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Tuesday 4 June 2013

Study on works contract under Haryana Value Added Tax Act, 2003.

Works Contract is an agreement between contractor and contractee to transfer the moveable goods as per section 2(1) (zt). This includes the activities of assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any moveable or immoveable property.

Contractee as per section 2(1) (j) is the person for whom or for whose benefit a works contract is executed and contractor as per section 2(1) (k) is the person who executes either himself or through a sub-contractor a works contract. A sub contractor does not come under the definition of Contractor. Sub contractor is mere agent of contractor since goods transferred directly to Contractee.

Registration of Contractor/Contractee Contractor is to get himself registered under the VAT Act either as a registered dealer under section 11 or lump sum dealer under section 9. A lump sum dealer is also to submit the details of each contract to the Assessing Authority within 30 days of the award of the contract as per Rule 49. A Registered dealer is eligible for the input tax credit as per section 8 whereas the lump sum dealer is not since as per section 2(1)(w) input tax means the amount of tax paid to the State in respect of goods sold to a VAT dealer. A lump sum is not a VAT dealer though he is registered under the Act. A register dealer is to pay the tax on the goods transferred in the contract as per the rate of tax on the goods transferred as per section 7 of the Act whereas the lump sum dealer is to pay the tax @ 4% on the value of the contract as per Rule 49(1).

Filing of Returns        A registered contractor is to file quarterly return on Form R-1 like other dealers as per Rule 16. A lump sum dealer is to file the return on Form R-6 as per Rule 49(4). A contractee is to file his return on Form R4A whether he is registered or not registered under the Act as per Rule 16(1). The return is to be filed by the next of the month after each quarter i.e. 31 July, 31 October, 31 January, 30 April as per Rule 16(1). An annual return on Form R-2 is to be filed by every registered contractor by 30 November as per Rule 16(2) but in the case of lump sum contractor need not to file the Annual Return since R-2 is to be filed by the registered dealer who file the R-1 as mentioned in Rule 16(1).
Payment of Tax  A registered contractor whose tax liability does not exceed 1 lakh rupees in a year  is to deposit the tax along with return otherwise he is to deposit the tax monthly by 15th of each month for the previous month as per section 14(3). A lump sum contractor is to pay the tax within 30 days of the close of the quarter. A contractee is to deduct the tax @ 4% before making the payment to contractor as per Rule 33(1) and the same will be deposited by 15 of the next month for the previous month as per Rule 33(5) into the appropriate Government Treasury in challan in Form VAT C-1 separately for each payee.

TDS    A contractee is to deduct the TDS @ 4% from the bill amount of contractor as per Rule 33. TDS will not be deducted on the Tax amount included in the Bill. A contractor is also to deduct the tax from the payment made to subcontractor as per the clarification given by Haryana Government in the case of DLF Universal Ltd. DLF has taken up the case with the Haryana Tax Tribunal against this clarification and the decision is awaited. A provision to deduct the TDS from the payment made to subcontractor is ultra vires as per decision of Allahabad High Court reported in 97STC355. Collection of Taxes from both contractor and sub contractor would be violative of article 14 as per AP High court decision in the case of M/s Larsen Toubro Limited and another V State of AP(148 STC 616AP).

Assessment    Assessment of registered dealer is to be completed within three years of the close of the year as per section 15(3). A notice is to be given for scrutiny assessment within one year of the last return filed. It means the notice for scrutiny assessment in the case of registered dealer is to be given by 30 November 2008 and in the case of lump sum dealer by 30 April 2008 for the year 2006-07.

Use of declaration Forms  A lump sum dealer/registered dealer is to use the declaration forms like VAT D-1, VAT D-3 and Central form C as per Rule 49(6). VAT D-3 from must be used for the movement of goods value exceeding 25000/-  from any place in the State to any other place in or outside the State. In case of loss of any form, an indemnity bond in Form VAT-B3 will be given to the Assessing Authority for the sum as the authority determine.
Tax invoice  A registered dealer can issue the sale invoice/tax invoice but the lump sum dealer can not issue the tax invoice as per Rule 46(5). Tax should not be charged on the invoice. Tax invoice is used between the two registered dealers under the VAT Act.

