M/s.S.V.T.Spinning Mills Pvt. Ltd., V.R.G.Gardens, Thadagam Road Edayarpalayam Coimbatore 641 025 v. M.Palanisami

JUDGEMENTThis appeal is filed under section 10-F of the Companies Act,1956 against the order of the Additional Principal Bench of theCompany Law Board made in C.A.No.161 of 2006 in C.P.No.37 of 2006dated 30.01.2009.2. The respondents in this appeal have filed the companypetition against the appellants for oppression and mismanagementunder sections 397 and 398 read with 402 and 403 of the CompaniesAct, 1956. It was, in that company petition, the appellants havefiled Application No.161 of 2006 before the Company Law Board fordismissal of the said company petition on the ground ofmaintainability. That application came to be dismissed by theCompany Law Board on the basis that the issue raised by theappellants require consideration in detail, which can be done onlyin the main company petition.3. The grounds on which the appeal is filed are that, theCompany Law Board cannot decide about the title in respect of sharesstated to have been transferred while exercising jurisdiction undersections 397 and 398 of the Companies Act; that the decision of theCompany Law Board in rejecting the application on the ground ofmaintainability is perverse and without basis; and that the CompanyLaw Board ought to have dismissed the company petition on theadmitted ground that the respondents are not holding shares in thecompany and therefore, they are non-members, who cannot maintain thepetition under sections 397 and 398 of the Companies Act, 1956.Besides, the appellants have also raised other legal issues. 4. The facts which are relevant for the purpose of disposal ofthis appeal are as follows: (a). The appellants 2 to 5 along with the first respondentM.Palanisamy, have jointly purchased 64 cents and 65 sq.ft. of vacantland under a sale deed dated 19.4.1995. When the said appellants 2to 5 have purchased the first appellant's mill, it was in the name,G.S.S.Spinners Private Limited, subsequently converted asM/s.S.V.T.Spinning Mills Private Limited. It is stated that the saidappellants 2 to 5 have purchased the shares of the erstwhileG.S.S.Spinners Private Limited while the first respondent has notpurchased any share. It was due to the reason that the firstrespondent was negotiating to purchase the said company, he wastaken nominally as one of the directors of the company even though hehas not contributed to the share capital. (b). Subsequently, it is stated, the first respondent wasremoved from the directorship in the General Body Meeting held on11.8.1985, since he had not purchased the qualification shares. It is https://hcservices.ecourts.gov.in/hcservices/ seen that the first respondent claiming himself to continue as aManaging Director, has filed O.S.No.1056 of 1995 on the file of theDistrict Munsif's Court, Coimbatore for injunction against theappellants from interfering with his function as Managing Director.He has also filed O.S.No.49 of 1998 in the same Court for declarationthat the resolution of the first appellant's company in the Extra-ordinary General Body Meeting held on 11.8.1995, removing him fromthe directorship is null and void. He has further filedO.S.No.201 of 1999 before the Sub Court, Coimbatore for declarationthat himself and his family members, who are other respondents in theappeal (shareholders in respect of 3880 equity shares) bearingdistinctive numbers from 0150 to 4050 and for permanent injunctionagainst the company from registering any transfer of those shares. (c). It is stated that during the pendency of the said suits, anagreement was entered into by the first respondent on 15.10.1995,agreeing to convey his 1/5th share in the said 64 cents and 65 sq.ft.of lands stated above and having received an amount ofRs.1,92,000/-, he failed to perform his part of obligation, whichresulted in the filing of a suit in O.S.No.1638 of 1995 on the fileof Sub Court, Coimbatore for specific performance against the firstrespondent, which is pending. It appears that some criminalcomplaints had been lodged by the first respondent, which weresubsequently dismissed. (d). It is stated that thereafter, the first respondent soughtpermission to withdraw all the said suits with liberty to claimremedy before the appropriate forum, however, the Civil Courtpermitted the first respondent to withdraw his suits on 18.1.2006,without granting liberty as sought for by him. Nearly six yearsafter withdrawing the suits, the first respondent approached theCompany Law Board by filing the company petition against theappellants for oppression and mismanagement. However, the suit filedby the appellants 2 to 5 for specific performance against the firstrespondent is still pending. (e). It was the case of the appellants that the filing ofcompany petition by the first respondent is an abuse of process oflaw and inasmuch as the first respondent has not purchased thequalification shares and become a shareholder of the company, thepetition filed by him for oppression and mismanagement under sections397 and 398 of the Companies Act is not maintainable by virtue ofsection 399 of the Companies Act,1956.5. On the other