V B RANGARAJ Vs. V B GOPALAKRISHNAN

JUDGEMENT

(1.) These two appeals, Civil Appeal No. 1946 of 1980 filed by defendant 1 and Civil Appeal No. 1947 of 1980 filed by defendants 4 to 6, are against the decision dated February 8, 1980 of the Madras High Court. The main question that falls for consideration in both the appeals is whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company.

(2.) The third defendant is a private limited company which all along had a total shareholding of 50. Before the joint family of the plaintiffs and defendants came to hold all the 50 shares of the company, the family was a minority shareholder holding 13 shares, the rest 37 shares being held by outsiders. In course of time, the family acquired the rest 37 shares and became the sole shareholder of the company. The family consisted of Baluswamy Naidu and Guruviah Naidu who were brothers, and each of the brothers held 25 shares in the company. The plaintiffs and defendants 1 and 2 and one Selvaraj are the sons of Baluswamy Naidu and defendants 4 to 6 are the sons of Guruviah Naidu. Baluswamy Naidu died on February 5, 1963 and Guruviah Naidu died on January 10, 1970. The plaintiffs alleged that in 1951 there was an oral agreement between Baluswamy Naidu and Guruviah Naidu that each of the branches of the family would always continue to hold equal number of shares, viz., 25 and that if any member in either of the branches wished to sell his share/ shares, he would give the first option of purchase to the members of that branch and only if the offer so made was not accepted, the shares would be sold to others. Although on behalf of defendants, it was disputed that there was any such agreement entered into between the two brothers, the finding recorded by all the Courts below is against the defendants. It is not in dispute that the Articles of Association of the company were not amended to bring them in conformity with the said agreement. Contrary to the said agreement, the first defendant, i.e., son of Baluswamy Naidu sold the shares to defendants 4 to 6 who are the sons of Guruviah Naidu. Hence the plaintiffs who are Baluswamy's sons filed the present suit for (i) a declaration that the said sale was void and not binding upon the plaintiffs and the second defendant (who is also the son of Baluswamy Naidu but has joined as a pro forma defendant, and for (ii) an order directing defendants 1 and 4 to 6 to transfer the said shares to the plaintiffs and the second defendant, and for (iii) a permanent injunction restraining defendants 4 to 6 from applying for registering the said shares in their names and from acting adversely to the interests of the plaintiffs and the second defendant on the basis of the transfer of the said shares.

(3.) The trial Court decreed the suit by holding that the sale of the said shares was invalid and not binding on the plaintiffs and the second defendant, and directed both the first defendant and defendants 4 to 6 to transfer the said shares to the plaintiffs, and granted permanent injunction as prayed for. The appeals filed by the first defendant and defendants 4 to 6 were dismissed. In the second appeals filed by them the High Court held that the Courts below had proceeded on a wrong basis. According to the High Court the suit was in effect one to enforce the agreement providing for pre-emption and the Court was entitled to mould the reliefs on the facts proved in the case and accordingly the High Court modified the decree by directing substitution of the plaintiffs as share holders in place of defendants 4 to 6. In other words, the High Court in terms held that (i) the sale of the shares by the first defendant in favour of defendants 4 to 6 was invalid and hence the plaintiffs and the second defendant became entitled to purchase the said shares, (ii) the agreement was binding on the company, and (iii) the company was bound in law to register the said shares in the plaintiffs' names.