Refund Contractor can also claim the refund if applicable. Tax collected from the sub contractor will also be the case of refund but this amount can not be refunded till the assessment of sub contractor is finalized. These provisions under the Act make joint or severally liable to contractor and the sub-contractor. Burden to prove the turnover of sub-contractor can not be shifted to contractor as per judgment of AP High Court reported in 105STC227(AP) and 47STC204(AP)

Judicial Guidelines


The Apex Court in Dunkerley had brought a wide impact till the 46th Constitutional amendment sales tax on indivisible works contracts could not be levied. The Supreme Court has upheld the validity of the 46th Amendment and the works contract which was indivisible one is by a legal fiction altered into a contract which is divisible one for sale of goods and the other for supply of labour and services. The cost of consumables used in works contract property in which is not transferred in the course of execution of the works contract, is to be excluded from the taxable turnover as nothing is being transferred from contractor to contractee to be taxed as held in the case of Gannon Dunkerley and Co. Vs St. of Rajasthan(88STC 204SC).

The Benami Transactions (Prohibition) Act, 1988 and its loopholes.

I had gone through the Benami Transactions (Prohibition) Act, 1988 earlier but I never noticed the loopholes in it. In fact I had no reason to examine the Act as I never had an opportunity to deal with that Act. It was only yesterday when a journalist called me and told that a Benami Transactions Prohibition Bill is about to take formation and he asked for my suggestions, I went through the Act once again and examined it thoroughly. Although it is the duty of the Legislature and the Legislature will see what are the expedient factors for an amended bill, I am inclined to point out some factors that may be necessary for a revised bill on the prohibition of Benami Transactions.
  1. Section 3 of the Act prohibits any kind of benami transaction whereas no distinction has been made between immovable and movable properties. The Act should clearly state the properties which shall come under the purview of the Act.
  1. The definition of benami transaction should include the sham transactions, in which no transaction actually takes place.
  1. When one is not refrained from entering into a benami transaction with one’s wife/unmarried daughter/coparceners, the object of the Act is not fulfilled and may lead to misuse of law. At the same time there is every chance that it would be difficult to prove such transaction is not made with a view to benefit such persons. On the other hand, if the Legislature takes a liberal view and is inclined to exempt some transactions from the purview of benami transaction, the provision should be made in favour of all the dependants, and not only in favour of wife/unmarried daughter/Hindu coparceners.
  1. When the Act justifies benami transactions in favour of some specific close relatives, it appears quite ridiculous that the said close relatives shall come forward to claim his/her right against the real owner.
  1. As the penal provision is made against the real owner as well as the benamidar, it can not be said that either of them shall take shelter of law to claim his/her right under this Act. In such a case the discovery of a benami transaction shall be that of a third party incident which shall be a rare case.
  1. The Act should clearly state by whom the cognizance may be taken and who should try the case under this Act. The jurisdiction of Court i to be clearly mentioned. Moreover, there should have a lower limit to the discretion of the Court.

In view of the above facts, the Benami Transactions (Prohibition) Act, 1988 must be amended and in such a way that shall suit the timely need of the Act.

Defeated Labour Laws in India

Title: Labour Laws are being defeated in India.