hand, it was the case of the first respondentbefore the Company Law Board that the application filed by theappellants questioning the maintainability of the company petition isonly to prolong the matter and the first respondent has in fact paida sum of Rs.1 lakh by way of cheque as against the agreed https://hcservices.ecourts.gov.in/hcservices/ consideration of Rs.60 lakhs, agreeing to pay the balance of Rs.59lakhs to the 12th respondent and later, on payment of balance amountto the 12th respondent and his group, the 12th respondent hastransferred 3880 shares in favour of the first respondent anddelivered the original share certificates numbering 0150 to 4050 incompliance of the formalities in respect of transfer of shares.Since the first respondent has lost the original share certificates,he made a request to the appellants to issue duplicate sharecertificates, which was not considered, resulting in filing of thesuits. Therefore, it was the case of the first respondent before theCompany Law Board that he has substantial interest over the company'saffairs as he is a shareholder since the transferor viz., 12threspondent who was the owner had received the full consideration anddelivered the share certificates.6. As stated above, the Company Law Board has considered therival submissions and held that the questions whether the firstrespondent has substantial interest over the company's affairs andwhether the transfer of shares has not been effected in favour of thefirst respondent in spite of payment of entire sale considerationare all matters which have to be decided in the company petition forthe purpose of finding whether the first respondent as a member canmaintain the said company petition. Taking such view, the CompanyLaw Board has felt that the question of maintainability cannot bedecided at this stage and rejected the application filed by theappellants.7. Mr.R.Thiagarajan, learned senior counsel for the appellantswould submit that the case of first respondent himself is that he haspaid the sale consideration in respect of the shares to the 12threspondent, who after receiving the same has handed over the sharecertificates but, the shares are not transferred and are not standingin his name as on date, and therefore, the shares have not beentransferred in the name of the first respondent legally and on thataccount, the company petition has to be rejected as not maintainable.7(a). According to the learned senior counsel, the CompanyCourt, while exercising its powers under Sections 397 and 398 of theCompanies Act, cannot decide as to whether the transfer has beeneffected or not and whether the transfer of shares is valid or not,and what the Company Court, while exercising its powers undersections 397 and 398, can do is to prima facie satisfy that theperson who approaches it under the abovesaid provisions is a memberof the company on the said date. When, on the admitted pleadings,the first respondent cannot be treated as a member of the company anda shareholder of the company, according to him, the very filing ofthe company petition by him should be treated as meaningless and theCompany Law Board cannot be expected to keep the petition which is onthe face of it not maintainable. https://hcservices.ecourts.gov.in/hcservices/ 7(b). It is his submission that while rejecting the applicationfiled by the appellants for maintainability of the company petition,the Company Law Board shall have referred to the income-tax returnsof the 12th respondent/transferor about his assets and rights inrespect of the share certificates. 7(c). It is his further submission that the returns filed onbehalf of the appellants in respect of investment, especiallyrelating to that of 3rd appellant, who claims to be the owner of theabovesaid shares, have been rejected by the Company Law Board as aweak evidence, which, according to him, is not the correct view. Hewould rely upon various judgments in,(i) Gulabrai Kalidas Naik and others vs. Laxmidas Lallubhai Patel andOthers (1977) 47 Comp.Cas 151;(ii) Ved Prakash and others vs. Iron Traders (Private) ltd., andOthers 1960 (XXXI) Comp.Cas 122 (Punjab);(iii) N.Satyaprasad Rao and Others vs. V.L.N.Sastry and Others (1988)64 Comp.Cas 492 (AP);(iv) Shri Balaji Textile Mills Pvt. Ltd., and another vs. Ashok Kavleand others (1989) 66 Comp.Cas 654 (Karnataka); and(v) Mrs.Saroj Goenka and others vs. Nariman Point Building Servicesand Trading Private Ltd., and others (1997) 90 Comp.Cas 205 (Madras),to substantiate his contention that the Company Law Board has todecide as to whether a person who approaches under section 397 of theCompanies Act is a member of the company.8. On the other hand, Mr.Venkatavaradhan, learned counselappearing for the respondents, especially for the first respondent,would submit that merely because the civil Court has not grantedleave to file appropriate proceedings, it does not mean that therights conferred on the respondents to file company petition undersections 397 and 398 are taken away. 8(a). It is his case that when admittedly the first respondenthas paid the entire sale consideration in respect of shares to the12th respondent, who was the original owner and who had in facttransferred his right over the shares in favour of the firstrespondent, which is evident on the face of it, the presentapplication filed by the appellants questioning the maintainabilityof the company petition was correctly rejected by the Company LawBoard. 