Case Law Details

Case Name : Radhabari Tea Co. Pvt. Ltd. Vs. Mridul Kumar Bhattacharjee (Guwahati High Court)
Appeal Number : Appeal No: F. A. O. No. 15 of 2009
Date of Judgement/Order : 02/12/2009
Related Assessment Year :
Courts : All High Courts (3897) Guwahati High Court (23)

Decision of a company has to rest on views of majority; in case of disagreement by the minority, remedy lies u/s 397 & 398 and not in Civil Court. When a case falls within four corners of section 397 and/or section 398, ordinary civil court’s jurisdiction would stand barred to deal with such a dispute

HIGH COURT OF GAUHATI

Radhabari Tea Co. Pvt. Ltd. Vs. Mridul Kumar Bhattacharjee

APPEAL NO: F. A. O. No. 15 of 2009

DECIDED ON December 2, 2009

RELEVANT PARAGRAPH

106 The history of development of companies, as indicated by Palmer> clearly indicates that it is the law of contract, which became the basis of the” deed of settlement of companies. The English Companies Act largely regulates, by way of statutory provisions, the contractual rights of the parties^ The general law of contract is, thus, the basis of the rights of the parties even in the affairs of the company, though, as we would note shortly, the Companies Act does give to the shareholders some rights, which never existed in common law. Unless, therefore, there is exclusion of jurisdiction of the civil court by words, express or implied, in a given case, a suit will bf maintainable for enforcement of such rights of the shareholders, which are contractual in nature. Same situation prevails in India.

107 A narration of the history of the provisions, contained in sections 397 and 398, clearly shows that no right had existed with a minority share* holder to apply, instead of opting for winding up, for suitable orders as are now, provided under sections 397 and 398. To the extent, therefore, that; sections 397 and 398 deal with, civil court’s jurisdiction would stand impliedly barred.

108 Coupled with the above, and as already discussed above, sections 397 and 398 contain a complete body of the Code as regards enforcement of the rights of the minority shareholder. The special procedure, prescribed by sections 397 and 398, clearly shows that the legislative intent is to bar the jurisdiction of the civil court in respect of matters, which are covered by*; sections 397 and 398 inasmuch as every shareholder shall not be allowed to disturb (as the legislative intent reflects) the affairs of the company unless he either has the support of requisite number of shareholders or hold requisite number of shares. The freedom to, therefore, approach a civil court in respect of matters, which are governed by the statutory provision of sections 397 and 398, shall be treated to be barred ; otherwise, there is no meaning for the legislature imposing restrictions on a shareholder right to disturb the working of his company. This will, however, not take away the shareholder’ s right to approach the civil court for remedy of such grievances, which are contractual in nature. No wonder, therefore, that with regard to even winding up procedure, the Delhi High Court has held, in Maharaja Exports v. Apparels Exports Promotional Council [1986] 60 Comp Cas 353, that in winding up proceeding, the civil court’s jurisdiction is impliedly barred. Though the Supreme Court took note of the decision, in Dwarka Prasad (supra), it has not differed from the law laid down in Maharaja Exports (supra). I, therefore, see no reason to take a view different from what was taken by the Delhi High Court in Maharaja Exports (supra) and, on this reasoning, I too hold that when a case falls within the four corners of section 397 and/or section 398, the ordinary civil court’s jurisdiction would stand barred to deal with such a dispute.

What emerges from the above discussion is that a company shall be 109 allowed to function according to the decision of the majority shareholders and a shareholder, who does not agree with the decision of the majority of the shareholders, cannot challenge the decision of the company except when the decision is, as held in Helliwell’s case (supra), ultra vires the company or illegal or when the decision constitutes a fraud against the minority and the wrongdoers are themselves in control of the company; or when a resolution, which requires a qualified majority, has been passed by a simple majority. If the decision of the majority does not fall under any of the exceptions as indicated herein before, the remedy of the aggrieved shareholder lies, unless his rights and liabilities are founded on common law, in applying under section 397 or 398, as the case may be, if he considers such a decision to be oppressive or against the interest of the company or against the interest of the public and, further, if he holds adequate number of shares or has the support of adequate number of shareholders as are statutorily required by section 399 or else, if he is authorized by the Central Government.

What logically follows from the above discussion is that if the grievances 110 of the plaintiff- responden t herein are founded on his rights under the common law, he can file a suit, in the civil court of ordinary jurisdiction, for remedy of his grievances ; but if his grievances are founded on statutory rights, which are created, for the first time, under sections 397 and 398, his remedy will lie in making appropriate application if he has the support of the requisite number of shareholders or if he holds the requisite number of shares and if he has no such qualification, he has to apply to the Central Government and it is only when the Central Government authorizes him that he would be able to apply under section 397 or 398, as the case may be.

111 The question, therefore/is as to whether the plaintiffs suit was prima facie barred by the provisions of section 397 and/or 398.

112 Before answering the question posed above, let me, for a moment, leave, the question without being answered and look into the question as to whether the plaintiffs grievances are founded on common law.

113 In order to resolve the controversy in this appeal, it is appropriate to restate the plaintiff-respondent’s case.

114 The sum and substance of the plaintiff’s claim is that under the articles of association of the appellant-company, no shareholder can sell his shares outside the company without giving an option to the shareholder, who may be interested in buying the shares, and the directors cannot allow transfer of shares to an outsider without letting the other shareholders exercising their option to buy shares. The plaintiff claims that he opted to purchase shares at the very same price, which had been offered by an out-sider, but the directors, by their act and conduct, refused to allow him to buy the shares. The plaintiff has, therefore, instituted the present suit.

115 Let me, first, point out as to what a share is. As observed in Life Insurance Corporation of India v. Escorts Ltd. reported in [1986] 59 Comp Cas 548 ; [1986] 1 SCC 264, section 2(46) of the Companies Act defines “shares” as meaning “share” in the share capital of a company, and includes stock except where a distinction between stocks and shares is express or implied.

116 Section 84 makes a certificate, under the common seal of the company, specifying any shares held by any member prima facie evidence of the title of the members to such shares. Section 87 gives every member of a company, holding any equity share capital therein, a right to vote, in respect of such capital, on every resolution placed before the company, his voting right to be in proportion to his share of the paid-up equity capital of the company. Section 428 defines “contributory” and it includes the holder of any shares, which are fully paid-up. Apart from the rights given to a shareholder to apply for appropriate order(s) under sections 397 and 398, the shareholder, as a contributory, has also the right to apply for winding up of the company under section 439. On winding up, section 475 enables the court to adjust the rights of the contributories among st themselves and to distribute the surplus among the persons entitled thereto.

117 It may be noted that section 3(iii) of the Companies Act, 1956, defined private company to mean a company, which, by its articles, restricts the right to transfer its shares, if any, and limits the number of its shares to 50 (excepting employees and ex-employees, who were and are members of the company) and prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company.

118 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 the articles of association of the company. Thus, section 82 itself recognizes share as movable property transferable in the manner as may have been prescribed by the articles of the company.

119 Section 26 of the Act provides that in the case of a private company limited by shares, there shall be registered with the memorandum, articles of association signed by the subscribers of the memorandum prescribing regulations for the company. Section 28 provides that the articles of association of a company, limited by shares, may adopt all or any of the regulations contained in Table A in Schedule I of the Act. Section 31 provides for alteration of the articles by a special resolution of 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 of memorandum and 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.

120 `The above statutory provisions, discussed above, clearly show that the articles of association are regulations of the company, which bind the company as well as its shareholders, the shares are movable properties and their transfer is regulated by the articles of association of the company. It needs to be, however, borne in mind that, ordinarily, there can be no restriction on the transfer of shares by a shareholder of a company to any person within or outside his company. Many a times, however, a private company may, in order to maintain close ties of the shareholders of the company, not allow intrusion of an outsider as a shareholder. Such a restriction can be imposed by the articles of association of the company.

121 In Palmer’s Company Law, Vol. 1 (25th edition), it has been stated that the articles of a private company often contain restrictions, on the transfer of shares, in order to preserve the private character of the concern. As regards transfer of shares in private company, particularly, pre-emption clauses, Palmer’s Company Law, points out, “A private company is, normally, what the Americans call a ‘close corporation’ ; this means that its members are connected by bonds of kinship, friendship or similar close ties and that the intrusion of a stranger as shareholder would be felt to be undesirable unless his admission is accepted by those for the time being interested in the company. Some private companies are, in fact, so constructed as to amount, in economic terms, to incorporated partnerships with the attendant close connection between the members. For this reason, in private companies, the regulation, dealing with the restriction of the right to transfer shares, even though no longer required by law, remains of particular practical importance”.

122 It has to be further borne in mind that a pre-emptive right to buy shares’ of his company is granted in favour of a member of a private company under the articles of association so that his right of control is not taken away. Exercise of such pre-emptive rights is, particularly, needed in relation to those private companies, which are essentially incorporated partner ships. (See Gower and Davies’ Principles of Modern Company Law, 7th edition, page 635.)

123 The question, therefore, is : Whether transfer of a share by a shareholder in violation of another shareholder’ s pre-emptive right to buy such share as provided for in the articles of association, is a valid transaction? The question, so posed, brings me to the case of Hunter v. Hunter reported in [1936] AC 222; [1937] 7 Comp Cas 36 (HL), wherein the shareholders, in a private company, challenged the transfer of shares by another shareholder to third parties without compliance with the provisions of articles of association. In Hunter (supra), a member could not have transferred, in terms of the articles, his shares until he had given notice to the secretary offering to” sell the shares at a price to be fixed by the auditor and until the secretary had offered them to the other members, it was found that in violation of a this article, one of the shareholders had sold the shares to nominees of a bank from which that shareholder had obtained loans. The application for rectification of the share register was resisted by the purchaser in whose favor the shares had already been registered with the company, lip House of Lords came to the conclusion that the purchase was not in terms of the articles and that the transfer in violation of the articles was inoperative.

124 A similar situation arose in the case of Lyle and Scott Ltd. v. ScoMm Trustees reported in [1959] 2 All ER 661 (HL), inasmuch as in Lyle and Scott (supra) too, the articles of association provided for, inter alia, a preemptive right to the existing shareholders to purchase shares. There was dispute that the article had been violated. The House of Lords observe^

“The purpose of the article is plain : to prevent sales of shares to strangers so long as other members of the appellant company are willing to buy them at a price prescribed by the article and this is a perfectly legitimate restriction in a private company.”

