Case Note & Summary
The appeal was placed before the High Court of Judicature at Bombay following a remand order by the Supreme Court in Civil Appeal No. 2481 of 2014. The Supreme Court directed the High Court to conduct a factual enquiry into whether the transfer of five shares by the appellant from his individual name to joint names with his children and wife caused the total membership of Gharda Chemicals Limited to exceed 50. The background of the dispute involved a long-standing family conflict over pre-emption rights under Article 57 of the company’s Articles of Association. The appellant, Darius Rutton Kavasmaneck, had earlier filed Company Petition No. 77 of 1990 under Sections 397 and 398 of the Companies Act, 1956, alleging oppression and mismanagement, which was later withdrawn on assurances. In 2009, he filed Company Petition No. 132 of 2009 seeking enforcement of pre-emption rights and an injunction against share transfers by the second respondent, Dr. Keki Hormusji Gharda. The Company Law Board dismissed that petition on 14 May 2010, holding that after the 2000 amendment to the Companies Act, 1956, Section 43A was inapplicable, the company had become a public company, and Article 57 was invalid. The appellant’s appeal to the High Court (Company Appeal No. 24 of 2010) was dismissed on 14 June 2011, upholding the Company Law Board’s view that the company was a full-fledged public company and Article 57 was void for violating free transferability. The appellant then appealed to the Supreme Court, which on 28 October 2014 allowed the civil appeal and remanded the matter solely for the factual enquiry regarding membership count. The High Court heard submissions from both parties at length. The text of the judgment provided does not include the court’s final determination on the remanded issue.
Issue of Consideration
Whether the transfer of five shares by the appellant to himself jointly with his children and wife resulted in the total members of Gharda Chemicals Limited exceeding 50.
Law Points
- private company membership limit
- Section 3(1)(iii) Companies Act 1956
- pre-emption rights under articles
- Article 57
- Section 43A Companies Act 1956
- deemed public company
- amendment of Companies Act 1956 in 2000
- free transferability of shares
- validity of pre-emption agreements in public companies
- joint shareholding and membership count
Case Details
2017 LawText (BOM) (08) 77
Company Appeal No. 24 of 2010 in Company Petition No. 132/397-398/CLB/MB/2009
Appellant: Praveen Samdhani, Senior Advocate, with Mayur Khandeparkar, Shriraj Dhruve, Mitesh Naik, Heena Desai, instructed by Dhru & Co.; Respondents: V.R. Dhond, Senior Advocate, with Rohan Kadam, Amol Baware, Abhishek Adke, instructed by Legasis Partners
Darius Rutton Kavasmaneck
1. Gharda Chemicals Limited, 2. Keki Hormusji Gharda, 3. Aban Keki Gharda, 4. A. K. Luke, 5. Almitra H. Patel, 6. D. T. Desai
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Nature of Litigation
Dispute concerning the validity and enforcement of pre-emption rights under Article 57 of the Articles of Association of Gharda Chemicals Limited, and whether a share transfer by the appellant to joint names resulted in the company's membership exceeding the statutory limit of 50.
Remedy Sought
The appellant sought to challenge the order of the Company Law Board dated 14 May 2010 dismissing Company Petition No. 132 of 2009, and to obtain an injunction against the second respondent from transferring shares; the appeal also sought to establish that the company remained a private company and that Article 57 was valid.
Filing Reason
The Company Law Board had held that after the 2000 amendment to the Companies Act, 1956, Section 43A became inapplicable, the company became a public company, and Article 57 was invalid; the appellant contested this and also sought to prevent the transfer of shares in alleged violation of pre-emption rights.
Previous Decisions
Company Law Board dismissed Company Petition No. 132 of 2009 on 14 May 2010; the High Court dismissed Company Appeal No. 24 of 2010 on 14 June 2011; the Supreme Court allowed Civil Appeal No. 2481 of 2014 on 28 October 2014 and remanded the matter for a factual enquiry on whether the transfer of five shares made the total members exceed 50.
Issues
Whether the transfer of five shares from the appellant singly to the appellant jointly with his children and wife resulted in the total members of Gharda Chemicals Limited exceeding 50.
Submissions/Arguments
Appellant argued that the family understanding and the Articles of Association created a pre-emptive right that prevented transfer to outsiders; that the company was still a private company and Article 57 remained valid; and that the transfer would cause the membership to exceed the statutory limit.
Respondents argued that after the 2000 amendment to the Companies Act, 1956, Section 43A was inapplicable, making the company a full-fledged public company, and that Article 57 was invalid as it violated the principle of free transferability of shares.
Judgment Excerpts
whether the transfer of five shares from the appellant (singly) to the appellant jointly with his children and wife resulted in the total members of the respondent no.1 i.e. Gharda Chemicals Limited exceeding 50.
the question of validity of Article 57 was thus alive and was pending in this court.
Article 57 was consequently invalid being violative of the concept of free transferability.
this court in case of Messer Holding held that the pre-emption agreement was valid even in the case of a public listed company.
Procedural History
28 April 1962: Kavasmaneck and Gharda family constituted firm M/s Gharda Chemicals Industries. 6 March 1967: Firm incorporated as private company. 17 August 1988: Company became deemed public company under Section 43A. 1990: Company Petition No. 77 of 1990 filed under Sections 397 and 398; withdrawn on 8 September 2005 by appellant on assurances. 16 January 1990: Resolution proposed to amend Article 57; stayed by order dated 14 February 1990. 13 December 2000: Amendment to Companies Act, 1956; Section 43A made inapplicable. 5 May 2001: Proposed amendment to articles defeated. 2009: Company Petition No. 132 of 2009 filed; ad-interim injunction granted on 11 December 2009. 14 May 2010: Company Law Board dismissed petition, held company public, Article 57 invalid. 21 May 2010: Company Appeal No. 24 of 2010 filed; admitted on 28 June 2010, injunction continued. 1 September 2010: High Court in Messer Holding held pre-emption agreement valid in public listed company. 16 October 2010: Notice for EGM to delete Article 57. 29 October 2010: Company Petition No. 87 of 2010 filed to restrain EGM. 9 December 2010: Notice withdrawn. 14 June 2011: High Court dismissed Company Appeal No. 24 of 2010. July 2011: SLP No. 16994 of 2011 filed; injunction continued. 25 April 2012: Second EGM notice. 9 May 2012: Company Application No. 73 of 2012 filed. 19 May 2012: Original petitioner Maharukh informed CLB she would not support deletion. 21 May 2012: CLB allowed EGM but kept resolution in abeyance. 22 May 2012: EGM held; resolution passed. June 2012: Company Application No. 85 of 2012 for vacating ad-interim order; Company Application No. 91 of 2012 for further amendment. 10 August 2012: CLB heard applications. 13 August 2012: CLB allowed amendment and vacated injunction. 27 August 2012: Appeal (L) No. 41 of 2012 filed; stay granted on 30 August 2012. September 2012: Appeal (L) No. 45 of 2012 filed by company. 20 December 2012: High Court dismissed Appeal (L) No. 45 of 2012, upheld CLB order vacating injunction. 14 February 2014: Supreme Court granted leave, SLP converted to Civil Appeal No. 2481 of 2014. 28 October 2014: Supreme Court allowed appeal and remanded Company Appeal No. 24 of 2010 for factual enquiry on membership exceeding 50. 4 August 2017: High Court pronounced judgment on the remanded issue.
Acts & Sections
- Companies Act, 1956: 43A, 397, 398, 3(1)(iii)