8(b). He would contend that the entire pleadings prove that thetransfer of shares by the 12th respondent in favour of the firstrespondent is an admitted fact. His submission is, for the purposeof deciding an issue under sections 397 and 398 of the Companies Actand to ultimately decide as to who is the member under section 399 ofthe said Act, the term 'member' has to be interpreted as per section2(27) of the Companies Act and not as per section 41 of the CompaniesAct. https://hcservices.ecourts.gov.in/hcservices/ 8(c). It is his submission that the term 'member' , which is anon-inclusive definition under section 2(27) has to be liberallyconstrued in respect of sections 397 and 398 of the Companies Act,since it would include even a legal heir of a person in whose namethe transfer has not yet been effected but still is a member withinthe meaning of section 2(27) of the Act. He would rely upon thejudgment of the Supreme Court in World Wide Agencies Pvt., Ltd., vs.Margaratt.Desor [(1990) 1 SCC 536].8(d). He would submit that the company petition filed by thefirst respondent is one of composite in nature which not only seeksfor an action under sections 397 and 398 of the Companies Act, butalso for a direction to rectify the records by issuing duplicatecertificates, etc., and therefore, the first respondent having anindisputable and unchallengeable title as a member can maintain thecompany petition. 8(e). He would also submit that the petition under sections 397and 398 is filed on just and equitable grounds and therefore, theword, 'member' should be construed liberally. He would refer to thejudgments cited by the learned senior counsel for the appellants tosubstantiate his contention. 8(f). He would submit that the question of considering taxreturns, etc. is a matter to be decided on merits of the case andthat cannot be construed while deciding about the maintainability.He would rely upon the judgment in Mrs.Saroj Goenka and others vs.Nariman Point Building Services and Trading Private Ltd., and others(1997) 90 Comp.Cas 205 (Madras), to insist that the question ofmaintainability cannot be treated as a question of law and therefore,under section 10-F of the Companies Act, the appeal is notmaintainable. 8(g). He would rely upon the judgment in Nagindas Ramdas vs.Dalpatram Ichharam @ Brijram and others [(1974) 1 SCC 242] to submitthat when the decision on an issue involves appreciation of evidenceand other factors, it cannot be an issue for maintainability. It ishis submission that when the above said issue raised by the firstrespondent requires a detailed investigation, the Company Law Boardhas correctly rejected the application for maintainability anddirected the main company petition to be heard.9. I have heard the learned senior counsel for the appellantsand the learned counsel for the respondents and given my anxiousthoughts to the issue involved in this case.10. Some of the undisputed facts are that the appellants 2 to 5along with the first respondent had purchased jointly the vacant landto the extent of 64 cents and 65 sq.ft. by a sale deed dated19.4.1995 and the first respondent was made as the Managing Directorof the first appellant company and subsequently he was removed in theExtra-ordinary General Body Meeting held on 11.8.1995. The pendencyof the suit filed by the appellants 2 to 5 against the first https://hcservices.ecourts.gov.in/hcservices/ respondent for specific performance of agreement dated 15.10.1995,wherein it is stated that the first respondent has agreed to conveyhis 1/5th share in the above said property purchased jointly on19.4.1995 and the pendency of the civil suit for specific performanceitself cannot be a ground to throw out the company petition filed bythe first respondent against the appellants under sections 397 and398 of the Companies Act, 1956.11. Again, the mere fact that the civil suits stated above havebeen dismissed by the Court without giving liberty to the firstrespondent to take action in an appropriate forum, itself will nottake away the rights of the first respondent if the same areavailable and conferred on him under the provisions of the CompaniesAct, 1956, especially for approaching the appropriate forum viz., theCompany Law Board complaining about the oppression and mismanagementunder sections 397 and 398 of the Act. This being a statutory rightavailable to a shareholder or a member of the company, in myconsidered view, it does not require any leave to be granted by thecivil Court. Of course, the question whether the non-transfer ofshares in the name of the first respondent by the company is valid ornot may not be strictly within the purview of the Company Law Boardwhile deciding the issue under sections 397 and 398 of the CompaniesAct. But as correctly pointed out by the learned counsel for therespondents, the term, 'member' has to be construed based on