125 Having examined the provisions, embodied in the Companies Act, l^S the apex court in V. B. Rangraj v. V. B. Gopalakrishnan, reported’™ [1992] 73 Comp Cas 201 ; [1992] 1 SCC 160, concluded, at paragraph 2010] Radhabari Tea Co. v. M. K. Bhattacharjee (Gauhati) 639 thus (page 205 of 73 Comp Cas): “These provisions of the Act make it clear that the articles of association are the regulations of the company binding on the company and its shareholders and that the shares are movable property and their transfer is regulated by the articles of association of the company.”

126 Having examined the scheme of the Companies Act, 1956, the apex court has held, in V. B. Rangraj (supra), at paragraph 8, that under the Companies Act or Transfer of Property Act, 1882, the shares are transferable like any other movable property. The apex court points out that the only restriction on the transfer of the shares of a company is as may have been laid down in the articles of association, if any. A restriction, which is not specified in the articles, is, therefore, according to the apex court, in V. B. Rangraj (supra), not binding either on the company or on the shareholders and that the vendee of such shares cannot be denied registration of the shares purchased by him on a ground other than what is stated in the articles of association.

127 In V. B. Rangraj (supra), what fell for determination of the court was when the shareholders, among st themselves, had entered into an agreement, imposing on themselves restrictions to transfer shares, which were contrary to, and inconsistent with, the articles of association of their company, as regards transfer of share, whether such agreement can prevail upon the articles of association.

128 On finding, in V. B. Rangraj (supra), that the articles of association do not impose any such restrictions, which the shareholders had, by a separate agreement entered into, the apex court took the view that no restriction, on the transfer of shares, can be imposed by private agreement. In other words, no restriction, on the transfer of shares, is permissible except to the extent as the articles of association of the company concerned may have imposed.

129 Referring to certain authorities on the question as to what restrictions can be imposed on a shareholder’ s right to transfer shares, the apex court, in V. B. Rangraj (supra), further observed :

“12. In Chapter 16 of Gore-Browne on Companies (43rd edition) while dealing with transfer of shares it is stated, that subject to certain limited, restrictions imposed by law, a shareholder has prima facie the right to transfer his shares when and to whom he pleases. This freedom to transfer may, however, be significantly curtailed by provisions in the articles. In determining the extent of any restriction on transfer contained in the articles, a strict construction is adopted. The restriction must be set out expressly or must arise by necessary implication and any ambiguous provision is construed in favor of the share-; holder wishing to transfer. j

13. In Palmer’s Company Law (24th edition) dealing with the ‘transfer of shares’, it is stated at pages 608-609, that it is well settled that unless the articles otherwise provide, the shareholder is a free right to transfer to whom he will, It is not necessary to seek in the articles for a power to transfer, for the Act (the English Act of 1980) itself gives such a power. It is only necessary to look to the articles to ascertain the restrictions, if any, upon it. Thus a member has a right to transfer his share/shares to another person unless this right is clearly taken away by the articles. *

14. In Halsbury’s Laws of England, 4th edition, paragraph 359 dealing with ‘attributes of shares’ it is stated that ‘a share is a right tfl t a specified amount of the share capital of a company carrying with itf | certain rights and liabilities while the company is a going concern arwft | in its winding up. The shares or other interest of any member in * J company are personal estate transferable in the manner provided by 1 its articles and are not of the nature of real estate’. // §

15. Dealing with ‘restrictions on transfer of shares’ in Pennington’s 1 Company Law (6th edition) at, page 753, it is stated/that shares are I presumed to be freely transferable and restrictions on their transfer are construed strictly and so when a restriction is capable of two meanings, the (less restrictive interpretation will be adopted by the ; court. It is also made clear that these restrictions have to be embodied in the articles of association” –

130 With regard to the restriction on transfer of shares, Halsbury’s Laws of England, (Fourth edition), at paragraph 863, states :

“863. Restriction on transfer of shares.—The articles of many companies contain some restrictions on the right of transfer. A restriction the right to transfer shares is not repugnant to the absolute Ownership of the shares, but is one of the original incidents of the shares attached to them by the contract contained in the articles.

Restrictive provisions are strictly construed because shares, beings personal property, are prima facie transferable.

Where’ the scheme and intent of the restrictions are to accord; rights of pre-emption to the other members of the company, if there is no substantial compliance with the procedure laid down, the shareholder denied such rights is entitled to an appropriate injunction to protect his position.”

Thus, a restriction, on the right to transfer shares, is not repugnant to 131 the absolute, ownership of the shares, but is one of the original incidents of the shares attached to them by the contract contained in the articles. The restrictive provisions, contained in the articles of association of a company, are to be strictly construed, because the shares, being personal property, are prima facie transferable. Unless, therefore, the articles of association, in a given case, impose any restriction on the transfer of shares, there can be no restriction on the transfer of shares. Consequently, when the articles of association do not give any absolute or inflexible pre-emptive right to purchase shares to the shareholders of a company, it becomes the duty of the court to determine if transfer of shares to an outsider is illegal. In other words, the exceptions, to the restrictions in transferring the shares, must be liberally construed.

As already pointed out above, in the case of V. B. Rangaraj v. V. B. 132 Gopalakrishnan [1992] 73 Comp Cas 201; AIR 1992 SC 453, an agreement was entered into between the members of the family who were the only shareholders of a private company. The agreement was that for all times to come, each of the branches of the family would always continue to hold equal number of shares 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. This was a blanket restriction on all the shareholders, present and future. Contrary to the agreement, one of the shareholders of one branch, sold his shares to members of the second branch. Such sale was challenged in a suit as being void and not binding on the other shareholders. The Supreme Court rejected the challenge holding that the agreement imposed a restriction on shareholders’ rights to transfer shares, which was contrary to the articles of association of the company. It was, therefore, held that such a restriction was not binding on the company or its shareholders.

133 The case of V. B. Rangaraj (supra) shows that no restriction on the transfer of shares, contrary to the articles of association, can be imposed on the shareholders or the company itself. Conversely, the restriction, imposed by the articles of association, cannot be violated. Any action, which has been taken by a company or its shareholders, in general, or the directors, which is beyond the powers contained in the memorandum of association or not authorized by the memorandum of association of the company or law, would be nothing but ultra vires unless the action can be regarded, as already discussed above, incidental to, or consequential upon, the powers, which the person, taking the action, otherwise, enjoy. If a decision is ultra vires, such a decision cannot be legally enforced.

134 What is, now, necessary to point out is that section 10 of the Specific Relief Act, 1963, makes, a contract specifically enforceable if there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done, or when the act agreed to be done, if such that compensation, in money, for its non-performance, would not afford adequate relief. Normally, in the case of a contract to transfer movat. He property, specific performance is not granted except in circumstance specified in the explanation to section 10 of the specific Relief Act, 1963, One of the exceptions is where the property is “of special value or interest to the plaintiff, or consists of goods, which are not easily obtainable in the market”. It has been held, by a long line of authority, that shares, in a limited company, would come within the, phrase “not easily obtains able in the market” (see Jainarain Ram Lundia v. Surajmull Sagarmuffl AIR 1949 SC 211).

135 The Privy Council, in Bank of India Ltd. v. Jamsetji A. H. Chinoy, AIR 1950 PC 9a held (page 96) :

“It is also the opinion of the Board that, having regard to the nature of the company and the limited market for its shares, damages would not be an adequate remedy.”

136 From the observations made by the Supreme Court, in V. B. Rangaraj J: V. B. Gopalakrishnan [1992] 73 Comp Cas 201; AIR 1992 SC 453, it become clear that, ordinarily, even in a private company, “limited by shares, a shareholder shall be free to transfer a share to anyone except as provided in articles of association. Thus, the right given, under the articles of association of a company, to a shareholder to purchase that share, which another share-holder of the company wishes to sell to an outsider, is nothing but a contract having a right of pre-emption to buy the share and such a right is enforce^ J able under section 10 of the Specific Relief Act, 1963.

137 Thus, subject to such restrictions as the articles of association may impose, a shareholder, in a private company, may agree to sell his share; tal a person of its choice. Such an agreement can be specifically enforced Wm fact, there is no dispute that the right to specifically enforce a contract from common law. Such a right can, therefore, be enforced through um civil court unless the Companies Act can be shown to have, expressly “m impliedly, barred, in a given case, the jurisdiction of the civil court to specifically enforce a contract. Viewed thus, it is clear that the pre-emptive right, given to a shareholder, under the articles of association, can be specifically enforced by a civil court unless the Companies Act can be shown to have in a given case, ousted the jurisdiction of the civil court.

It will, therefore, depend on the facts of a given case as to whether a suit 138 for specific performance of contract of pre-emptive right to purchase share can or cannot be specifically enforced, though, ordinarily, it will be difficult to reject the claim of specific performance of contract of such a pre-emptive right unless the case is shown to fall within the four corners of sections 397 and 398 of the Companies Act, 1956.

Even in M. S. Madhusoodhanan v. Kerala Kaumudi P. Ltd. reported in 139 [2003] 117 Comp Cas 19 ; [2004] 9 SCC 204, the apex court has held that the specific performance of a contract for transfers of shares, in a private limited company, could be granted.

I may, in this regard, refer to the observations made by the apex court in 140 M. S. Madhusoodhanan v. Kerala Kaumudi P. Ltd. reported in [2003] 117 Comp Cas 19 ; [2004] 9 SCC 204, which read as under (page 62 of 117 Comp Cas) :

“141. Subject to this restriction, a holder of shares in a private company may agree to sell his shares to a person of his choice. Such agreements are specifically enforceable under section 10 of the Specific Relief Act, 1963, which corresponds to section 12 of the Specific Relief Act, 1877. The section provides that specific performance of such contracts may be enforced when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done ; or when the act agreed to be done is such that compensation in money for its non-performance would not afford adequate relief. In the case of a contract to transfer movable property, normally specific performance is not granted except in circumstances specified in the Explanation to section 10. One of the exceptions is where the property is ‘of special value or interest to the plaintiff, or consists of goods which are not easily obtainable in the market’. It has been held by a long line of authority that shares in a private limited company would come within the phrase ‘not easily obtainable in the market’ (see : Jainarain Ram Lundia v. Surajmull Sagarmull, AIR 1949 FC 211, 218). The Privy Council in the Bank of India Ltd. v. /. A. H. Chinoy, AIR 1950 PC 90, paragraph 21, said : ‘It is also the opinion of the Board that, having regard to the nature of the company and the limited market for its shares, damages would not be an adequate remedy.’

The specific performance of a contract for transfers of shares in a private limited company could be granted.” I may also point out that there is an inherent distinction between issue 141 of new shares in a company and sale of share by a shareholder to another, for, it is the company, which issues and allots new shares and not the shareholders; whereas the decision to sell shares is, ordinarily, the decision of the shareholder and it is a private arrangement unless the company becomes a party to such a decision.

