shall be bound, upon payment to the transferor of the fair value of such shares, to transfer the shares of member applying;In case any member or members shall not have applied for the purchase and transfer of any or all of the shares to which he is entitled, the company shall within seven days of the date at which the offer closed, offer the untaken shares to such of the members as have applied for the purchase and transfer of all the shares to which they were entitled by the terms of the original offer in proportion as the holding of each of such members bears to the total number of shares held by them and they shall be entitled within fifteen days of the offer to apply for the purchase and transfer of a pro rata number of the said untaken shares and the company shall be bound, upon payment to the transfer of the fair value of such shares, to transfer the shares to the member applying;The promising transferor shall be bound to execute a transfer in respect of any shares so sold and in default thereof be deemed to have executed such a transfer. The company shall thereupon cause the names of the members who have purchased the shares to be entered in the Register as the holders of such shares and thereafter the validity of the proceedings shall not be questioned by any person;In case no member shall apply for any of the shares included in the transfer notice or in case any are untaken after the compliance with the foregoing provisions of this Article the intending transferor shall have the right (which right shall endure for the period of one year from the date of transfer notice) to sell and dispose of hi shares to any person and at any price and to apply for registration of the transfer of the same and the company shall be bound to give effect to the transfer of such shares accordingly.For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors for the time being of the Company shall certify as the fair value thereof provided that it expressly declared that the fair value shall be (1) the amount of capital paid upon thereon plus (2) a sum bearing the same proportion to the value as appearing in thelast balance sheet of any reserve fund or other fund of the company as the capital paid up on all the shares of the company for the time being issued plus or minus as the case may be, (3) a sum bearing the same proportion to the value as appearing in the profit and loss account consisting of or representing undivided profits or losses as the capital paid up on such share bears to the total capital paid up on all the shares of the company for the time being issued.With effect from 17th August, 1988, the first respondent company became a public company (under Section 43A (1A) of the Act) as its turnover exceeded the limit prescribed****** ****** ************ ****** ******(1A) Without prejudice to the provisions of sub-section (1), where the average annual turnover of a private company, whether in existence at the commencement of the Companies (Amendment) Act, 1974, or incorporated thereafter, is not, during the relevant period, less than rupees one crore, the private company shall, irrespective of its paid-up share capital, become, on and from the expiry of a period of three months from the last day of the relevant period during which the private company had the said average annual turnover, a public company by virtue of this sub-section;Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven.One important development in the history of the first respondent company relevant for the decision of the instant appeal is that on 2nd April, 2001 a notice was issued calling for extraordinary general meeting of the first respondent company scheduled to be held on 5th May,purpose of the said meeting was to adopt a resolution for amending the Articles of Association of the first respondent by inserting clause (d) to Article 3 thereof. The substance of the said clause is to prohibit any invitation or acceptance of deposits from persons other than the members, directors or the relatives of the members or the directors of the company. According to the respondents, such a proposal for amendment was necessitated to comply with the requirements of the newly inserted sub-section (d) of Section 3(1)(iii) [3.(1)(iii) - ‘privatemeans a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,--prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.] which came to be inserted by Act 53 of 2000 w.e.f. 13.12.2000. The appellant opposed the amendment of the Articles of Association and the amendment could not be carried as the proposal failed to muster the requisite majority.HISTORY OF THE LITIGATION:6. In the month of May, 2009, certain reports appeared in the media that the second respondent was proposing to sell his shares in the first respondent company which were at that time valued at approximately 1600 crores. The appellant, therefore, filed a Company Petition No. 132/397-98/CLB/MB/2009 (hereinafter referred to as the Company Petition 132 of 2009) before the Company Law Board, inter alia, seeking prohibitory orders [That thisBench be pleased to grant a permanent order and injunction restraining the 2nd/3rd respondents by themselves or through their servants and or agents, directly or indirectly, from selling, transferring, alienating, dealing or disposing the shares held, directly or indirectly, by the 2nd/3rd Respondents in the 1st Respondent to any person without first offering the same to the Petitioners at the fair value quantified in accordance with Article 57(g) of the Articles