thebroader object of sections 397 and 398 of the Companies Act. 12. On facts as elicited above, the crux of the issue appears tobe that the first respondent and the respondents 2 and 3 haveentered into an agreement on 27.3.1995 with the 6th respondent andhis family members for acquiring the entire shareholdings of the 12threspondent, Mr.V.R.Govindarajulu and his family members, relativesand friends in the erstwhile G.S.S.Spinners Private Limited, whichhas been subsequently converted as M/s.S.V.T.Spinning Mills Pvt.Ltd., for a sum of Rs.60 lakhs and that was for transferring 19580equity shares of Rs.100/- each aggregating Rs.19.58 lakhs, apart fromthe building, plant and machinery and other properties of the saidcompany. In furtherance of the said agreement it is stated that thefirst respondent paid a sum of Rs.1 lakh as advance and the balanceamount of Rs.56.50 lakhs was paid to the 12th respondent through bankaccount said to have been jointly maintained by the first respondentalong with respondents 2 to 5 and the remaining amount of Rs.2.50lakhs was paid in cash and therefore, the case of the firstrespondent is that he has paid the entire sale consideration inrespect of shareholdings of the 12th respondent in the firstappellant company and the 12th respondent transferred the sharesnamely, 19400 shares in favour of the first respondent and his group,in favour of respondents 2 to 5 to the extent of 3880 shares each andthe remaining 180 shares were transferred in favour of thetransferees at the time of vacating the Office of Director by the https://hcservices.ecourts.gov.in/hcservices/ 12th respondent. It is the specific case of the said respondentsthat the 12th respondent and his family members have handed over theoriginal certificates in distinctive numbers and the transfer ofshares was duly entered in the register of members of the company.It was only based on that factual position, the suits were filed,which were of course subsequently withdrawn and dismissed. 13. As I have stated earlier, by the withdrawal of the saidsuits it is not as if the respondents have lost their rights inclaiming ownership over the shares in the first appellant company, ifreally such ownership was transferred. The validity or otherwise ofthe transfer of shares is not an issue while deciding aboutoppression and mismanagement under sections 397 and 398 of theCompanies Act. Nevertheless, the Company Law Board can certainly gointo the merits of the case to find out what interest the respondentshave in the shareholdings of the first appellant company. TheCompany Law Board has, in fact, in my considered view, correctly heldthat these are the issues to be decided in detail while hearing themain company petition in which the Company Law Board wouldnecessarily decide about the right and interest of the respondents inthe shareholdings of the first appellant company and the same cannotbe decided in the maintainability application and the respondentscannot be thrown out from the company petition on the preliminaryissue.14. It is further relevant to note that it is not as if theappellants who are the respondents in the company petition have losttheir right of proving their case that the respondents are not eitherthe shareholders or members of the company on merits and that therespondents are not entitled to maintain the company petition undersections 397 and 398 of the Companies Act. Therefore, on the face ofit, the appellants cannot have any grievance. The contention of thelearned senior counsel for the appellants that when the respondentsprima facie have no status of shareholders or members of the company,allowing the company petition to prolong for some more time would beonly an abuse of process of law and also unnecessarily taking awaythe court's time, has no application to the facts and circumstancesof the case. On facts, it is not possible to draw an inference thatthe pendency of company petition would be an empty formality. 15. On the one hand, it is the contention of Mr.R.Thiagarajan,learned senior counsel appearing for the appellants that in theincome-tax return filed by the 12th respondent, who transferred theshares as stated above for the financial years 1995-96 (assessmentyear 1996-97), the 12th respondent has shown that he was holding3830 shares in G.S.S.Spinners Private Limited to the value ofRs.3,83,000/- and similar is the case for the assessment year 1997-98(financial year 1996-97) and therefore, the claim of the firstrespondent and other respondents that the shares have been purchased https://hcservices.ecourts.gov.in/hcservices/ cannot be prima facie accepted. But, on the other hand, it is thecase of the learned counsel for the respondents Mr.R.Venkatavaradhanthat even in the suits filed by the first respondent, the appellantswho have filed written statement have, at no point of time, whisperedthat the first respondent has never had the qualification shares inthe company. However, these are the matters which are to be decidedon facts and evidence and cannot be decided in summary proceedingswhile dealing with the maintainability application.16. It is also incidentally relevant to point out at this