Articles of Association- Restriction on the rights to transfer of shares – Darius Rutton Kavasmaneck Versus Gharda Chemicals Limited & Others – Supreme Court

Articles of Association- Restriction on the rights to transfer of shares- whether any preemption clause/article restraining transferability of shares in public company is valid. Whether on and after the bringing into force of the Companies (Amendment) Act, 2000, the status and character of Gharda Chemicals Ltd. (R-1) continued to be as that of a “hybrid company” (Section 43A company) and whether this company and its members are bound by the terms of a preemption clause contained in Article 57 of the Articles of Association? Held that- The case of the appellants all through has been that notwithstanding the amendment of the Act by the Amendment Act 53 of 2000, Article 57 of the Articles of Association still governs the rights of the members of the first respondent Company. On the other hand, the case of the respondents has always been and is that the first respondent company is a public company having had become so by the operation of law i.e., Section 43A(1) and it cannot now become a private company. There is nothing in the Amendment Act 53 of 2000 which automatically renders a public company created under Section 43A to become a private company. It is also the case of the respondents that the failure to amend the Articles of Association to give effect to Section 3(1)(iii)(d) ipso facto make the first respondent a public company thereby rendering Article 57 inoperable.

it can be seen that by the date of amendment of Section 43A by the Act 53 of 2000, there are four classes of private companies which are declared by the said section to become public companies on the happening of an event mentioned in each of the sub-sections.It is also necessary to note that each of the abovementioned four sub-sections contained a proviso. The tenor of all the four provisos is identical. Proviso- “Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven.”

The High Court held that It is clear from the factual position that the attempt to amend the Memorandum and Articles of Association of the first respondent was unsuccessful. The said resolution proposed in the meeting held on 5th May 2001 was not carried but in fact defeated. Once it was defeated, then, the first respondent which had become a public company on 17th August 1988 continued with that status. It would be of relevance to note that the resolution was moved in the meeting held on 5th May 2001. That resolution was defeated on that day. However, the Companies Amendment Act 2000 had come into effect already and to be precise from 13th December 2000. On 13th December 2000, GCL was not a deemed public company but a public company. Once it was a public company, then, the argument of the appellants that it continued to retain its fundamental and basic character as a private company cannot be accepted. The status is conferred by law. The status was sought to be changed or amended by moving an amendment to insert an additional clause (d) was defeated, then, there is no scope to alter the status of the respondent No.1 company by either terming it as a deemed public company or a public company retaining the fundamental and basic character of a private company. Both these concepts are unknown to law.

The REAL question is not whether the failure to amend the Articles of Association by the first respondent company rendered the first respondent company (which is otherwise a private company) a public company, but whether such a failure destroyed the collective right of the members of the first respondent company to have shares whose transferability is subject to limitations and restrictions contained in Article 57 of its Articles of Association. In our opinion, the failure of the first respondent company to amend its Articles of Association to give effect to clause (d) of Section 3(1)(iii) does not effect the operation of its Article 57.

The question whether the first respondent Company is a public company or a HYBRID company or a private company was never directly and substantially in issue in Company Petition No.77 of 1990. The parties to the said company petition proceeded on the basis that in view of the fact that an amendment to the Articles of Association to give effect to the newly inserted clause (d) of Section 3(1)(iii) could not be carried on, the first respondent company became a public company. Therefore, the Court never examined that question of law. Hence, it cannot be said that the appellants are precluded from raising such a question of law in the instant appeal. Appeal allowed.

Source – TMI

 

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