Structure, objects and Aims to set up and codified Labour Laws in India is now at the edge of its failure. The left parties who had been introducing themselves as Watchdogs for labourers are now become habitual of enjoying chair in politics and have forget their so called aim of welfare of labour class. India is going sharply to contract labour and the labour laws are being defeated. Even Govt. departments who are bound to engage permanent employees are now hiring labour/employees through out sourcing agencies and there is no future of indian yputh and their future is not safe in India at present because the labour welfare organisations have closed their eyes. No one cry for the labour and the Judiciary has also denied help of employees saying that back door entry is not allowed (Uma Devi Case) whereas front doors have already been closed by the Govt.
Mr. Sarvesh K Sharma has added an article on the topic of labour laws in India saying that the, “The history of labour legislation in India is naturally interwoven with the history of British colonialism. Considerations of British political economy were naturally paramount in shaping some of these early laws. In the beginning it was difficult to get enough regular Indian workers to run British establishments and hence laws for indenturing workers became necessary. This was obviously labour legislation in order to protect the interests of British employers.Then came the Factories Act. It is well known that Indian textile goods offered stiff competition to British textiles in the export market and hence in order to make India labour costlier the Factories Act was first introduced in 1883 because of the pressure brought on the British parliament by the textile magnates of Manchester and Lancashire. Thus we received the first stipulation of eight hours of work, the abolition of child labour, and the restriction of women in night employment, and the introduction of overtime wages for work beyond eight hours. While the impact of this measure was clearly welfarist the real motivation was undoubtedly protectionist!To date, India has ratified 39 International Labour Organisation (ILO) conventions of which 37 are in force. Of the ILO’s eight fundamental conventions, India has ratified four – Forced Labour 1930, Abolition of Forced Labour 1957, Equal Remuneration 1951, and Discrimination (employment and occupation) 1958.”

But where our organisations have been slept. The Contract /outsourcinmg agencies are filling their pocketswith Govt. Money by procuring more money from Govt and by paying very much lesser to the employees and are getting much hard work for more than 12 hours a day and no body hearing their cry.

Legal Perspective of the live-in relationship

India is a country, which is slowly opening its doors for western ideas and lifestyles and one of the most crucial episodes amongst it, is the concept of Live-in relationships. Many has been said and debated on the concept of Live-in relationships in India. It is important to understand the said concept from legal view point. In the year 2010 the Hon’ble Supreme Court of India had rendered few land mark judgments with regard to the live-in relationship.

CHANMUNIYA Vs VIRENDRA KUMAR SINGH KUSHWAHA
Judgment date: October 07, 2010

Facts: The Appellant, Chanmuniya was married to Ram Saran and had 2 daughters. Ram Saran died on 07.03.1992. Chanmuniya married Virendra Kumar Singh Kushwaha, the younger brother of her deceased husband, in accordance with the local custom of Katha and Sindur. They were living as husband and wife together, Virendra Kumar Singh Kushwaha started harassing and torturing Chanmuniya, she asked for maintenance but Kushwaha refused saying that she wasn’t his legally wedded wife.

The Uttar Pradesh High Court also dismissed her petition on the ground that 125 Cr.P.C is available only to the legally wedded wife; thereafter she approached the apex court to seek justice.

Decision: Women in Live-in relationships are also entitled to all the reliefs given in the said Act (The Protection of Women from Domestic Violence Act, 2005).

Important observations: The courts should enforce express contracts between non-marital partners except to the extent that the contract is explicitly founded on the consideration of meretricious sexual services. In the absence of express contracts, the courts should inquire into the conduct of the parties to determine whether that conduct demonstrates an implied contract, agreement of partnership or joint venture, or some other tacit understanding between the parties.

The Protection of Women from Domestic Violence Act, 2005 assigns a very broad and expansive definition to the term ‘domestic abuse’ to include within its purview even ‘economic abuse’. Economic abuse includes deprivation of financial and economic resources. Section 20 of the Act allows the Magistrate to direct the respondent to pay monetary relief to the aggrieved person, who is the harassed woman, for expenses incurred and losses suffered by her, which may include, but is not limited to, maintenance under section 125 Cr.P.C.

The Protection of Women from Domestic Violence Act, 2005 gives a very wide interpretation to the term ‘domestic relationship’ as to take it outside the confines of a marital relationship, and even includes Live-in relationships in the nature of marriage within the definition of ‘domestic relationship’. Therefore, women in Live-in relationship are also entitled to all the reliefs given in the said Act, they should also be allowed in proceedings under section 125 of Cr.P.C.