142 Referring to the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [19&] 35 Comp Cas 351 ; AIR 1965 SC 1535), which deal with the question-of enforcement of an agreement relating to issue of hew shares, the apex court, in M. S. Madhusoodhandn (supra), observed (page 62 of 117 Comp. Cas.). Therefore, while it is imperative that the company should be a party to any agreement relating to the allotment of new shares, before such an agreement can be enforced, it is not necessary for the company to be a party in any agreement relating to the transfers of issued shares for such agreement to be specifically enforced between the parties to the transfer,?’. (emphasis1 is added).

143 Thus, to an agreement for specific performance of transfer of issued share, the company is, ordinarily, not a necessary party for, the company would come into picture only when the question of recognizing the transfer of share would arise. In a given case, a company has, in the light of section 111, freedom to, if so authorized by the articles of association, refuse transfer of shares. Thus, an agreement between two shareholders or between a shareholder or outsider to transfer share is enforceable against the one, who is a party to such an agreement, and such an agreement would not be binding on the company unless, the company is also a party to such an agreement. If the articles of association of a company give pre-emptive right to a shareholder, it becomes a contract not only between the shareholder and the company, but also the shareholders inter se. In a suit for specific performance of such a contract, not only the shareholder, against whom pre-emptive right is sought to be exercised, but even the company would be necessary parties.

144 What logically follows from the above discussion is that when there is a contract for sale’ of shares between two shareholders of the same company or between a shareholder and an outsider, the shareholder or the outsider, whoever was to purchase share, may institute a suit for specific performance of contract against the shareholder, who was to sell share. To such a suit, the company is not, unless the company was also a party to the agreement, a necessary party. Extended logically, what it means is that the shareholder, who was to sell share, is, at any rate, necessary party to such a suit for specific performance of contract. No wonder, therefore, that Halsbury’s Laws of England (fourth edition), at paragraph 378, states :

1. Here printed in italics.

“378. Contract between members inter se.—While the articles regulate the rights of the members inter se, the older authorities support the view that they do not constitute a contract between the members inter se, but only a contract between the company and its members. Therefore, the rights and liabilities of members as members, under the articles, may be enforced by or against the members only through the company. However, more recent authorities support the direct enforcement by members of rights as members conferred by the articles.

Rayfield v. Hands [1960] Ch 1 ; 2 All ER 194, Hurst v. Crampton Bros (Coopers) Ltd. [2002] EWHC 1375 (Ch) ; [2003] 1 BCLC 304 (transfer of shares by member in breach of pre-emption requirements in articles defeasible at the suit of another member.)”

145 From what the Halsbury’s Laws of England states, it is clear that in order to institute a suit for enforcement of a contractual obligation of the right of pre-emption, as regards purchase of share, it is not necessary to make a company a party to the suit, but the shareholder, against whom the pre-emptive right is sought to be exercised, is a necessary party.

146 However, if the right of pre-emption arises out of the articles of association the company would necessarily be treated as a party to the agreement inasmuch as the articles of association bind the company and not only regulates company’s relationship with the shareholders, but also relationship of the shareholders inter se. In a suit, therefore, arising out of a right of pre-emption, given by the articles of association, both the shareholder, whose share is sought to be purchased by the plaintiff, as well as the company would be necessary parties.

147 It is, now, imperative to note that section 108(1) prohibits a company from registering a transfer of shares in a company unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee has been delivered to the company along with the certificate relating to the shares. Section 108(1 A)(a) provides for the presentation of the instrument of transfer, in the prescribed form, to the prescribed authority for the purpose of having duly stamped on it the date of such presentation. Section 108(lA)(b) provides for the delivery of the duly stamped instrument to the company within, generally, two months from the date of such presentation. Section 110 provides for application for transfer of shares. Section 111(1) preserves the power of the company under its articles to refuse to register the transfer of any shares of the company and section 111(3) provides for an appeal to the Central Government against such refusal to register. Section 206 obliges a company not to pay the dividend in respect of any share except to the registered holder of such share or to his order or to his bankers or where a share warrant has been issued, in respect of the share, to the bearer of such warrant or to his banker.

148 Let me pause, at this stage, to consider the question as to what will happen if transfer of share by one shareholder to another or by a shareholder to an outsider is refused to be recognized by the directors in exercise of their powers under section 111 of the Companies Act, 1956. It may b<£ noted, in this regard, that the directors do not have any inherent power or right to refuse to recognize transfer of shares unless the articles of asso2 ciation so indicate (see Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkifa reported in [1989] (2) Supp SCC 656 ; [1990] 67 Comp Cas 518).

149 With regard to the above the apex court has clarified the position of la# in Bajaj Auto Ltd. v. N. K. Firodia [1971] 41 Comp Cas 1; AIR 1971 SC” 321, by pointing’ out that even if the articles of association of a company provide that the directors might, in their absolute and uncontrolled discretion, decline to register any transfer of share, such discretion does not, mean a bare affirmation or negation of a proposal and that such discretion has to be exercised bona fide on just and proper consideration of the proposals in the facts and circumstances of the case and in the general interest of the company and its shareholders, particularly, because the directors hold a fiduciary position towards the company as well as its shareholders and, consequently, such discretion cannot be exercised arbitrarily. Taking note of the decision of the case of Bajaj Auto Ltd. (supra), the apex court in Escorts Ltd. (supra), observed as under (page 617 of 59 Comp Cas)

“83. Earlier we mentioned that section 111 of the Companies’ Act preserves the power of the company under its articles to refuse to register the transfer of any shares of the company. The nature and extent of the power of the company to refuse to register the transfer of shares has been explained by this court in Bajaj Auto Ltd. v. N. K. Firodia [1971] 41 Comp Cas 1 ; AIR 1971 SC 321. It was said , that ‘even if the articles of the company provided that the directors might at their absolute and uncontrolled discretion decline to register any transfer of shares, such discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal, in the facts and circumstances of the case. In-the l exercise of that discretion, the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive’. Where the articles permitted the directors to decline to register the transfer of shares without assigning reasons, the court would not necessarily draw adverse inference against the directors but will assume that they acted reasonably and bona fide. Where the directors gave reasons the court would consider whether the reasons were legitimate and whether the directors proceeded on a right or wrong principle. If the articles permitted the directors not to disclose the reasons, they could be interrogated and asked to disclose the reasons. If they failed to disclose that reason, adverse presumption could be drawn against them.”

150 Broadly in tune with the above position of law, as I have already pointed out, can also safely hold that notwithstanding the pre-emptive right, which a shareholder may have under the articles of association and can specifically enforce such pre-emptive right to buy shares, the shareholders’ freedom to sell shares to an outsider, or the board of directors’ power to allow such transfer of share to an outsider, must be liberally construed ; whereas restrictions on such a freedom, imposed by the articles of association, have to be strictly construed. Consequently, the right to specifically enforce the pre-emptive right to buy shares has to be strictly, and not liberally, construed.

151 In Manilal Brijlal Shad v. Gordon Spinning and Manufacturing Co. Ltd., AIR 1916 Bom 147, the purchaser of a share, in an auction sale, held by the court, sought to get his transfer of share registered by the company, whose share he had purchased. The director refused to register the share. The purchaser brought a suit for enforcement of his right to get the share registered on the ground that he, having purchased the share, in an auction sale held by the court, had become a shareholder of the company, whose share he had purchased, and the company must register his name as the holder of the share. A Division Bench of the Bombay High Court held that the purchase, though made in a court sale, cannot override that part of the memorandum of association, which vests the director with the discretion to refuse to admit any undesirable candidate. A Division Bench of the Bombay High Court held that the court did not have any right over the share more than what the shareholder had ; consequently, the court too could not have given the purchaser a right, which even the court did not have. The court also held that the purchase of share would be subject to the same limitations, as were there when the original owner held the share, that the compulsory character of the sale cannot prejudice the rights of the company and cannot alter the position of the purchaser. The relevant observations made in Manilal Brijlal (supra), read as under :

“1. For the purposes of this argument, we must, of course, assume that the directors would be within their powers in refusing to register the present appellant if he were a private purchaser, and not a court purchaser. Upon that assumption, I can see no reason why the directors’ powers should be curtailed merely because the appellant purchased at a court sale. For whether the sale is made by a private individual or by a court, it seems to me clear that the thing sold and transferred from the seller to the buyer is merely the property in the share plus a limited, not an absolute, right to have the transfer registered. But the appellant here contends, and must contend, that when he purchased, over and above the share, the absolute right of forcing the directors to register his name. But that is a right, which ex hypothesi the court never had to sell. I infer that the appellant never bought it. This conclusion seems to me to be reinforced by the consideration to which the learned judge has referred, the consideration, namely, that upon the case for the appellant nothing would be easier than to override that part of the memorandum of association which invests the directors with a discretion to refuse to admit undesirable candidates. For if the appellant is right, then a person whose professed object might be to wreck or damage the company could nevertheless oust the director’s discretion, and compel them to register him, by the simple process of purchasing through the court after a collusive decree. On these grounds, I am of opinion, that notwithstanding that the appellant’s purchase was made through the court, the directors’ powers, under the memorandum of association, for refusing to accept the appellant as a shareholder, are unaffected.

2. The issue in this case raises two questions, one of law, and the other of fact. The question of law is whether the purchaser of certain shares of a limited company at a court-sale in execution of a decree against the shareholder is entitled as of right to have the shares transferred by the company to his name. It is contended on behalf of the appellant that the company has no discretion in the matter and-has no power to refuse to transfer the shares to the name of the auction-purchaser. It is common ground that a private purchaser from a shareholder must submit his application for transfer to the company and the application is liable to be dealt with by the directors as provided by articles 22 and 23 of the articles of association of the company in question. But it is argued that the auction-purchaser in virtue of purchase at a court-sale has a much higher right in this respect than a private purchaser. On principle, I am quite unable to see how the purchaser at a court sale can have any higher right. He purchases 1the property subject to the same limitations to which the original owner could sell privately. The intervention of the court, and the compulsory character of the sale, cannot prejudice the rights of the company and cannot alter the position of the purchaser in any way on this point. There is nothing in the provisions of the Companies Act and the Civil Procedure Code to support the argument that the company is deprived of its usual powers, and relieved of its corresponding obligations, to deal with a transfer application, when the transfer is sought in virtue of a court-sale.