stagethat the original company petition filed by the respondents undersections 397 and 398 of the Companies Act is also in respect ofrelief under sections 235 and 236 of the Companies Act. The ultimaterelief claimed in the company petition is as follows:"(a) For a direction to the 1st respondent company toissue duplicate share certificates representing 3780shares in the share capital of the 1st respondent companyand the consequent rectification in the register ofmembers to this effect;(b) For a declaration that the removal of the 1stpetitioner as Managing Director of the 1st respondentcompany at the purported meeting held on 11.08.1995 asillegal, null and void;(c ) For declaration that the increase in theauthorized share capital and the paid-up capital of thefirst respondent company in the year 1996 and thereafterto the exclusion of the petitioners as illegal, null andvoid and a consequent direction to the respondent to allotproportionate shares in the first respondent based on theagreement dated 27.03.1995;(d) For superseding the board of directors of the 1strespondent company, appoint independent persons in orderto administer and manage the 1st respondent company;(e) To restore the petitioner as Managing Director ofthe 1st respondent company or alternatively for adirection, directing the respondents to purchase theshares of the petitioners at a fair value;(f) To surcharge the respondents 2 to 5 for theirmisfeasance, fraud and cheating committed, and for adirection to investigate the affairs of the 1st respondentCompany under Section 235 of the Companies Act, 1956.(g) For such other reliefs as this Hon'ble Board maydeem fit and proper in the circumstances of the case. "Therefore, there is no doubt that the application filed by therespondents is one of composite in nature which includes the reliefof issuance of duplicate certificates apart from the relief againstmisfeasance. https://hcservices.ecourts.gov.in/hcservices/

17. It is true that in Gulabrai Kalidas Naik and others vs.Laxmidas Lallubhai Patel and Others [1977 (47) Comp.Cas 151], theGujarat High Court has held that the pre-requisite for invokingjurisdiction under sections 397 and 398 of the Companies Act isprovided under section 399(1) and a person who makes a complaint ofoppression must be a member of the company. But, in the said case, itwas also decided that in cases where title of membership is indispute, the relief is under section 155 of the Companies Act to gethis name rectified in the register of members. In that case, ofcourse, the High Court has taken note of the fact that admittedly thesignatures were obtained from the transferor in blank papers, basedon certain understanding and it was, in those circumstances, the HighCourt held that the transferee cannot be held to be a member.18. Even in the judgment of Division Bench of the Karnataka highCourt relied upon by the learned senior counsel for the appellants inShri Balaji Textile Mills Pvt. Ltd., and another vs. Ashok Kavle andothers [1989 (66) Comp.Cas. 654], it was held that for the purpose ofdeciding about the term, 'member' or 'shareholder' under sections 397and 398 of the Companies Act, it is not necessary for such person tocomply with section 41(2) of the Act and a broader meaning to begiven to the term, 'member' as per section 2(27) of the Act. Theoperative portion of the judgment of the Division Bench of theKarnataka High Court is as follows:"A combined reading of sections 397, 398 and 399 ofthe Act makes it clear that the meaning of the word"member" of a company should be understood in the contextin which it is used and that meaning cannot be tagged on tothe membership clause in section 41(2) of the Act. Theclause which is applicable to test whether a membersatisfies the requirement of sections 397 and 398 of theAct would be section 2(27) of the Act and not theprovisions of section 41(2) of the Act. "19. Again, in the judgment relied upon by the learned seniorcounsel for the appellants in Mrs.Saroj Goenka and others vs. NarimanPoint Building Services and Trading Private Ltd., and others [1997(90) Comp. Cas.205], the Division Bench of the Madras High Court hascategorically held that when the issue to be decided in the companypetition involves pleadings running to hundreds of pages and severalissues are to be gone into, the maintainability question has to betried along with other issues and it would not be just and proper tosubject the parties to the trial of entire case for deciding thequestion of maintainability. The portion of the judgment on whichreliance was placed by the learned senior counsel is as follows:"That under section 10F of the Act, appeals againstorders of the Company Law Board lie only on questions of https://hcservices.ecourts.gov.in/hcservices/ law, and the Company Law Board could not be held to havecommitted an error of law in holding that the issue ofmaintainability in the present case was not a purequestion of law giving rise to an appeal; however, thereis no proposition of law that in cases where the questionof maintainability of the petition involves a mixedquestion of law it cannot be treated as a preliminaryissue. In the normal