VELUSAMY Vs D PATCHAIAMMAL
Judgment date: October 21, 2010

The Hon’ble Supreme court in the above case observed that a woman in a live-in relationship is not entitled to maintenance unless she fulfills certain parameters, the Supreme court had observed that merely spending weekends together or a one night would not make it a domestic relationship.

A bench comprising Justices Markandey Katju and T S Thakur said that in order to get maintenance, a women, even if not married, has to fulfill the following four requirements:

  1. The couple must hold themselves out to society as being akin to spouses.
  2. They must be of legal age to marry.
  3. They must be otherwise qualified to enter into a legal marriage.
  4. They must be voluntarily cohabited and held themselves out to the world as being akin to spouses for a significant period of time.


The Supreme court observed, in our opinion not all Live-in relationships will amount to a relationship in the nature of marriage to get the benefit of the Protection of Women from Domestic Violence Act, 2005. To get such benefit the conditions mentioned above must be satisfied, and this has to be proved by evidence. If a man has a ‘keep’ whom he maintains financially and uses mainly for sexual purpose and/or as a servant it would not, in our opinion, be a relationship in the nature of marriage.


The Apex court passed the judgment while setting aside the concurrent orders passed by a matrimonial court and the Madras High Court awarding Rs 500 maintenance to Patchaiammal who claimed to have married the appellant D Velusamy.
Velusamy had challenged the two courts order on the ground that he was already married to one Laxmi and Patchiammal was not married to him though he lived with her for some time.
The Apex court also observed, “No doubt the view we are taking would exclude many women who have had a Live-in relationship from the benefit of the 2005 Act (Protection of Women from Domestic Violence Act), but then it is not for this court to legislate or amend the law. Parliament has used the expression ‘relationship in the nature of marriage’ and not ‘Live-in relationship’. The court in the garb of interpretation cannot change the language of the statute,” the bench observed.

S. KHUSHBOO VS KANNIAMMAL
Judgment date: April 28, 2010
In appeal filed by the well know actress, Khushboo seeking quashing of criminal proceedings filed against her mostly in the state of Tamil Nadu, for the remarks made by her in an interview to a leading new magazine. The Hon’ble Supreme court opined that a man and woman living together without marriage cannot be construed as an offence.

The Apex court said there was no law which prohibits Live-in relationship or pre-marital sex.

The Supreme court, held that Live-in relationship is permissible only in unmarried major persons of heterogeneous sex. In case, one of the said persons is married, man may be guilty of offence of adultery and it would amount to an offence under section 497 IPC.

OTHER NOTABLE OBSERVATIONS MADE BY SUPREME COURTS

In S.P.S Balasubramanyam Vs Suruthaya @ Andali Padayachi and Ors. AIR 1992 SC 756, the Supreme court held that if man and woman are living under the same roof and cohabiting for a number of years, there will be a presumption under section 114 of the Evidence Act, that they Live as husband and wife and the children born to them will not be illegitimate.

Quashing the gifts case against jayalalithaa

The quashing of gifts case against the Present Chief Minister of Tamilnadu shows that the Court are going on ln line with the people in Government. The Madras High Court would have given the relief to Jayalalithaa. But it has sent out a wrong signal to the people at large that whatever the wrong committed by the individuals could go with the time provided that individual should come to power either as Chief Minister or Miniser . Really the madras high court has made a fun as judgment stating that the judge of the high court has come to a  mind that the prosecution could not say the reasons for  delay in completing the investigation. If this is a case, how many ordinary individuals have been allowed to go Scot free from the crime committed in either in tamilnadu or India as a whole. Therefore , what it indicates to the society is that if the persons indicted is powerful and also takes revenge in wholesale way taking the law machinery in their hands , the courts will  go stooping its position. . The courts should not behave like one more executive to selective persons fearing life threatening . At least the case in Karnataka should not take a lead from Madras High Court. We may hope to the extent alone.