3.1 am, therefore, of the opinion that the purchaser at a court-sale is not entitled, as of right, to have his name entered in the register of the company as a shareholder. He is subject to the same rules on this point as a private purchaser undoubtedly is.”

152 From what have been observed in Manilal Brijlal (supra), it logically follows that the auction purchaser of the share had only equitable right on the said share; whereas the original owner of the share still remained the legal owner. The principle enunciated in Manilal Brijlal’s case (supra), has been followed by a Division Bench of the Madras High Court in T. Naga-bhushanam v. S. Ramachandra Rao reported in AIR 1923 Mad 241. This view was, however, deviated by another Division Bench of the Madras High Court in T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd., AIR 1928 Mad 571, wherein the regulatory nature of the Companies Act vis-a-vis common law, was pointed out and held that the general right to institute a suit cannot be considered to be taken away merely because of some statutory provisions. The view of the Madras High Court as expressed in T. A. K. Mohideen Pichai Taraganar (supra), has, however, not been agreed to in its later decision in Avanthi Explosives P. Ltd. v. Principal Subordinate Judge, Tirupathi reported in [1987] 62 Comp Cas 301 (AP). Thus, the law, laid down in Manilal Brijlal (supra), is still adhered to by the Madras High Court.

153 What emerges from the above discussion is this : when right to sell shares has to be liberally construed, a restriction on such a right has to be strictly construed. Consequently, the directors may, in a given case, not be incorrect in allowing transfer of share to an outsider by rejecting the preemptive right of another shareholder to buy such share if such a decision is not contrary to the conditions embodied in the articles of association or if such a decision of the directors subserves the public interest, for even a private company, in the light of the provisions of sections 397 and 398, is required to adhere to the requirements of public interest irrespective of the fact as to whether the articles of association specifically mention or not the freedom to allow sale of shares to an outsider as an act, which can be done in the public interest by the board of directors.

154 In R. Mathalone v. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385; [1954] 24 Comp Gas 1, the question of relationship between the transferor and transferee of shares before registration of the transfer in the books of the company, came to be considered. The Supreme Court held that on the transfer of shares, the transferee becomes the owner of the beneficial interest. Though the legal title remained with the transferor, the relationship of trustee and “cestui que trust” was established and the transferor was bound to comply with all the reasonable directions that the transferee might give and that he became a trustee of the dividends as also a trustee of the right to vote. The relationship of trustee and cestui que trust arose by reason of the circumstance that till the name of the transferee was brought on the register of the shareholders in order to bring about a fair dealing between the transferor and the transferee, equity clothed the transferor with the status of a constructive trustee and this obliged him to transfer all the benefits of property rights annexed to the sold shades of the cestui que trust.

155 It bears, repetition that the liability to specifically perform a contract was a liability under the common law. In such circumstances, a shareholder will have the right to seek remedy of the enforcement of his pre-emptive rightly to buy shares by taking resort to the civil court, unless the Companies Act can be shown to have, in a given case, excluded, expressly or impliedly, this regard, the jurisdiction of the civil court. Unless, therefore, the appellants can show that in the facts and circumstances of the present case specifically enforceable pre-emptive right, if any, of the plaintiff-responden t cannot be enforced by the civil court, the inference would be that such a pre-emptive right of the plaintiff could have been enforced and can be enforced by the civil court.

156 It may, however, be noted that transfer of share, in violation of the provisions, contained in articles of association, would not per se be void; ab initio ; rather, such transfer would be voidable at the option of the aggrieved shareholder in the sense that the aggrieved shareholder may waive his pre-emptive right and not seek to enforce it. That such a right can be waived or modified is recognised at paragraph 171 of Sangramsifm P. Gaektvad’s case (supra). Thus, a transfer of share, which may be in violation of the articles of association, would not be void ab initio, but on voidable.

157 What follows from the above discussion, in the light of the decision. Sangramsinh P. Gaekwad (supra), is that the pre-emptive right can be waived or modified. Thus, transfer of shares by a shareholder to an outsider, in denial of the pre-emptive right of any other shareholder to buy such share, is not void ab initio ; rather, such a violation would make the transaction voidable and can be interfered with by the court at the option of the aggrieved shareholder. If an individual shareholder can have the right to waive his pre-emptive right to buy shares, it logically and as a corollary, follows that the shareholders, in general too, can take a collective decision to sell shares outside the company. Such a decision cannot be said to be ultra vires, for, when the shareholders can waive their right to buy shares, the logical effect would be that such a decision is within the competence of the company and such a decision cannot be said to be ultra vires. When a decision is not ultra vires or mala fide or fraudulent, the decision cannot be interfered with unless the decision is, as embodied in sections 397 and 398, against the interest of the company, or against public interest, or oppressive to minority shareholders. Since the decision of a company has to rest on the views of the majority, the minority, even if aggrieved, cannot question it, for, minority shareholders too, being shareholders, cannot question the decision of the company except when the decision is said to be against the company or against public interest or oppressive to the minority shareholder. However, in such a case of disagreement by the minority, the remedy lies, unless can be shown otherwise, under sections 397 and 398 of the Companies Act, 1956 and not in the civil court.

158 What crystallises from the above discussion is this : if the decision to sell shares, in the present case, is taken to be decision of the individual shareholders, the shareholders, who have taken such a decision, are necessary parties, if the present suit can be treated to be a suit for specific performance of contract, for, the shareholders are, as correctly pointed out by Dr. Saraf, the owners of shares and it is they, who have to be compelled to sell shares, particularly, when I notice that the plaintiff considers himself not bound by the resolution adopted in the extraordinary general meeting of the appellant-company. This apart, in the present case, if the right to obtain relief of specific performance of contract of pre-emptive right of a shareholder exists, such a right exists against the shareholder, who seeks to sell his share, and no effective decree, in such a suit, can be passed in the absence of the shareholder, who seeks to sell his share, inasmuch as the shareholder, being owner of the shares, has to execute necessary documents for transfer of shares. In the light of the respective cases of the parties, particularly, in the light of the pleaded case of the plaintiff-responden t, whether the shareholders were necessary parties to the present suit is a question, which I would answer a little later. For the moment, suffice it to point out that if the decision of the shareholders, in the present case, is taken to be the decision of the appellant-company and if this decision can be treated to be a decision taken in public interest as envisaged in sections 397 and 398 of the Companies Act, 1956, particularly, when the decision, so taken, by the shareholders has been acted upon by the board of directors, then, the decision to sell the shares of the appellant-company cannot be said to be in violation Or contravention of the provisions of sections 397 and 398. The plaintiff is as much bound by this decision as any other shareholder, for, such a decision is not per se ultra vires inasmuch as the shareholders have, as already indicated above, inherent right to waive their pre-emptive right to buy shares and the pre-emptive right is enforceable only at the option of the person, who may have such pre-emptive right Thus, the shareholder’ s decision to sell their shares, which forms the subject-matter of the suit, is prima facie a valid decision and such a decision is binding on the appellant-company and also on all its shareholder including the plaintiff-responden t. If a minority shareholder, such as, the plaintiff- respondent feels that the decision, so taken, is oppressive or hot in public interest, his remedy lies in invoking the provisions of sections 397 and 398 and the present suit would be prima facie barred. I may hasten to add that it has not been the case of the plaintiffs- respondent that the decision to sell shares to an outsider is not in public interest.

159 In short, the present suit cannot prima facie be held to be maintainable and no injunction, as reflected by the impugned order, could have been granted unless the plaintiff- respondent can show that he is prima facie entitled to the reliefs, which he had sought for in his plaint. This apart, as would be showing in the succeeding paragraphs of this judgment the plaintiff- respondent’s right, if any, to buy shares, in the present case is a qualified and conditional right and if his right to buy share is conditional and qualified, whether a suit of the present nature would, at all, lie ? This is the question, which, now, we face.

160 For the purpose of answering the question posed above, let rife, now turn to the merit of the plaintiffs application seeking injunction.

161 While considering the above aspect of the case, it needs to be recalled as already indicated above, that the articles of association are regulations the company and bind the company as well as its shareholders. In effect the conditions, embodied in the articles of association, determine the terms of contract between the company and the shareholders as well as’ the shareholders inter se. I have also pointed out that in the light of the provisions of section 9 of the Companies Act, 1956, when there is a conflict between the conditions imposed by the articles of association and the statutory provisions of the said Act, the statutory provisions would prevail. I have further pointed out that with the amendments, which sections 397 and 398 of the Companies Act, 1956, have undergone, it clearly follows that the affairs of every company, public or private, must not be carried out in a manner, which is prejudicial to “public interest”. In substance, therefore, adherence to the needs of “public interest” has to be read in the body of every articles of association of a company. Consequently, if “public interest” requires transfer of shares of a private company, such a transfer, even if not provided in the articles of association of a company, has got to be read into the articles of association. In short, thus, “public interest” can be a ground for transfer of shares even in a private company.

162 Bearing in mind the position of law as indicated above, when I turn to the articles of association of the appellant-company, what attracts the eyes is that, the articles of association do not impose any absolute restrictions on the transfer of shares to an outsider by shareholders of the appellant-company. This inference is borne out of a reading of the provisions made in the articles of the appellant-company. The relevant provisions read :

“7(b). A shareholder may at any time transfer a share to his or her father, mother, wife or husband, children, grandchildren or any male agnatic relation within three degrees or daughter-in- law, sister, sister’s son or to anyone of the existing shareholders of the company without previous sanction of the directors, provided that the transferee is not an insolvent or otherwise incapable of discharging his or her obligations as a shareholder.

(c) In case a shareholder desires to transfer his/her share or shares to a person other than the persons mentioned in the last proceeding clause, he/she (hereinafter called the selling member) shall give a notice of his/her intention in writing to the managing director of the company specifying the number of shares he/she proposes to transfer and the value he/she puts on each share. Upon receipt of such notice, the directors shall, within 2 months from the receipt of such notice, find a purchaser from among the shareholders for the share notified for sale, at a price not less than the value of the share so put and as soon as they are able to secure a desirable purchaser at the price, they shall notify the fact to the selling member, who shall be bound, upon payment of the price within 14 days of the date of the notice issued by the directors to the selling member to transfer the share to such purchaser, and complete the transaction.

(d) If the directors fail to find a purchaser within two months, the selling member shall be competent to transfer the share to any one at his opinion at any price within a period of four months from the date of the notice of sale ; provided that before such transfer is effected* the selling member shall intimate the price so obtained to the man-i aging director who shall circulate the said price to all shareholders, and if within 14 days of the date of the circular letter, any shareholder is willing to offer the said price, and deposits the amount with the managing director in the office, the selling member, on receipt of intimation from the managing director to that effect shall transfer the share in favour of such shareholder only and not to the outsider ; ,j (i) Notwithstanding anything contained in these articles, the board of directors may at its discretion recognize a transfer of share(s) by a member to any person if such transfer is in fulfillment of and object considered as charitable or beneficial or for any public purpose? or warranted under any terms of a trust deed created by a shareholder with any such object.”