circumstances, where the case doesnot involve pleadings running into hundreds of pages andseveral issues, the issue relating to maintainability canbe tried along with the other issues, because trial ofsuch a case would not occupy a longer time and would notsubject the parties to long trial. But in cases where thepleading run into several hundreds of pages and severalissues arise, it would not be just and proper to subjectthe parties to the trial of the entire case for thepurpose of deciding the issue of maintainability. If insuch cases, the maintainability issue is decided as apreliminary issue, it would be convenient for both theparties because in the event it is held that the petitionis not maintainable, several other issues involved in thecase need not be tried and the evidence need not beadduced. On the facts, therefore, the single judge wasjustified in directing that the issue as tomaintainability should be tried as a preliminary issue."I am of the view that on the facts and circumstances of the presentcase, while the pleadings are running to many pages and crucialissues are raised in respect of status and right of the respondentseither as members or shareholders of the company, the above dictum isnot of any help to the appellants.20. It is, in this regard, relevant to refer to the basis ofsections 397 and 398 of the Companies Act. A reading of the saidsections including section 399 makes it abundantly clear that theright of complaining about oppression and mismanagement lies with the'member', of course, subject to the requirement under section 399 inrespect of holding of share capital and the word used is 'member' inthe above said sections. Sections 397 and 398 are as follows:"Section 397. Application to Tribunal for relief incases of oppression.-(1) Any member of a company who complain that theaffairs of the company are being conducted in a mannerprejudicial to public interest or in a manner oppressive toany member or members including any one or more ofthemselves may apply to the Tribunal for an order underthis section, provided such members have a right so toapply i virtue of section 399.(2) If, on any application under sub-section (1) the https://hcservices.ecourts.gov.in/hcservices/ Tribunal is of opinion-(a) that the company's affairs are beingconducted in a manner prejudicial to public interest or ina manner oppressive to any member or members; and (b) that to wind up the company would unfairlyprejudice such member or members, but that otherwise thefacts would justify the making of a winding up order on theground that it was just and equitable that the companyshould be wound up;the Tribunal may, with a view to bringing to an end thematters complained of, make such order as it thinks fit.""Section 398. Application t Tribunal for relief incases of mismanagement-(1) Any members of a company who complain:(a) that the affairs of the company are beingconducted in a manner prejudicial to public interest or ina manner prejudicial to the interests f the company; or(b) that a material change not being a changebrought about by, or in the interests of, any creditorsincluding debenture holders, or any class of shareholders,of the company has taken place in the management or controlof the company, whether by an alteration in its Board ofdirectors, or manager, or in the ownership of the company'sshares, or if it has no share capital, in its membership,or in any other manner whatsoever, and that by reason ofsuch change, it is likely that the affairs of the companywill be conducted in a manner prejudicial to publicinterest or in a manner prejudicial to the interests of thecompany;may apply to the Tribunal for an order under this section,provided such members have a right so to apply in virtue ofsection 399.(2) If, on any application under sub-section (1), theTribunal is of opinion that the affairs of the company arebeing conducted as aforesaid or that by reason of anymaterial change as aforesaid in the management or controlof the company, it is likely that the affairs of thecompany will be conducted as aforesaid, the Tribunal may,with a view to bringing to an end or preventing the matterscomplained of or apprehended, make such order as it thinksfit."21. The term, 'member' is defined under section 2(27) of theCompanies Act in the form of non-inclusive definition which says asfollows: https://hcservices.ecourts.gov.in/hcservices/ "Section 2(27) "members", in relation to a company, doesnot include a bearer of a share-warrant of the companyissued in pursuance of section 114."Therefore, the term 'member' under section 2(27) of the Companies Acthas to be construed on a larger connotation, which means that thepersons other than bearers of share warrants are to be treated asmembers. This is in apparent contravention of section 41 of theCompanies Act which is captioned as definition of 'member', asfollows:"Section 41. Definition of "member".- (1) Thesubscribers of the memorandum of a company shall be deemedto have agreed to become members of the company and on itsregistration, shall be entered as members in its registerof members.