Judicial Creativity: A Magic Band

DPSP’s risen to standard of Fundamental rights:

This paper is an attempt to draw the attention of readers on the present day high degree of Judicial CreativityIf we take a look towards DPSP’S (Directive Principle Of State Policy) then in today’s context we find them risen  to the standard of Fundamental Right’s  which were considered once to be surplus, a rope of sand and mere moral precepts. At one time the role of the State was restricted of merely acting as a Police State whose main work was maintenance   of law and order, protection of life and personal liberty and property of the subject. Such a restrictive role of State has no place in modern era of Welfare State where role of State knows no boundaries and presses on well being of people and promotion of prosperity of subjects. Gone are the days when narrow perception of Police State was given stage  , DPSP’S were taken to be mere moral precepts without legs to stand rather in present context we find some of the DPSP’s enforceable as being risen to the standard of Fundamental Right’s(F.R’s).

DPSP’s read into Fundamental Right’s (F.R’s):

 1) Article 38 (State to secure a social order for the promotion of welfare of the people)
Article 38 r/w Article 21

2) Article 39 A( Equal Justice and Free legal aid)
Article 39 r/w Article’s 21 and 14

3) Article 39 (d) (Equal pay for equal work)
Article 39(d) r/w Article’s 14 and 16

4) Article 39(f)  (Children are given opportunities and facilities to develop  in a healthy manner)
Article 39(f) r/w Article 21

5) Article 45 (Provision for childhood care and education to children below age of six years)
Article 45 r/w Article 21 A

6) Article 46 (Promotion of educational and economic interests of S.C, S.T  and other weaker sections)
Article 46 r/w Article’s 21 and 16

7) Article 48A (Protection and improvement of environment and safeguarding of forests and wild life )
Article 48A r/w Article 21

JUDICIAL CREATIVITY:

Duty under the above Fundamental Directives can be enforced through writ petitions based on above F.R’s respectively. They may be treated as a part of Fundamental Rights.

In Kesvananda Bharati V. State of Kerala [1] , the Supreme Court has said that “ Fundamental rights and directive principles aim at the same goal of bringing about a social revolution and establishment of a welfare state and they can be interpreted and applied together. They are supplementary and complementary to each other “. It can well be said that directive principles prescribed the goal to be attained and fundamental rights lay down the means by which that goal is to be achieved.

In Unni Krishnan v. State of A.P.[2] the Supreme court has reiterated the same principle that the “ fundamental rights and directive principles are supplementary and complementary to each other and the provisions in Part III should be interpreted having regard to the Preamble and Directive Principle of state policy(DPSP’s).

CONCLUSION:


We herby reach to the conclusion that the beauty of development of our Constitutional law is that many of the directive principles have been enrolled into F.R’s  by high degree of Judicial Creativity. In this way the legal utility and recognition of the D.P.S.P’s   have increased with the times manifold and have risen to the status of Fundamental Right’s.

Hearsay Evidence Inadmissible


Hearsay is information gathered by one person from another person concerning some event, condition, or thing of which the first person had no direct experience. When submitted as evidence, such statements are called hearsay evidence3a.

Statement of witness based on information received from others is inadmissible3.

The Apex Court in Kalyan Kumar Gogoi V Ashutosh Agnihotri3, had provided reasons why hearsay evidence is not received as relevant evidence are:

(1) The person giving such evidence does not feel any responsibility. The law requires all evidence to be given under personal responsibility. i.e., every witness must give his testimony, under such circumstances, as expose him to all the penalties of false hood.

(2) Truth is diluted and diminished with each repetition, and

(3) If permitted, gives ample scope for playing fraud by saying “someone told me that………..”

Restriction on Transfer of Shares in a Public Company


(The following Article have been published in the Journal of Chartered Accoutants, Sepember 2011 issue, published by ICAI, New Delhi. This Article is posted here for general and academic purpose only.)

Recent decision of the Bombay High Court in the case of Messer Holing has changed the way to negotiate restriction on transfer of shares in a public company. The decision brought some respite for JV partners however its not provides effective resolution for equity partners and some questions yet to find their standing. This article discusses legal position in reference to the said decision and Companies Bill 2009.