163 A conjoint reading of the above clauses of the articles of association go to show that a shareholder, as per clause 7(b), can, at any point of time, transfer a share to his or her father, mother, wife or husband, children, grand children or any male agnatic relation within three degrees or daughter in law, sister, sister’s son or to any one of the existing shareholder of the company without previous sanction of the directors. However, clause 7(c) an4 7(d) impose restriction upon a shareholder’ s right to sell/transfer his/her share to an outsider without following the procedure prescribed by sub* clauses (c) and (d) of clause 7 of the articles of association.

164 The scheme of restriction, as conceived by sub-clauses (c) and (d), aforesaid mentioned, is this : A shareholder, who is desirous of transferring his shares to a person other than those, who are mentioned in clause 7(b) aforementioned, is required to give a notice, in writing, to the managing director of the appellant-company specifying the number of shares he or she proposes to transfer and the value he or she puts on his or, her shares. Upon receipt of the notice, the director shall, within two months-from the date of receipt of such notice, find the purchaser from among st the share holders for the share notified for sale, at a price not less than the value of the share so put, and as soon as they are able to secure a desirable purchaser chaser at the price, as assessed by the shareholder, who desires to still share, the directors shall notify the fact to the selling member, who shall be bound, upon payment of the price within 14 days of the date of the notice, issued by the directors, to the selling member, to transfer the share to such purchaser, and complete the transaction. If, however, the director fails to find a purchaser within the period of two months aforementioned, the selling member shall be competent to transfer the share to any one at his opinion at any price within a period of four months from the date of the notice of sale ; provided that before such transfer is effected, the selling member shall intimate the price, so obtained, to the managing director, who shall circulate the said price to all shareholders and, if within 14 days of the date of the circular/letter, any shareholder is willing to offer the said price, and deposits the amount with the managing director in the office, the selling member, on receipt of intimation from the managing director to that effect, shall transfer the share in favour of such shareholder only and not to the outsider.

165 What is, now, of paramount importance to note is that sub-clause (i) of clause (7) gives an overriding power to the board of directors to recognize, at its discretion, a transfer of share (s) to anyone by a member to any person if such transfer is in fulfillment of any object considered as “charitable or beneficial or for any public purpose or warranted under any terms of a trust deed created by a shareholder with any such object”.

166 Thus, notwithstanding the fact that sub-clause (d) of clause (7) gives pre-emptive right to the shareholders of the appellant-company to purchase shares offered for sale by another shareholder of their company, the board of directors may, subject to the conditions,’ which have been specified in sub-clause (i) of clause (7), recognize such a transfer of shares by any member to any outsider.

167 It could not be disputed, on behalf of the respondent, that sub-clause (i) of clause (7) contains non-obstante clause, which is overriding in nature. If read carefully, what becomes transparent, from the provisions embodied in sub-clause (i), is that the pre-emptive right of the shareholders, under the articles of association of the appellant-company, becomes exercisable only when transfer or sale of shares by a member or members of the appellant-company to an outsider does not fall under the explanations given in sub-clause (i) or when, even if the conditions specified in sub-clause (i) are satisfied, the board of directors do not, in exercise of their discretion, allow sale or transfer of share to an outsider without first giving an option to the shareholders, in general of the appellant-company, to purchase the share offered for sale by one or more of the shareholders. In other words, the pre-emptive right of the shareholders, under the scheme of the articles of association of the appellant-company, comes into existence only when the conditions, as specified in sub-clause (i) are not satisfied or even when such conditions are satisfied, the board of directors decide, in their discretion, to give an option to the shareholders of the appellant-company to exercise their right of pre-emption.

168 What is curious to note is that in the plaint and in the application for injunction, the respondent relied upon sub-clauses (b), (c) and (d) of clause (7) of the articles of association of the appellant-company, but has not referred to sub1: clause (i) of clause (7).

169 What is all the more curious to note is that it is not even contended that the board of directors have decided to act upon the decision of the shareholders as expressed by them in the extraordinary general meeting of the appellant-company mala fide or only to defeat the purported pre-emptive’ right of the appellant to purchase shares.

170 Coupled with the above, the learned trial court, as the impugned order reveals, did not take notice of the existence of sub-clause (i) of clause (7) of the articles. In fact, whether existence of sub-clause (i) was ignored & escaped complete attention of the learned trial court is not very clear. This fact, however, remains that the learned trial court has not made even incidental reference to sub-clause (i).

171 Let me, therefore, determine as to when the discretion given to the board of directors under sub-clause (i) is exercisable ?

172 Under sub-clause (i), transfer to an outsider, in denial of the pre-emptive right, is allowed only when transfer is in fulfillment of any object, which can be considered as “charitable or beneficial or for any public purpose or warranted under any terms created by a shareholder with any such object. Thus, the object has to be charitable, beneficial or for in any public purpose or a purpose akin to public purpose. There can be no doubt that merely for the benefit of an individual shareholder, sub-clause (i) of clause (7) cannot be resorted to.

173 While interpreting the Word “beneficial” , which occurs in sub-clause (i) of clause (7) of the articles of association, the court has to bear in mind that the word “beneficial” occurs between the words “charitable” ‘and “public purpose”. The expression beneficial, which occurs in the memorandum of association, as aforesaid, has to be interpreted bearing in mind the concept of ejusdem generis.

174 It may be pointed out that ejusdem generis is a Latin expression, which means “of the same kind”. In Parakh Foods Ltd. v. State of Aiwm Pradesh reported in [2008] 4 SCC 584, the apex court illustrated the7OT trine of ejusdem generis by saying that (page 587) : “… ejusdem generic is a Latin expression which means “of the same kind”, for example, where a law lists specific classes of persons or things and then refers to them in general, the general statements only apply to the same kind of persons or things specifically listed. In other words, it means words of similar class. According to Black’s Law Dictionary (8th edition, 2004), the principle of ejusdem generis is where general words follow an enumeration of persons or things, by words construed in their widest extent, but are to be held as applying only to persons or things of the same kind or class as those specifically mentioned. It is a canon of statutory’ construction that where general words follow the enumeration of particular classes of things, the general words will be construed as applying only to things of the same general class as those enumerated.”

The Privy Council in Bisheswar v. Parath Nath reported in AIR 1934 PC 213, 175 had the occasion to interpret the words “or for any other reason”, occurring in Order 47, rule 1 of the Code of Civil Procedure, 1908 and prescribed the ground upon which an application for review can be made. Interpreting what the words “any other sufficient reason”, mean the Privy Council pointed out that the words must be taken as meaning “a reason sufficient on grounds at least analogous to those specified immediately previously”. Thus, the expression, ejusdem generis, as observed by the Supreme Court in Siddheshivari Cotton Mills P. Ltd. v. Union of India, AIR 1989 SC 1019, signifies a principle of construction, whereby words in a statute, which are otherwise wide but are associated in the text with more limited words are, by implication, given a restricted operation and are limited to matters of the same class or genus as preceding them. If a list or string or family of genus, describing terms are followed by wider or residuary or sweeping-up words, then, the verbal context and the linguistic implications of the preceding words limit the scope of such words. Observed Lord Campbell in R. v. Edmundson [1959] 28 LJMC 213 : “I accede to the principle laid down in all the cases which have been cited, that, where there are general words following particular and specific words, the general words must be confined to things of the same kind as those specified” (see Craigs on Statute Law—7th edition, 2002).

176 If the expression, “charitable or beneficial or for any public purpose or a purpose akin to public purpose or any such object”, is analysed bearing in mind the doctrine of ejusdem generis, it is difficult to construe that beneficial purpose would include beneficial to the transferor. However, beneficial purpose would, undoubtedly, include beneficial for the public at large or when such transfer is in public interest.

177 The word “beneficial” , in the context of the words, which appear in sub- clause (i) of clause (7), leaves no room for doubt that beneficial would be tantamount to public interest. This apart, I have already pointed out above, that in the light of the amendments introduced in sections 397 and 398, whereby it has been made possible for the court to interfere in the affairs of the company if the affairs of the company are being conducted in the manner prejudicial to public interest, the court is bound to read into every memorandum of association, the requirement of the company, public or private, to adhere to interest of the public. Viewed thus, it is clear that while considering the right to sell shares or restrictions on the right to sell shares, the court has to bear in mind that whichever interpretation advances the cause of “public interest” is the interpretation, which the court shall, in tune with the legislative intent, adopt. The legislative mechanism, provided in sections 397 and 399, would stand defeated if the court, while interpreting sub-clause (i) of clause (7) of the articles of association of the appellant-company, ignores the requirement of public interest.

178 The dispute, which the plaintiff has raised in the present case, is, according to the plaintiff, a private dispute ; whereas the developed concept of public interest being an integral part of the affairs of every company, public or private, the court cannot ignore the requirement of public interest, while considering the question as to whether the plaintiff had been able to make’ out a prima facie case for the purpose of entitling him to obtain injunction as has been sought for by him.

179 Beneficial for the public cannot be said to be different from, inconsistent with or contrary to, public interest. Though the decision to sell shares to art outsider is, primarily, in the interest of the shareholders and the officers arid members of the appellant-company, the fact remains that a tea estate^ unlike other industries, provides employment not only to the individual workers, but employment is almost hereditary in nature inasmuch as it is the legal representative Of a labor, who, ordinarily, succeeds and take over the job as a legal representative of a retired or deceased labor. Whole of the family, in one way or other of a labor, survives on the employment in the tea estate itself. Thus, the situation of the laborers, in a tea estate, S| substantially different from other industries, where employment is not at all hereditary in nature ; whereas in the tea estate, the employment is almost hereditary in nature as far as laborers, working in the tea estates are concerned.

