Deshraj Gupta and Another vs Shivraj Gupta and Others

S. Ravindra Bhat, J.—In this suit, the Plaintiffs seek declaration to the effect that the proceedings of the third Defendant''s Annual General Meeting (AGM) dated 30.09.1985 are invalid and inoperative and that the Resolution passed that day vis-�-vis the Board of Directors is also inoperative. Consequentially, injunctions are sought against the Defendants. In addition, the first Plaintiff seeks declaration that he is the owner of about 35 equity shares in the company with a further direction to the third Defendant to record the transfer in his favour. Lastly, the Plaintiff seeks a declaration that he has retired as a Director.

The brief facts that emerge from the pleadings are that the third Defendant (Central Investments), is a private limited company. The Plaintiffs and the first two Defendants are related to each other, being the brothers and children of Late Shri Hans Raj Gupta who died on 3.7.1985. There were 200 shares in the company of which Late Shri Hans Raj Gupta owned 50 through a Trust i.e. Gopal Charity Trust. The company had also issued 300 voting preference shares. The Plaintiffs claim that by virtue of certain arrangements i.e. letters dated 15.6.1985, another agreement dated 15.8.1985, and a further agreement dated 6.8.1985 and 27.7.1985, various shareholders i.e. Avinash Sharma, Sushil Chander Gupta and Harish Chander Gupta have assigned/transferred their holding which worked out to a total of 35 shares.

It is not in dispute that on 16.8.1985, Board of Directors of Central Investment in a meeting approved the transposition of Avinash Sharma as the heir and permitted rectification of the share holding of Late P.C. Sharma. This Resolution has been admitted by the Defendants. On 2.9.1985, the third Defendant issued a notice, stating that an AGM would be held on 30.09.1985, and also circulated an agenda of the meeting. The Plaintiffs'' claim - an allegation which is not denied by the Defendants that they gave notice to Central Investments on 10.09.1985 holding themselves out as candidates for election as Directors. The Plaintiffs also issued a special notice to the third Defendant company intending to move a Resolution for removal of the first Defendant from Directorship on 13.09.1985. The Company apparently took cognizance of the two notices, dated 10.09.1985 and 13.09.1985, issued by the Plaintiffs and informed its members about the two proposed Resolutions stating that the same would be taken up on 30.09.1985, when the AGM was scheduled.

On 24.09.1985, the Board of Directors in a meeting registered Share numbers 26-30 in favour of Avinash Sharma and also accepted the Resolution of the third Defendant''s Secretary M.P. Tiwari. On the next date, i.e., 25.09.1985, apparently the Board of Directors of the Company in a Resolution decided to increase its share capital and resolved that the Directors could procure the applications of shares from relatives and friends. This Resolution too has been challenged. On 30.09.1985, the AGM was held as scheduled. The said meeting apparently put to vote the Plaintiffs'' Resolution for removal of Shri Shivraj Gupta and the election of the Plaintiffs as Directors. The motion was, however, defeated and consequently, the first Defendant Shri Shivraj Gupta continued. The said document is a part of the record and is produced at page 65 of the Local Commissioner''s report dated 19.10.1985. This Court had appointed a Commissioner to visit the third Defendant company''s premises and take charge of relevant documents as well as note the contents of the Minutes books (of the company) for the relevant period. The Plaintiffs'' approached this Court in view of the above events challenging the Resolution of the third Defendant''s Board of Directors and filed the present suit on 10.10.1985.

The first Plaintiff contends that he is the true and lawful owner of the 35 shares which were transferred to him by their previous holders and that he had sought for them to be recorded before the impugned meeting and Resolution of 30.09.1985. The suit was permitted to be amended. After the amendment, the Plaintiffs claim that the original owners of the shares had lost the share certificates, consequent to which, the same cannot be filed in the Court. The Plaintiffs also rely upon the affidavits of some of the heirs of the original owners. These were filed after the suit was instituted. It is submitted that the Defendants'' action in failing to register the transfer of shares in the first Plaintiff''s favour vitiates the meeting and the decisions taken on 30.09.1985. It is argued, in addition, that the first Defendant could not continue as a Director of Central Investments in view of the legal requirement that Directorships had to be rotated. It is argued, in this context, that by virtue of Section 255 of the Companies Act, any Director whose tenure ends has to retire and there is a prohibition against such rotation. Such being the case, argue the Plaintiffs further, the Resolution of 30.09.1985 is open to attack by the participation of the first Defendant is illegal, since that reduced the valid Directorship of the company to one which is impermissible under the Company Law. It is argued that the non-registration and consequent denial of permission to the Plaintiffs to rely upon the 35 shares has also vitiated the decision taken in the meeting of 30.09.1985. Based on these allegations, the Plaintiffs seek the declaratory, mandatory and other injunctive reliefs.

