M RATNAVARMA PADIVAL Vs. KARNATAKA THEATRES LTD

JUDGEMENT

(1.) THE petitioner is a shareholder of respondent No. 1 company namely the Karnataka Theatres ltd. The dispute raised in this petition is within a very narrow ambit in so far as the petitioner contends that he had obtained an overdraft facility from the South Indian Bank Ltd. , Mangalore, in the year 1976 and that as a security for the overdraft, the petitioner had transferred 360 equity shares belonging to the petitioner in respondent No. 1 company to the bank and the company had registered the transfer on March 21, 1976 and entered the name of the third respondent in the register of members of the company. In January, 1987, the third respondent released the security of 360 equity shares in the company and executed three instruments of transfer dated January 14, 1987, transferring the 360 shares in favour of the petitioner. The petitioner lodged with respondent No. 1 company the three instruments of transfer dated January 14, 1987, accompanied by the eighteen share certificates on January 15, 1987, along with the petitioner's letter of the same date together with a cheque for Rs. 6 on account of the transfer fees. By letter dated March 16, 1987, the company refused to transfer the 360 equity shares in the name of the petitioner and the reason given by the company for such refusal was based on the legal advice obtained by the company dated March 6, 1987. The ground on which the transfer was refused was that the petitioner already holds 500 shares and that therefore, he cannot hold another 360 shares. The legal opinion was based on Article 15 of the company's articles of association whereunder no member whether singly or jointly shall at any time hold shares exceeding in the aggregate one-tenth of the total number or value of shares then issued by the company. The legal opinion stated that the total number of shares of the company including forfeited shares disposed of by the company is 5016 which means that no member can hold more than 501 shares. Article 15 of the company's articles of association is extracted below :

(2.) THROUGH the present petition, the petitioner has challenged the action namely refusal to transfer 360 shares and I need to mention that this is a petition under the Companies Act and the only relief that is asked for is that the register of members be rectified by entering the name of the petitioner as holder of the 360 shares in question. I am referring to this aspect of the case because the relief asked for is extremely limited in so far as only corrective action has been prayed for. There are averments in the petition that Article 15 is untenable and not valid in law but, there is no relief asked for from this court by way of either a declaration that the article is bad in law or that it should be struck down. Furthermore, the prayer clause itself is restrictive in so far as the only relief prayed for is what has been reproduced by me above but I shall take a charitable and a broad view of prayer (a) in so far as I shall assume that the relief asked for is that the shares should be transferred to the petitioner's name as otherwise, there can be no question of entering the name of the petitioner in the register of members as holder of 360 shares. I have pointed out this aspect of the case because it narrows down the controversy immensely in so far as the short question which the court will have to look into is as to whether the relief can be granted assuming Article 15 continues to form part and parcel of the memorandum and articles of association of the company.

(3.) THE petitioner's learned counsel submitted that the action of the company is defenceless and he relied on an earlier decision of this court reported in the case of Karnataka Theatres Ltd. v. S. Venkatesan [1998] 93 Comp Cas 433, which is an earlier proceeding between the same parties wherein this court upheld the contention that if the action is essentially wrong a legal opinion is no defence. Secondly, learned counsel submitted before me that the respondents' submission that the alternate remedy be availed of by way of an appeal to the Government is also unnecessary because the option is left with the petitioner and that even the head of delay and laches is not sustainable again in view of the observations contained in the aforesaid judgment. There can be no two opinions about the fact that the present petition is very much maintainable and furthermore that in the light of the aforesaid decision, all that this court is required to consider is as to whether in the light of Article 15 this court can direct the transfer to be effected or not. Learned counsel submitted that in view of the ratio laid down in Lallan Prasad v. Rahmat Ali, AIR1967 SC 1322 , [1967 ]2 SCR233 and Shatzadi Begum Saheba v. Girdharilal Sanghi, AIR1976 AP 273 , the residuary interest in the shares always continued with the petitioner in so far as the shares were only pledged to the bank as and when by way of collateral security for the overdraft, that the interest of the petitioner in the shares was never extinguished and that therefore, the retransfer to his name is a mere formality. This last argument is fallacious because the respondents, learned advocate is right when he points out that once the petitioner had executed the documents of transfer in favour of the bank and the company had given effect to the transfer, irrespective of the nature of the transaction between the petitioner and the bank, that there can be no two opinions about the fact that it was a clean, clear-cut complete transfer and that no residuary interest survived with the petitioner.