180 As rightly pointed out by Dr. Saraf, learned senior counsel, appearing for the appellant, that in a case of present nature, the element of public interest is a factor, which ought to have been kept in view by the learned trial court at the time of considering the application for injunction. The observations mad||| by the apex court in Ramniklal N. Bhutta v. State of Maharashtra reported iH [1997] 1 SCC 134, cannot be said to be misplaced. The relevant observatioflH made in Ramniklal N. Bhutta (supra), at paragraph 10, read as under (page 140)

“10. Before parting with this case, we think it necessary to make a few observations relevant to land acquisition proceedings. Our country is now launched upon an ambitious programme of all-round economic advancement to make our economy competitive in the world market. We are anxious to attract foreign direct investment to the maximum extent. We propose to compete with China economically. We wish to attain the pace of progress achieved by some of the Asian countries, referred to as ‘Asian tigers’, e.g., South Korea, Taiwan and Singapore. It is, however, recognized on all hands that the infrastructure necessary for sustaining such a pace of progress is woefully lacking in our country. The means of transportation, power and communications are in dire need of substantial improvement, expansion and modernization. These things very often call for acquisition of land and that too without any delay, It is, however, natural that in most of these cases, the persons affected challenge the acquisition proceedings in courts. These challenges are generally, in the shape of writ petitions filed in High Courts. Invariably, stay of acquisition is asked for and in some cases, orders by way of stay or injunction are also made. Whatever may have been the practices in the past, a time has come where the courts should keep the larger public interest in mind while exercising their power of granting stay/injunction. The power under article 226 is discretionary. It will be exercised only in furtherance of interests of justice and not merely oh the making out of a legal point. And in the matter of land acquisition for public purposes, the interests of justice and the public interest coalesce. They are very often one and the same. Even in a civil suit, granting of injunction or other similar orders, more particularly of an interlocutory nature, is equally discretionary. The courts have to weigh the public interest vis-a-vis the private interest while exercising the power under article 226—indeed any of their discretionary powers. It may even be open to the High Court to direct, in case it finds finally that the acquisition was vitiated on account of non-compliance with some legal requirement that the persons interested shall also be entitled to a particular amount of damages to be awarded as a lump-sum or calculated at a certain percentage of compensation payable. There are many ways of affording appropriate relief and redressing a wrong; quashing the acquisition proceedings is not the only mode of redress. To wit, it is ultimately a matter of balancing the competing interests. Beyond this, it is neither possible nor advisable to say. We hope and trust that these considerations will be duly borne in mind by the courts while dealing with challenges to acquisition proceedings. “

181 In the present case, there is no denial of the fact that the appellant-company has sustained huge loss and the losses are mounting by leaps and bounds. Recovery proceeding for realization of debts of the appellant-company have already been initiated. There is labor unrest as wages and other statutory dues have not been made available to the laborers. In such circumstances, deaths, arising out of starvation of the laborers of the appellant-company, cannot be ruled out. The labor unrest threatens lives of the shareholders and office-bearers and employees of the appellant-company. In such circumstances, when the shareholders took a decision, in their meeting, as mentioned above, to look for a buyer, outside the appellant-company, who would agree to buy the appellant-company with all its assets and liabilities and the board of directors decided to act upon such resolution and initiated steps accordingly, it would be unreasonable and harsh to hold, even tentatively, particularly, when there is no accusation of mala fide against the board of directors, that the board of directors have decided, with ulterior motive, to act upon the resolution of the majority of the shareholders of the appellant-company to sell the shares to an outsider. In fact, the letter, which was issued, in this regard, by the board of directors, read as under :

“16, Date: 9-2-2008

(a) Sri Mridul Kr. Bhattacharjee – Joint shareholder

(b) Smt. Tumani Bhattacharjee – Joint shareholder

(c) Smt. Mahashweta Bhattacharjee Joint shareholder

(d) Smt. Mrdusmita Chablani – Joint shareholder

(e) Sri Ronjoy Bhattacharjee – Joint shareholder

Bamunimaidum,

Guwahati-21 (Assam).

Dear Sir/Madam,

We would inform you that the board of our company has decided to dispose of the company with its tea estate and assets and liabilities as per decisions of the EOGM’s held on 15-12-2006 and 19-3-2007 and as such, negotiation with a reputed company has been finalized. The party has agreed to pay the highest reasonable price per kg. of made tea on 4 years average crop and also accepted the terms and conditions put by our Board.

In view of the above, our board of directors has authorized the managing director and Mr. B. K. Bhattacharya, a director of the company to collect the original share certificates of the shares held by the shareholders along with the individual transfer forms signed by them immediately on the above.

It may kindly be noted that the proposed buyer company has requested us to submit the original shares certificates for verification in order to clear the bank dues, all outstanding liabilities including the market liabilities and net share money to each shareholder by individual A/C payee demand drafts. They will not allow any cash payment to any party or person. The buyer has decided to clear 100 per cent, of all the liabilities outstanding as on 31-1-2008 and net share money to the shareholders immediately by A/C payee demand drafts before taking over possession within 3rd week of February, 2008. Hence, they have requested us to produce the original share certificates with the individual transfer forms signed by the shareholders of our company to enable them to complete the transaction without loss of time. They have also agreed to re-imburse our running expenses of the tea estate for the month of February, 2008,

You are, therefore, requested to submit your original share certificates along with the share transfer form signed by you in favor of the proposed buyer whose name will be disclosed by the managing director at the time of submission of the share certificates. The managing director will issue a receipt of share certificates to you accordingly. Kindly treat this a most urgent Thanking you

Yours faithfully,

For Radhabari Tea Co. P. Ltd.

(A. K. Goswarni)

Managing Director.

Strictly Confidential

Estimated net consideration money to be received from the proposed purchaser

Rate—Rs. 170 per kg. of made tea on 2,52,505 kgs—offered by the party

Crop—2,52,505 kgs of made tea. i.e,. 4 years average crop—Calendar years—2004,

2005, 2006 and 2007 (from January to December)

Rs. 170 x 2,52,505 kgs = Rs. 4,29,25,850

Rounded of Rs. 4,29,26,000

Less : Liabilities including bank dues, Tea Board, R F. dues, Market liabilities, etc., etc.,

Rs. 2,31,10,000, Rs. 1,98,16,000

Refundable by the purchaser along with consideration money :

(Rupees) F. D. R. S. with S. B. I. with estimated interest up to 31-01-2008 11,77,00,000

Shareholder- Arpana Goswami’s loan amount 10,340.00

Shareholder- Dipak Kr. Bhattacharyya’ s loan amount 60,000.00

Old share money of A. F. C. 5,000.00

[Kiipees)

Old Share money of Assam Co-operative Apex Bank Ltd. 250.00

NABARD deposit 13,000.00

A. S. E. B. labor advance and advance to workers 47,502.00

Security deposit with A. S. E. B. 3,38,314.00

Security deposit with J. C. M. C. (Mission Hospital), Jorhat 30,000.00

Security deposit with Sale Tax Department 15,000.00

Security deposit with Bardalol Gas Agency, Jorhat 9,540.00

Security deposit with Kaziranga Gas Agency, Bokakhat 500.00

Security deposit with post office reference excise duty 1,100.00

Advance to staff members 12,736.00

Advance to sub-staff 1,800.00

Advance to M. K. Bardaloi & Co. Jorhat (C. A.) 8,000.00

Amount due from National Insurance Co. 1,869.00

Assam Tribune, Guwahati 500.00

FDR with Chartered Standard Bank (Grindlays), Kolkata 70,000.00 Amount in current account with Chartered Standard Bank (Grindlays)

Kolkata 3,000.00

Amount in current account with SBI, Dergaon 15,000.00

Value of stores in stock 93,000.00 [

Total 19,13,451.00

Advance to Tea Board (earnest money) 90,100.00

Income-tax refundable 39,000.00

Agriculture income-tax refundable 55,000.00

Total 1,84,100.00

This amount is receivable and being processed by us Rs. 4,29,26,000. 00 Rs. 7,00,000.00 (estimated expenditure of February 2008, to be reimbursed to us by the purchaser)

Rs. 19,13,451.00 (Refund of total of security money advances, FDRS’s amount, etc. (as? *» above) to be refunded by the purchaser.) Gross total amount Rs. 4,55,39,451. 00

Less : Liability amount Rs. 2.31,10,000. 00 (including bank’s dues, etc., etc., as above) to be paid by the purchaser subject to deduction from consideration money Approx. not amount to be paid by the purchaser to each shareholder by individual A/C payee D. 0^ subject to the production of original share certificates with transfer forms signed jbyj individual shareholder.

Rs. 2,24,29,45:- 23,760 Nos of shares = Rs. 944.00 per share (Approx. net consideration- 13 money per share) j

The above estimated net consideration money may slightly differ since confirmation or j the outstanding dues of the Tea Board is awaited and the same is expected within’* J short time.

Rate per kg of made tea on 2,52,505 kgs. on gross amount of Rs. 4,55,39,451. 00 = Rs. 180.35 per kg of made tea.

Note : To be deducted from the following shareholders individual share money at the time of releasing jthe shares money to them by the purchaser and the total amount will be added to our total net share money.

1. Smt. Arpana Goswami Rs. 10,340.00

2. Sri Dipak Kr. Bhattacharayya Rs. 60,000.00

(B) Brokers invoice advance of Rs. 13,00,000.00 (thirteen lakhs) approx will be paid by our company from sale proceeds lying in our bank account at the time of conclusion of the above deal with the proposed buyer.”

182 In the circumstances, as discernible from the pleadings of the parties and from the materials on record, and keeping in view the situation, which the appellant-company has been facing, the discretion exercised by the board of directors, in the present case, cannot be prima facie said to be beyond their powers as contained in sub-clause (i) of clause (7) and/or mala fide. These aspects of the present case appear to have gone unnoticed by the learned trial court. In such a situation, the reference made by Dr. Saraf to the case of Ramdev Food Products P. Ltd. (supra), cannot be said to be misplaced inasmuch as in Ramdev Food Products P. Ltd. (supra), it has been clearly laid down at paragraph 128 that when the court proceeds on a prima facie misconstruction of documents, adopt and apply wrong standards, interference with the decision, on such misconstruction or on application of wrong standards to the facts of a case, is permissible.

183 The fall out of the above discussion is this : If a shareholder is granted pre- emptive right to buy share of his company by the articles of association, it is possible for such a shareholder to institute a suit for specific performance of the contract of his pre-emptive right. To such a suit, the shareholder, who proposes to sell shares, would be a necessary party, for, it is that shareholder, who has to sell his share. To such a suit for specific performance of contract, even the company would be a necessary party inasmuch as the right of preemption, granted under the articles of association, would be a contract to which the company as well as the shareholders are parties.

184 The question, which, now, stares at us, is : Whether the present suit is at all a suit for specific performance of a contract ? The answer to this question is not very far to seek. If the reliefs, which the plaintiff has sought for (and which I have already reproduced at paragraph 10), are carefully examined, it leaves no room for doubt that the plaintiff-responden t’s suit is not a suit for specific performance of contract of his alleged pre-emptive right to buy shares, which the remaining shareholders of the appellant company have decided to sell.