of Association of the 1st Respondent.] against the 2nd and 3rd respondents from committing breach of the pre-emption agreement contained in Article 57 of the Articles of Association referred to supra. On 11th December, 2009, ad-interim injunction order was passed by the Company Law Board restraining the second respondent from alienating his share without permission of the Company Law Board. However, the Company Petition No. 132 of 2009 was heard finally and dismissed by an order dated 14th May, 2010.7. Aggrieved by the same, the appellants preferred Company Appeal No.24/2010 before the High Court of Bombay on 26th June, 2010. The High Court summarized the decision of the Company Law Board asIt is on this material that the company petition was placed before CLB and heard accordingly. The CLB firstly held that the first respondent is a public company. Once it is held to be a public company, then, its shares are freely transferable and the issue was to whether any preemption clause/article restraining transferability of shares in public company is valid. The Board held that the Article 57 does contain such restriction but, the Board relying upon a judgment of this Court in the case of Western Maharashtra Development Corporation Ltd. Vs. Bajaj reported in (2010) 154 Company Cases 593 (Bom) held that such an clause in the Articles of Association will not be applicable to 1st respondent company. Once it is held to be a public company, its shares are freely transferable and the Articles would not hold good as they are contrary to the statute. Holding that violation of such an clause in the Articles is not an act of oppression, the petition came to besaid appeal was finally heard and dismissed by the impugned judgment dated 14th June, 2011.According to the appellants, the High Court held thatagreement between shareholders of an unlisted public company conferring a right of preemption which is embodied in its Articles is invalid and8. Elaborate submissions were made on either side dealing with the various provisions of the Companies Act as amended from time to time. The learned counsel appearing on either side also submitted written briefs.9. According to the written brief submitted by the appellant the question that arises for consideration of this Court is summarized as follows:on and after the bringing into force of the Companies (Amendment) Act, 2000, the status and character of Gharda Chemicals Ltd. (R-1) continued to be as that of aon 43A company) and whether this company and its members are bound by the terms of a preemption clause contained in Article 57 of the Articles of Association?In our opinion, the REAL QUESTION is not whether after the Amendment Act 53 of 2000, the first respondent continued to be a private company or became a public company, But whether the amendment made by the Act 53 of 2000 to Sections 3 and 43A destroys the rights and obligations created by Article 57 of the Articles of Association of the first respondent company.The case of the appellants all through has been that notwithstanding the amendment of the Act by the Amendment Act 53 of 2000, Article 57 of the Articles of Association still governs the rights of the members of the first respondent Company.11. On the other hand, the case of the respondents has always been and is that the first respondent company is a public company having had become so by the operation of law i.e., Section 43A(1) and it cannot now become a private company. There is nothing in the Amendment Act 53 of 2000 which automatically renders a public company created under Section 43A to become a private company. It is also the case of the respondents that the failure to amend the Articles of Association to give effect to Section 3(1)(iii)(d) ipso facto make the first respondent a public company thereby rendering Article 57 inoperable.

Court's reasoning:
94. The question whether the first respondent Company is a public company or a HYBRID company or a private company was never directly and substantially in issue in Company Petition No.77 of 1990. The parties to the said company petition proceeded on the basis that in view of the fact that an amendment to the Articles of Association to give effect to the newly inserted clause (d) of Section 3(1)(iii) could not be carried on, the first respondent company became a public company. Therefore, the Court never examined that question of law. Hence, it cannot be said that the appellants are precluded from raising such a question of law in the instant appeal.95. We therefore, do not propose to examine the question as to what is the effect of thewithdrawal from the abovementioned company petition.96. The only other submission of the respondent which requires to be dealt with is regarding the transfer of five shares of the appellant which, according to the respondents, resulted in the membership of the first respondent company exceeding fifty thereby rendering the first respondent a public company. Unfortunately, though the High Court noted the submission at para 9, it did not record any finding in this regard. We, therefore, decline to examine this question. This Court cannot be converted into a Court which enquires into the questions of fact for the first time.97. In view of the fact the High Court, though noted the contentions of the respondent herein, failed to record any conclusion thereon, we deem it appropriate to remit the matter to the High Court only for the purpose of considering the abovementioned submissions of the respondent and take appropriate decision.