(2) Every other person who agrees in writing to becomea member of a company and whose name is entered in itsregister f members, shall be a member of the company.(3) Every person holding equity share capital of acompany and whose name is entered as beneficial owner inthe records of the depository shall be deemed to be amember of the concerned company."22. If the term, 'member' as defined in section 41 is applied,there would be two categories viz., (i) deemed members who aresubscribers to the memorandum, who on registration are entered inthe register of members; (ii) other persons whose names are enteredin the register of members. In fact,after the Depositors Act, 1996came into effect, even a depositor who is a beneficial owner, whois actually a person holding equity shares and whose name is enteredas a beneficial depositor, can also be deemed to be a member.Taking note of section 41 of the Companies Act, certainly it is arestrictive definition and it has an apparent conflict with section2(27) of the Companies Act which defines 'member' in a broad manner.23. In World Wide Agencies Pvt., Ltd., vs. Margaratt.Desor[(1990) 1 SCC 536], the Apex Court in respect of the above said term'any member', has considered the contention that even in case ofdeath of a shareholder, shares do not automatically go to the legalheirs by transmission and therefore, even the legal heirs of ashareholder cannot maintain the application under sections 397 and398 of the Companies Act. The said contention raised as elicited bythe Hon'ble Apex Court is as follows:"On behalf of the appellants it was contended that theright which is a specific statutory right, is given onlyto a member of the company and until and unless one is https://hcservices.ecourts.gov.in/hcservices/ member of the company, there is no right to maintainapplication under Section 397 of the Act. Mr. Narimancontended that there was no automatic transmission ofshares in the case of death of a shareholder to his legalheir and representatives, and the Board has a discretionand can refuse to register the shares. Hence, the legalrepresentatives had no locus standi to maintain anapplication under Sections 397 and 398 of the Act. Mr.Nariman submitted that the rights under Sections 397 and398 of the Act are statutory rights and must be strictlyconstrued in the terms of the statute. The right, it wassubmitted, was given to "any member" of a company and itshould not be enlarged to include "any one who may beentitled to become a member".The Supreme Court has held,"20. ...... We are clearly of the opinion that havingregard to the scheme and the purpose of Sections 397 and398 of the Act, the reasoning on a pari materia provisionof the English Act would be a valuable guide. The saidconstruction, appears to us, to further the purposeintended to be fulfilled by petitions under Sections 397and 398 of the Act. It facilitates solution of problems incase of oppression of the minorities when the member isdead and his heirs or legal representatives are yet to besubstituted. This is an equitable and just construction.This construction, as suggested by Pennycuick,J. Does notmilitate against either equity or justice of suchsituation. We would, therefore, adhere to thatconstruction. In this connection, it may be mentioned thatin the 1972 Edition of Gore-Browne on Companies, it hasbeen stated as follows:"It has recently been settled that thepersonal representatives of a deceased member,even though they are not registered as members,are entitled to present a petition under Section210. In Re Jermyn Street Turkish Baths Ltd.Pennycuick,J. Held that on its true constructionSection 210 required that the word 'member'should include the personal representatives of adeceased member, on whom title of his sharesdevolved by operation of law."24. The applicability of sections 397 and 398 of the CompaniesAct is an equitable jurisdiction which is intended to protect theminority members of the company from any oppression and mismanagementat the hands of majority members. It is in that background, theSupreme Court has held that the wider meaning of the term 'member'should be given in the context of sections 397 and 398 of the https://hcservices.ecourts.gov.in/hcservices/ Companies Act. On the facts and circumstances of the case,especially in the circumstance that the respondents filed a compositeapplication, viz., the company petition seeking reliefs including theissuance of duplicate share certificates, I am of the considered viewthat the claim of the respondents herein in the company petitioncannot be thrown out at the threshold without even going into themerits of the issue raised by the respondents under the guise ofdeciding the question of maintainability as a preliminary issue. 