185 The plaintiff-responden t, under clause (£) of paragraph 20 of the plaint, has sought for a decree of mandatory injunction directing the defendants to sell and transfer the shares of defendant No. 1 in favour of the plaintiff-responden t from those members, who intend selling their shares and also to deliver possession of Radhabari Tea Estate unto the plaintiff. Is the plaintiff entitled to a decree of mandatory injunction, as has been sought for by him, without seeking specific performance of his alleged pre-emptive right, if any, to buy shares ? The answer to this question can be found in section 39 of the Specific Relief Act, 1963, section 39 reads :

“39. Mandatory injunctions.— When, to prevent the breach of an obligation, it is necessary’ to compel the performance of certain acts, which the court is capable of enforcing, the court may, in its discretion, grant an injunction to prevent the breach complained of, and also to compel performance of the requisite acts.”

186 From a bare reading of section 39, what becomes transparent is that mandatory injunction can be granted by a court only when the court is required to prevent breach of an obligation, which is cast on the defendant to perform certain act, the court considers that the defendant needs to be compelled to perform such acts and the obligatory act is such, which the court is capable of specifically enforcing. Thus, the two essential elements whose existence is necessary for obtaining a decree of mandatory injunction, are : (1) The need for prevention of the breach of an obligation existing in favour of the plaintiff and (2) The need to compel the defendant to do certain acts necessary to prevent the breach. Performance of an obligation itself cannot be compelled through a decree of mandatory injunction. Performance of an obligation, which a court is capable of enforcing, can be compelled Only, by a decree for specific performance subject, of course, to the conditions and the limitations prescribed by the provisions of the Specific Relief Act, 1963.

187 In the case at hand, when the plaintiff-responden t has not sought for a decree of specific performance of contract of his alleged pre-emptive right?, the question of making available to him the same relief by way of mandatory injunction or the question of the plaintiff-responden t being able to 4 obtain, in such a suit, a mandatory injunction of the nature, as has been sought for by him, under clause (0 of paragraph 20 of the plaint, does not ||j arise at all.

188 The plaintiff-responden t’s suit, as clause (a) of paragraph 20 of the plaint shows, is, in fact, a suit for declaration of his alleged right of pre-emption to purchase share of the appellant-company from the shareholders, who have decided to sell their shares.

189 What is, however, of utmost importance to note is that pre-emptive right of purchase, which is at the core of the suit and regarding which positive and negative declarations have been sought for, in clauses (a) and (b) of paragraph 20 of the .plaint, is based on sub-clause (b) of clause 7 of the articles of association. This right, learned trial court appears to have failed to notice, is circumscribed by clauses 7(c), 7(d) and 7(i) of the articles of association.

190 As I have already discussed above, the plaintiffs right to buy share, under clause 7(b), is a qualified right and this right comes to the fore only when a shareholder’ s decision to sell share outside the company does not fall under clause 7(i) or when the board of directors, notwithstanding the power given to them under clause 7(i), decide not to allow the selling member to sell his share outside the company without giving an option to buy such share to such a member, who may be interested in buying such share.

191 Thus, the contract of pre-emption, if any, is, in the present case, a contingent contract inasmuch as the right to buy share would arise only when a shareholder’ s decision to sell his share falls outside clause 7(i) and/or when the board of directors does not permit a selling member to sell his share outside the company without offering an option to buy share to a shareholder, who may be interested in buying such share. Such a contract, being a contingent contract, is inherently determinable in nature inasmuch as the right of pre-emption is conditional and exercisable only when the transfer of share is not covered by clause 7(i) or, when, though covered by clause 7(i), the board of directors does not permit sale of share to an outsider without giving an option to buy share to another willing shareholder. Such a contingent contract, in the light of clause (c) of sub-section (1) of section 14 of the Specific Relief Act, is not specifically enforceable.

192 Thus, when the plaintiffs right, if any, to buy share, under the articles of association of the appellant-company, is a conditional and not an absolute right, such a right, being determinable in nature, is not specifically enforceable unless the conditions precedent, as indicated above, are fulfilled. Consequently, no declaration of so-called absolute pre-emptive right to buy shares, as have been sought for by the plaintiff under clauses (a) and (b) of paragraph 20 of the plaint, can be prima facie granted, particularly, when there is no pleading in the plaint and no case has been made out by the plaintiff-responden t that the reliefs of declaration, which he has sought for, do not fall within the ambit of clause 7(i) of the articles of association, which is, as already discussed above, overriding in nature. When the plaintiff cannot be said to have made out any prima facie case for the kind of declarations, which he has sought for, the plaintiff cannot be held to have made out any prima facie case for granting of injunction as has been sought for by him.

193 To put it a little^ differently, I may pause here to point out that the term “contingent” , when appended to the term “contract”, determines the time for the performance of the contract. Section 31 of the Indian Contract Act, 1872, states that a “contingent contract” is a contract to do or not to do something if some event, collateral’to such contract, does or does not happen. In “contingent contract”, the performance of contract is, thus, dependent on the happening or not happening of some collateral event. Thus, a “contingent contract” contains, within itself, two contracts, firstly, tire principal act agreed to be done or not be done, and embedded, in this principal contract, is the collateral contract of contingency. Sections 32, 33, 34 are various contingencies contemplated in the Indian Contract Act, 1872.

194 So far as the performance of contract is concerned, the courts can direct specific performance only in a concluded contract. The principal contract, in a contingent contract, cannot be specifically performed unless the contingency arises and, therefore, it can be said that till the contingent condition is fulfilled, the contract is not a concluded contract.

195 In the present case, when the plain tiff-respondent does not have absolute right to buy share in preference to an outsider, it clearly follows that his right is dependant on the fact as to whether a shareholder’ s decision t& sell share falls within the ambit of clause 7(i) or not and whether the board of directors does or does not permit the shareholder concerned to sell his share to an outsider. When the plaintiff-responden t’s case is dependant on fulfilment of the conditions precedent embodied in clause 7(i), it cannot, merely on the basis of the provisions contained in clause 7(b) of the articled of association of the appellant-company, be contended that in each and every case, a shareholder, such as, the plaintiff, has an absolute right to buy shares in preference to an outsider. No decree of declarations, in the present case, Can, therefore, be prima facie granted as has been sought for by the plaintiff-responden t, particularly, when the plaintiff has not pleaded any such fact to show that in the facts and attending circumstances of the present case, the provisions of clause 7(i) are not attracted or that the decision of the board of directors to act upon the resolution, adopted in thf extraordinary general meeting of the shareholders of the appellant-corrit pany, is beyond their competence even in the face of the provisions M clause 7(1). ;D :

196 In the facts of the present case, one is also required to bear in mind the provisions of section 34 of the Specific Relief Act, 1963. Section 34 read

“34. Discretion of court as to declaration of status or right.—Any person entitled to any legal character ; or to any right as to any property, may institute a suit against any person denying, or interested to deny, his title to such character or right, and the court may, in its discretion, make therein a declaration that he is so entitled, and the plaintiff need not in such suit, ask for any further relief :

Provided that no court shall make any such declaration where the plaintiff, being able to seek further relief than a mere declaration of title, omits to do so.”

197 A careful reading of section 34 shows that a person is not entitled to seek a decree of declaration of his right to a property if he, being able to seek further relief than mere declaration of his right, omits to do so. In the present case, the reliefs, which the plaintiff-responden t has sought for, clearly show that the plaintiff-responden t is seeking a declaration that he has an absolute preferential right to buy shares. This is a positive relief, which the plaintiff-responden t is seeking. The plaintiff-responden t is also seeking a declaration that the appellant-company has no right to sell or transfer shares to any outsider depriving the plaintiff-responden t of his preferential right to buy shares. This is a negative relief, which the plaintiffs respondent has sought for. The plaintiff-responden t is further seeking, amongst others, an injunction compelling the defendants to sell and transfer shares in favour of the plaintiff-responden t from those members, who intend to sell their shares, treating his (plaintiff-responde nt’s) alleged preemptive right to buy shares as an absolute (and not conditional) right. This is, again, a positive relief, which the plaintiff-responden t is seeking. In the face of these reliefs, which the plaintiff-responden t has sought for, it is clear that the plaintiff-responden t, if his case is correct, was en tided to seek specific performance of the contract of his alleged right of pre-emption, but he chose, for reasons best known to him, not to seek the relief of specific performance of contract. In such circumstances, a suit for mere declaration of the plaintiff-responden t’s alleged right is prima facie not maintainable.

198 What logically follows from the above discussion is that when no declaratory decree can be given in favour of the plaintiff as has been sought for by him, the question of granting any preventive injunction, interim or otherwise, does not arise, particularly, when the injunction, in the present case, is only a consequential relief. This apart, when (as already held above) no specific performance of the alleged pre-emptive right of the plaintiff-responden t is, in the facts and attending circumstances of the case, possible, the preventive injunction which the plaintiff-responden t had sought for, could not have been granted.

199 Coupled with the above, what also needs to be noted is that though a court’s satisfaction that a suit is prima facie maintainable is a pre-requisite for granting of injunction, the maintainability of the suit is, somewhat, a variable concept. -.

200 “Maintainability” , according to Advanced Law Lexicon, quoting Corpus Juris Secundum, has three meanings. The first meaning is “to commence, to begin, to bring, to institute”. The second meaning is “to continue, to carry on, to support, as contradistinguished from to institute”. The third meaning of the term is to commence and prosecute to a conclusion that which has already been begun.

201 The impact of non-joinder of a necessary party on the above three facets of maintainability will not be the same. A statute may provide that a suit cannot be instituted at all without joining some person as a party. Such a non-joinder, in violation of the statutory provision, would make the suit not maintainable at all within the first meaning indicated above. If, however, the non-joinder is merely procedural, as indicated in Order I, rule 9 and Order XXVII, rule 5A of the Code of the Civil Procedure, the suit may not be maintainable within the second and the third meaning of the term “maintainable” as indicated above. If the defect remains un-rectified, the suit may only be dismissed, A party, who has not been joined initially, may be added later subject to law of limitation. In relation to an order of injunction, because of non-joinder of a necessary party, the suit may become prima facie not maintainable within the first meaning. The inability to pass an effective decree in a suit, because of non-joinder, which is one of the tests to determine who is a necessary party, as applied to an order of injunction, would amount only to seeing whether the order of injunction can or cannot be made operative at all, because of non-joinder.