The Defendants in the written statement argue that there was no valid transaction of 35 shares as claimed in the suit. It is pointed out that the Plaintiffs have not disclosed as to whether these shares were actually presented to the Defendant company or lodged with it so that decision could be taken before 30.09.1985. It is also argued that the so called transfers are also not in accordance with Section 108 of the Companies Act which vests the Board of Directors with discretion to decide whether to register the shares or not having regard to the circumstances. In the present case, argue the Defendants, share certificates in original with the relevant transfer forms were not presented at all and that if the Plaintiffs'' case of their loss is really correct, there was no proof at the relevant time in that regard.

The Defendants also argue that by virtue of Resolution of 3.7.1985, it was clarified that no Director had to retire or go out of the Board on account of rotation or the ending of its tenure. It is pointed out, in addition, that Section 255 of the Companies Act does not apply to private companies and the third Defendant is one such company.

This Court had, by an interim arrangement dated 27.04.1985, on the basis of certain affidavits, including, inter alia, alleged affidavits of the heirs of the original share owners, (through whom the Plaintiffs claim) during the pendency of the trial, issued directions to the third Defendant company to consider the matter of registration of shares in favour of the Plaintiffs in respect of 35 disputed shares and apprise the Court of the objection, if any. On 26.07.1988, the third Defendant company filed the response indicating that it had rejected the request.

On 9.2.2000, after hearing counsel and considering the pleadings, this Court framed the following issues:

(1) Whether the Plaintiff has no locus standi to file the suit?

(2) Whether the plaint does not disclose any cause of action?

(3) Whether Defendant No. 2 was obliged to retire as a Director of the Company at the Annual General Meeting held on 30th September, 1985?

(4) If Issue No. 3 is decided in favour of the Defendant, whether the Defendant has been reappointed under the provisions of the Companies Act?

(5) If Issue Nos. 3 and 4 are decided against the Defendant, whether he has been co-opted as a Director, as alleged in the written statement?

(6) Whether this Court has no jurisdiction to try this Suit?

(7) Whether the Plaintiffs are entitled to declaration claimed in the Suit?

(8) Whether the persons who had entered into the agreement for transfer of shares to the Plaintiff had no authority to transfer the same?

(9) Whether the alleged agreements are binding upon the Defendants? If so, to what effect?

(10) Whether the suit is bad for non-joinder of parties?

(11) To what relief, if any, is the Plaintiff entitled?

The parties were sent to trial. The record would show that for a period of ten years, the Plaintiff did not prosecute the matter and lead any evidence. Apparently, the present suit was being shown along with a probate proceedings in which the first Plaintiff had sought for a probate in respect of estate of Late Shri Hans Raj Gupta. Those probate proceedings were, however, dismissed. Despite grant of several opportunities, the Plaintiffs did not take any steps to lead evidence. The Court noted this on 15.2.2008 and despite such lapse, granted final opportunity to the Plaintiffs to lead evidence, as denial of such a right would have prejudiced them. The Plaintiffs were directed to pay Rs. 50,000/- (Rs. Fifty thousand) as costs to the Defendants. Thereafter, the Plaintiffs persisted in defaulting and did not take the necessary steps. The Plaintiff neither paid the costs directed nor took steps to lead evidence, by filing affidavit as directed. In these circumstances, the Court closed the Plaintiff''s right to lead oral evidence.

ISSUE No. 1

This issue was framed at the behest of the Defendants. However, in view of the admitted fact that the Plaintiffs are shareholders of the company, no serious opposition to the maintainability was raised during the hearing. The issue is, therefore, answered in favour of the Plaintiffs and against the Respondents.

ISSUE Nos. 2 & 3

These issues concern an important aspect upon which this Court has to decide, i.e., whether the Directors in the third Defendant company automatically retired by rotation. In this context, the Plaintiffs'' argument is that the first Defendant who was due to retire on 30.09.1985, could not be allowed to continue, by virtue of the provisions contained in Section 255. The said provision read as follows:

Appointment of directors and proportion of those who are to retire by rotation

(1) [Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds] of the total number of directors of a public company, or of a private company which is a subsidiary of a public company, shall-

(a) be persons whose period of office is liable to determination by retirement of directors by rotation; and

(b) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.

(2) The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting.

The Defendants, on the other hand, contend that as the provision is clear, in the absence of a specific provision enabling the re-appointment, the Directors are deemed to retire. It is submitted that the third Defendant is a private company and, therefore, the provisions of Section 255 are inapplicable. The Defendants also rely upon the Resolution of 3.7.1985 clarifying the situation.

