Shares dispute holds lessons for boardrooms

By Vivek Vashi and Hrushi Narvekar, Bharucha & Partners
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Recently Bombay High Court (BHC), in the case of Afzal Khan & Ors v Mehboob Ayub & Ors, while affirming the decision of the Company Law Board (CLB) in Mumbai, considered two very important aspects of company law, namely: (1) the power of a company to rectify the register of members under section 111 of the Companies Act, 1956 (now section 58 of the Companies Act, 2013); and (2) the manner of transmission of shares held jointly under section 110 of the 1956 act (now section 56 of the Companies Act, 2013) upon demise of a joint holder.

Vivek_Vashi_-_Bharucha_&_PartnersAyub Khan, the son of filmmaker the late Mehboob Khan, was the shareholder of certain equity shares of Mehboob Productions, incorporated by the late Mehboob Khan.

By a board resolution (the first resolution), the then directors of the company at the request of Ayub resolved to add the names of Mehboob Ayub Khan (Mehboob) and Yasmin Ayub Khan (Yasmin), Ayub’s children from his second marriage, as joint shareholders in respect of certain shares of the company held by Ayub solely. Accordingly, the register of members of the company came to be rectified as certain shares came to be jointly held by Ayub and Mehboob, and Ayub and Yasmin (the said shares).

Ayub executed his last will and testament, bequeathing the said shares solely to Mehboob and Yasmin, respectively, in keeping with the first resolution.

After the demise of Ayub, Mehboob and Yasmin called upon the company to transmit the said shares to their sole names by: (a) survivorship (the articles of the company provided that shares held jointly must be transmitted by survivorship on the death of a joint holder); and (b) testamentary succession as beneficiaries under the will of Ayub.

For various reasons, one being a challenge pending to the will of Ayub, the company refused to transmit the said shares solely in favour of Mehboob and Yasmin. Consequently, Mehboob and Yasmin filed a petition before the CLB for rectification of the register of members under section 111 of the 1956 act.

During the pendency of the application, the board resolved to hold the first resolution as void ab initio, being in breach of the articles of the company, and suo motu deleted the names of Mehboob and Yasmin from the register of members (the second resolution).

Findings

The CLB and the BHC (in appeal) held that this action was illegal and set aside the second resolution, and ordered the said shares to be transmitted in favour of Mehboob and Yasmin by survivorship (as provided in the articles) for the following reasons:

Hrushi Narvekar
Hrushi Narvekar
  • The first resolution was in force for nearly 19 years until it was declared void by the second resolution, which was motivated.
  • The second resolution was illegal as it had the effect of omitting a name in the register of members without sufficient cause, which can be done only upon an application to the CLB under section 111 of the 1956 act. In this context, the BHC interpreted section 111(4) of the act by stating that for rectification of a register of members an application has to be made to the CLB. The present case fell within these parameters and therefore permission of the CLB was required to rectify the register.
  • There is an exception to this rule. The company may rectify any mistake or omission if there is sufficient cause to do so. However, where a dispute exists regarding the rectification, as with this case, the exception cannot be used as protection.
  • The reason for the legislature not reserving for the company the power to correct a subsisting entry is because the register of members is an important public document and its sanctity cannot be tampered with except in accordance with the law. If such power is vested in the company then surely an unscrupulous management would abuse it for their benefit.
  • Since the second resolution is illegal, and the articles of the company provide that shares held jointly shall be transmitted by survivorship on the death of a joint holder, the company was bound to transmit the shares in favour of Mehboob and Yasmin, as the articles of a company constitute a valid contract between the company and the shareholders. This decision has been challenged by way of a special leave petition, which is pending.

Companies cannot suo motu rectify subsisting entries in the register of members unless there is sufficient cause to do so, and there exists no dispute regarding the same. And where shares are registered in joint names, and the articles provide that the survivor shall be the only person having any title to or interest in the shares, the shares ought to go to the survivor irrespective of any testamentary or intestate succession of the deceased holder.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Hrushi Narvekar is an associate.

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