202 As already indicated above/ the present one is a suit for a decree declaring that the plaintiff-responden t has a preferential right and/or a right of pre-emption to purchase the shares of the appellant-company from the selling members and also for a decree declaring that the defendants have no right to sell or transfer shares of the appellant-company to any outside third party depriving a willing and desirous shareholder from purchasing shares from those members, who seek to sell their shares. Thus, the present suit is a suit for declaration of plaintiff-responden t’s alleged preemptive right to buy share and a suit for injunction. To such a suit, which is not a suit for specific performance of contract, a shareholder (had the suit been, otherwise, prima facie maintainable) was not a necessary party and the suit against the company would have been prima facie maintainable. It is in this, context that Order XXXIX rule 5 needs to be viewed inasmuch as Order XXXIX, rule 5 clearly lays down that when an injunction is passed against a company, the shareholders, even if they were not parties to the suit, would be bound by the order of injunction, whereby the personal action of the mqmbers and officers of the Corporation are sought to be restrained.

203 The appellants are also-correct when they point out that the learned trial court has assigned no reasons for coming to the conclusion that there is a prima facie case for trial or that the balance of convenience is in favour of the plaintiff or irreparable loss would be caused if injunction was not granted. Having set out the facts of the case, the learned trial court concluded and directed as follows :

“After considering the above facts and circumstances, I find that petitioner-plaintif f has established a prima facie case in his favour and if the prayer of the petitioner-plaintif f is not allowed, then it will cause irreparable loss to the petitioner-plaintif f which cannot be compensated by money and the balance of convenience is also in favour of the petitioner-plaintif f.

Considering the claim and counter claim of the parties, I find that is a fit case for granting temporary injunction in favour of the petitioner-plaintif f and it is also found that if the injunction is not granted in favour of the petitioner-plaintif f, then very purpose of instituting the suit will be defeated and it will be infructous. After hearing both sides, it appears that the disputes between the parties likely to go for trial.”

204 From a bare reading of what has been observed by the learned trial court, it becomes clear that the learned trial court has assigned no reason as to why it considered that the plaintiff had a prima facie case. The learned trial court has also assigned no reason as to why the learned trial court has arrived at the conclusion that irreparable loss would ensue if injunction is not granted and how balance of convenience is in favour of granting injunction. Thus, the learned trial court’s mere observation that dispute between the parties is likely to go for trial and/or that balance of convenience is in favour of granting injunction and/or that irreparable loss would ensue if injunction is not granted do not carry any force, particularly, when the learned trial court has not even considered the existence, meaning, effect and import of clause 7(i) of the articles of association vis-a-vis the facts of the present case.

205 Above all, when ultimate decree cannot be granted in a given fact situation, no injunction, in aid of such a decree, can be granted. The reference made by the learned trial court to the provisions of Order XXXIX, rule 5 of the Code of Civil Procedure is misplaced inasmuch as Order XXXIX, rule 5 does not deal with necessary parties. What it lays down is that when an order of injunction is made, it would not only bind the corporation, but also its members and officers, whose personal action the order of injunction seeks to restrain ; whereas the present suit, in effect, seeks, indirectly and with the help of mandatory injunction, specific performance of contract by forcing the shareholders to sell their shares to the plaintiff-responden t. In such a suit, since no effective decree can be passed in the absence of the shareholders concerned, they were necessary parties and in their absence, no injunction could, have been granted. 206 There can also be no doubt, as contended on behalf of the appellant, that it is the duty of the court, particularly, when it is dealing with the appeal that the developments, which are subsequent to the passing of the impugned order, be taken note of. Reference made by Dr. Saraf to the case of Pasupuleti Venkateswarlu v. Motor and General Traders reported in [1975] 1 SCC 770, is also not misplaced inasmuch as in this decision, the apex court at paragraphs 4 and 5, has observed as under (pages 772 and 773) :

“4. We feel the submissions devoid of substance. First about the jurisdiction and propriety vis-a-vis circumstances which come into being subsequent to the commencement of the proceedings. It is basic to our processual jurisprudence that the right to relief must be judged to exist as on the date a suitor institutes the legal proceeding. Equally clear is the principle that procedure is the handmaid and not the mistress of the judicial process. If a fact, arising after the lis has come to court and has a fundamental impact on the right to relief or the manner of moulding it. is-brought diligently to the notice of the tribunal, it cannot blink at it or be blind to events which stultify or render inept the decretal remedy. Equity justifies bending the rules of procedure, where no specific provision or fair play is violated, with a view to promote substantial justice—subject, of course, to the absence of other disentitling factors.or just circumstances. Nor can we contemplate any limitation on this power to take note of updated facts to confine it to the trial court. If the litigation pends, the power exists, absent other special circumstances repelling resort to that course in law or justice. Rulings on this point are legion, even as situations for applications of this equitable rule are myriad. We affirm the proposition that for making the right or remedy claimed by the party just and meaningful as also legally and factually in accord with the current realities, the court can, and in many cases must, take cautious cognisance of events and developments subsequent to the institution of the proceeding provided the rules of fairness to both sides are scrupulously obeyed. On both occasions the High Court, in revision, correctly took this view. The later recovery of another accommodation by the landlord, during the pendency of the case, has as the High Court twice pointed out, a material bearing on the right to evict, in view of the inhibition written into section 10(3)(iii) itself. We are not disposed to disturb this approach in law or finding of fact.

5. The law we have set out is of ancient vintage. We will merely refer to Lachmeshivar Prasad Shukul v. Keshwar Lai Chandhri [1940] FCR 84 ; AIR 1941 FC 5, which is a leading case On the point. Gwyer, C. J., in the above case, referred to the rule adopted by the Supreme Court of the United States in Patterson v. State of Alabama [1935] 294 US 600 :

‘We have frequently held that in the exercise of our appellate jurisdiction we have power not only to correct error in the judgment under review but to make such disposition of the case as justice requires. And in determining what justice does require, the court is bound to consider any change, either in fact or in law, which has supervened since the judgment was entered and said that that view of the court’s powers was reaffirmed once again in the then recent case of Minnesota v.- National Tea Co. [1940] 309 US 551, Sulaiman, J., in the same case relied on English cases and took the view that an appeal is by way of a re-hearing and the court may make such order as the judge of the first instance could have made if the case had been heard by him at the date on which the appeal was heard (emphasis1 ours). Varadachariar, J. dealt with the same point a little more comprehensively. We may content ourselves with excerpting one passage which brings out the point luminously (at page 103) :

‘It is also on the theory of an appeal being in the nature of a re-hearing that the courts in this, country have in numerous cases recognised that in moulding the relief to be granted in a case on appeal, the court of appeal is entitled to take into account even facts and events which have come into existence after the decree appealed against’.” Even in Laxmi and Co. v. Dr. Anant R. Deshpande reported in [1973] 1 SCC 207

37, on the question of subsequent development, the apex court has observed as under (page 45) :

1. Here printed in italics.

“27. It is true that the court can take notice of subsequent events. These cases are where the court finds that because of altered circumstances like devolution of interest it is necessary to shorten litigation. Where the original relief has become inappropriate by subsequent events, the court can take notice of such changes. If the court finds that the judgment of the court cannot be carried into effect because of change of circumstances of the court takes notice of the same. If the court finds that the matter is no longer in controversy the court also takes notice of such event. If the property which is the subject-matter of suit is no longer available the court will take notice of such event. The court takes notice of subsequent events to shorten litigations, to preserve rights of both the parties and to subserve the ends of justice. Judged by these principles it is manifest that in the present case suits are pending. On the one hand the appellant has challenged the decree obtained by Ashar and others as also the warrant of execution. On the other hand, the suit instituted by Ashar and others against inter alia the appellant in 1965 for possession is pending. This court cannot say with exactitude that any final decision has been reached on the respective and rival rights and claims of the appellant and the respondent. It is, therefore, neither desirable nor practicable to take /notice of any fact on the rival versions of the parries as to subsequent events.”

208 In fact, as late as in 2000, the apex court in Jai Mangal Oraon v, Smt. Mira Nayak reported in [2000] 5 SCC 141, has observed that it is, by now, well-settled that even subsequent developments or facts and turn of events coming into existence, but found really relevant, genuine and vitally important in effectively deciding the issues raised and necessary to do real, effective and substantial justice or prevent a miscarriage of justice is into only can but ought to be taken into consideration by courts even at the appellate stage.

209 If the subsequent events can be taken into consideration and in the facts and circumstances of the present case, when subsequent developments are required to be taken into account, it clearly follows that the plaintiff-responden t has received the offer to purchase shares at the rate of Rs. 800 per share with all assets and liabilities of the appellant-company, but he refused to buy the shares. As a measure of abundant caution, even this I court has enquired from learned counsel for the plaintiff-responden t if he M was willing to buy shares at the rate of Rs. 800 per share. Mr. Ali, learned counsel for the plaintiff-responden t, has not been able to assert that the plaintiff is willing to buy shares at the rate of Rs. 800 along with the assets and liabilities of the appellant-company. In such circumstances, the shareholders cannot be restrained from selling shares to an outsider at the rate of Rs. 800 per share nor can the appellant-company be restrained from allowing the shareholders to sell their shares at the rate aforementioned along with the assets and liabilities of the appellant-company. Any restriction, if imposed in this regard, may prove disastrous not only for the company, but the public at large, for, a large number of lives are depending on the outcome of this appeal.

210 The discussions, held above, as a whole, may be summarised thus : The decision of the shareholders of the appellant-company to sell shares outside the company is a decision of the company itself, particularly, when the board of directors of the appellant-company has acted upon the decision so taken by the shareholders. The plaintiff-responden t is as much bound by this decision as any other shareholder. It is not the case of the plaintiff-responden t that the shareholders’ decision to sell shares outside the company is not in public interest or prejudicial to the interest of the company. If the plaintiff-responden t is aggrieved by the said decision as a minority shareholder, his remedy lies in invoking jurisdiction under sections 397 and 398. Viewed thus, the present suit is not prima facie maintainable. This apart, the reliefs of various declarations, which the plaintiff-responden t has sought for, cannot, in the background of the discussions already held above, be prima facie made available to the plaintiff-responden t. Situated thus, it is made clear that the plaintiff-responden t’s suit is prima facie not maintainable and the plaintiff-responden t could not have been said to have made out a prima facie case entitling him to obtain injunction of the nature as he had been sought for. In no way, therefore, the impugned order of injunction can be sustained.

211 In the result and for the reasons discussed above, this appeal is allowed with cost and the impugned order is hereby set aside.

212 With the above observations and directions, this appeal shall stand disposed of.

More Under Company Law

Posted Under

Category : Company Law (3635)
Type : Judiciary (10586)

Leave a Reply

Your email address will not be published. Required fields are marked *