The Court has carefully considered the submissions. The allegation in the suit that the first Defendant could not continue as Director is premised on the assumption that there is a bar in law for retiring Directors or those whose tenure is ending, from being continued or "rotated". However, the Plaintiffs have been unable to substantiate any bar in this regard either in the Memorandum or Article of Association of the third Defendant company which is concededly a private company. Furthermore, the phraseology of Section 255 clarifies that the law provides for the consequence in the absence of a specific provision in the Articles of Association of a public limited company. Such, however, is not the case here. As stated previously, the third Defendant is a private company. Also the Resolution of 3.7.1985 produced along with the Local Commissioner''s report establishes beyond doubt that the Board of Directors had provided to the contrary and clarified the situation. In these circumstances, the Plaintiffs'' contentions cannot succeed. Issue Nos. 2 and 3 are accordingly answered against the Plaintiffs.

ISSUE No. 4

The fourth issue was cast as a consequential one i.e. that in the event the Defendants succeed whether it is shown that first Defendant was validly reappointed under the provisions of the Companies Act. In this regard, the Court is of the opinion that the label and phraseology adopted are really in consequential because the ending of the tenure in the case of a private company does not create a bar for re-election/re-appointment/continuation of the existing Director since the provisions of Section 255 are inapplicable. The fourth issue is also accordingly answered in favour of the Defendants. The first Defendant validly continued as Director of the third Defendant company.

ISSUE No. 5

In view of the findings returned in issue Nos. 3&4, this issue does not require any decision.

ISSUE No. 6

The Defendants who have insisted on framing this issue do not oppose the suit. The same is accordingly answered in Plaintiff''s favour.

ISSUE Nos. 8-10

The onus of proving whether original shareholders had in fact agreed to transfer the 35 shares was upon the Plaintiffs. In this suit, the Plaintiffs categorically referred to 5 agreements, dated 6.8.1985, in respect of share Nos. 1-5 with Harish Chander Gupta; agreement dated 15.8.1985 in respect of 5 shares (i.e. Nos. 26-30) by Avinash Sharma and two agreements dated 27.7.1985 in respect of share Nos. 6-10 and 111 and 130 entered into with Shri Sushil Chander Gupta and Harish Chander Gupta, respectively. The Plaintiff had produced copies of these documents but they were denied. During the time period between 9.2.2000 and 3.8.2010, no steps were taken to prove these agreements. The Plaintiff also did not file any affidavit by the original shareholders or their legal heirs to substantiate the case of such valid transfer. On the other hand, they argued before this Court, as is evident from the hearing on 27.4.88, that the transfer certificates were lost by all the original owners. Though an implausible argument, it was imperative for the Plaintiffs to have discharged the onus on them that all the original owners/their heirs had lost the certificates and had validly transferred the shareholding to them, to substantiate this claim/argument. They chose not to do so, even though some affidavits had been filed at the interim stage. The Central Investments'' case is that the Plaintiffs'' request could not, in any event, be entertained or acted upon as it was contrary to Section 108 of the Companies Act. The said provision reads as follows:

Transfer not to be registered except on production of instrument of transfer

(1) A company shall not register a transfer of shares in, or debentures of, the 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 and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debentures:

Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit:

Provided further that nothing in this section shall prejudice any power of the company to register as shareholder or debenture holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law.

The Plaintiffs did not state any particulars as to when the share certificates were lost nor did they establish, through any credible documentary evidence, that such documents had been with the original owners who had lost them before the transaction itself. One of the well established propositions of civil law is that "he who alleges or claims something is under a duty to prove it''; the Plaintiff has to primarily establish his case before the onus of proof shifts on the other party. In this case, Plaintiffs have not discharged their primary obligation by not leading any credible evidence to show that the agreements were entered into as is alleged, or that the transfer was sought within standards prescribed u/s 108. In these circumstances, the Court is of the view that issue Nos. 8-10 have to be answered against the Plaintiff and in favour of the Defendants. It is held that agreements relied upon have not been proved; consequently, the Plaintiffs did not become the owners of the 35 shares, as claimed.

The Court also notices that since the Defendants disputed the veracity of the transaction concerning the transfer of shares, the Plaintiffs were under a duty to implead the original shareholders or their legal heirs. The omission to do so is fatal in the circumstances. The suit is also bad for non-joinder of necessary parties. Issue Nos. 8, 9 & 10 are accordingly answered against the Plaintiff and in favour of the Defendants.

ISSUE Nos. 7-11

In view of the previous findings rendered on the other issues, it is held that the Plaintiffs are not entitled to any relief including the relief of declaration or the injunction sought for. The suit has to, therefore, fail.

CS (OS) 1941/1985 is, therefore, dismissed, with costs.