25. On the factual matrix, even assuming that the appellantshave got the right of raising maintainability of company petitionunder sections 397 and 398 of the Companies Act filed by therespondents, the same has to be decided in the main petition alongwith other issues and not as a preliminary issue. The same was alsothe view taken by the Karnataka High Court in Srikanta DattaNarasimharaja Wadiyar vs. Venkateswara Real Estate Enterprises (P)Ltd., [1990 (3) CLJ 38 (Karn)], wherein while construing the meaningof the word 'member' under sections 41 and 2(27) of the Companies Actin the context of sections 397 and 398, by referring to the judgmentof the Gujarat High Court in Gulabrai Kalidas Naik and others vs.Laxmidas Lallubhai Patel and Others [(1977) 47 Comp. Cas. 151] it washeld as follows: "35. So, the Gujarat High Court has not categoricallyruled that the petition should be thrown out on the groundthat the petitioner has not got on the register of members.If, in a given case, it is shown that, though the name of aperson is not shown in the register of members, if he hadbeen treated as a member by the company, the Company Courtcan always exercise its equity jurisdiction. This Courtshould not decline to exercise its equity jurisdiction onthe ground of mere technicality. Till the year 1986, i.e.,till the matter was taken to this court in this petition,there was no shred of doubt on the rights of the petitionerto represent his interests as a shareholder in respondentNo. 1 company. It was contended that in a number ofmeetings he has signed the proceedings of the said meetingsand even the balance-sheet prepared by respondent No. 1company right from the year 1971 to 1986 does not show anyindication that the petitioner had been excluded from themembership of the company either on the ground that he hasnot inherited the shares or otherwise. In thecircumstances, I am of the view that the decision of theDivision Bench in Balaji Textile Mills (1988) ILR 1988 Kar1213: (1989) 66 Comp Cas 654, is applicable on theundisputed material on record. "26. In these circumstances, I am of the considered view that thecontention raised on behalf of the appellants that on the ground of https://hcservices.ecourts.gov.in/hcservices/ maintainability the company petition filed by the respondents has tobe dismissed is not sustainable. The Company Law Board has correctlycome to the conclusion that these are the issues to be decided onmerits of the case and cannot be decided at this stage. 27. The Division Bench of Madras High Court in the above saidcase reported in Mrs.Saroj Goenka and others vs. Nariman PointBuilding Services and Trading Private Ltd., and Others [(1997) 90Comp.Cas. 205] has in fact held that the issue relating tomaintainability cannot be a pure question of law while decidingappeal under section 10F of the Companies Act. On the facts of theabove said case, the Division Bench has held as follows: "The contention of the respondents is that thepetitioners are not shareholders and their names are notentered in the register of members and they are not thesubscribers of the memorandum of the company. As such,they cannot be either held to hold the requisite numberof shares, nor can be held to be the members of thecompany. According to the case of the petitioners, thelate Shri Ramnath Goenka was a registered shareholder of9,280 equity shares and 4,000 cumulative redeemablepreference shares and one-third of the same has devolvedupon the petitioners, who are no other than the widow anddaughter of pre-deceased son of Ramnath Goenka. Assuch their one-third share would come to 3,093.33 sharesand 1,666.67 of the preference shares with voting rightsunder section 87 of the Companies Act. As such, theyhave the right to file the petition under sections 397and 398 of the Act. At this stage, it may be mentionedthat there is also a suit, namely, C.S.No. 1246 of 1992,filed on the original side of this court for adeclaration that the shares held by the late Shri RamnathGoenka were, in fact, the shares of the plaintiff. Thereis also another suit filed by the first-appellant beingC.S.No. 1123 of 1992, on the original side of this courtfor various reliefs pertaining to the shares held by thelate Shri Ramnath Goenka. Therefore, it is contended bylearned counsel that the issue relating to themaintainability cannot be held to be a pure question oflaw, as it depends upon the determination of theaforesaid several facts. As such, it could not have beendecided as a preliminary issue. Hence, the Company LawBoard was justified in deciding that the said issue willalso be decided along with the other issues. From therespective case of the parties, referred to above, it isclear that the issue relating to maintainability cannotbe held to be a pure question of law. That being so, theCompany Law Board cannot be held to have committed anyerror of law in holding that the issue relating to the https://hcservices.ecourts.gov.in/hcservices/ maintainability of the petition shall also be decidedalong with the other issues. That being so, it shallhave to be held that there was no question of lawinvolved for entertaining the appeal under Section 10Fof the Act. However, in the light of the facts andcircumstances of the case, we do not consider itnecessary to answer point No. 1 at this stage itself. Wewould now take up point No. 2. "In these circumstances, the appeal fails and the same isdismissed.khSd/Asst.Registrar/true copy/ Sub Asst.RegistrarToThe Company Law Board,Additional Principal Bench, Channai.+ 1 cc to Mr. R. Venkatavaradan, Advocate SR No.35498CU(CO)SR/18.8.2009Judgment in COMPANY APPEAL NO.10 OF 2009