INTRODUCTION

Restriction on share transfer is not only the statutory subject but the business requirements. It would be more interesting if we can see it from management perspective and part of decision making process. Suppose a businessman, entrepreneur in knowledge field, an Investor is planning for new business ventures and considering the gravity of transactions and amount of investments, what would be the right way to do venture with counter part, what precaution should be taken, what understandings should be made now for future contingency and what most important is whether the arrangements being finalized is legally valid. Whether rights and obligations can be enforceable legally before the court and if not find out the alternatives to the extent possible. This is what the roll of professional in decision making process. All these aspects and roll becomes more vital and critical when joint venture party is foreigner. Because to handle laws of multi countries and to correlate each other is a challenging task. Restriction on transfer of shares is management and business decisions. The role of professional is to test such decision in terms of applicable statutory as well as case laws and to ensure it enforceability to serve the ultimate purpose of a venture.

NECESSITY FOR RESTRICTION ON SHARE TRANSFER

The basic thing need to understand is why the restriction on transfer of shares? Restrictions are very much required to meet the strategic reasons in commercial sense. If a person alone doing something there will no need to any understanding. However two or more persons come together for a venture, it is necessary to have understanding about the control and rights of management and transfer of the same. Here control means mainly shares and voting powers. Mainly restriction on share transfer is used in Joint Venture Company (JV).

Practically, if anybody is holding more than 10% shares, it needs to take care. prime facie it appears minority holding and it can not block any resolution but a person with 10 % holding can approach to Company Law Board on ground of operations and mismanagement and many time it is difficult to put the business situation before the authority. Among other because of these business reasons party wants some kind of restrictions on share transfer e.g. ‘First right of refusal’ and ‘Tag along Right’.

Although parities are ambitious in beginning, many times hard facts come to realize in a midway. at some point of time if any party thinks to exit or finds other way or other person to do in different way and accordingly it going to exit, whats about the other party who is willing to continue. The purpose of restriction on share transfer is to protect that party who is willing to continue the venture and to have some understanding in advance to meet the contingency which may arise in between. For example, If two person planning for a JV Company. Its not only the money either or both the parties put in corpus does matter, however some other criteria are also relevant. For example, reputations, business areas, future prospects, professional attitude for investment and business, possibility to align business interest in future of a JV Partner. JV Partners considering all these aspects set a length of way and valuing the walk together. Now if any JV partner it means a Shareholder in a JV Company want to exit, want to dispose of its shares, then whats about the other partner who want to continue on the place and what is more important is whats about the new incoming partner. Whether existing operations or a project of JV Company can be continued smoothly with new shareholders. The vary purpose of share transfer restrictions are to meet such kind of contingencies. Purpose of share transfer restrictions is to protect interest of the parties who is continuing in the JV and overally to set a mechanism in advance to avoid any business and management dead lock. Restrictions are agreed through shareholders agreement which is further incorporated in Articles of Association of the Company (the Articles).

In case of a private company, restrictions on share transfer can be agreed between the shareholders and further incorporated in Articles of the private company and accordingly binding to all the shareholders and the private company. Private company is most preferable vehicle for Joint Venture. In this Articles Author focus on restriction on transfer of shares in a public company registered under the Companies Act 1956.

STATUTORY PROVISIONS AND JUDICIAL PRECEDENTS

Coming on the issue, what is the relevance to discuss the subject matter now? Two  important things, one is back to back decision of Bombay High Court in the case Bajaj Auto Ltd and Messer Holding and other is Companies Bill 2009 which is expected going on floor very soon.

For better understanding, should have quick view about the relevant sections of the Companies Act 1956 (the “Act”).  Section 3 of the Act requires and enables a private company inter alia for restriction on transfer of shares. Section 9 of the Act stipulates that the provisions of the Act shall have effect, notwithstanding anything to the contrary contained in the Memorandum or Articles of Association or Resolution or any Agreement.

Section 111A of the Act is more relevant for the subject matter and it is perhaps most significant unresolved controversy in Indian Corporate Laws. In 1996, The Depositories Act was enacted which omitted section 22A of the Securities Contract Regulation Act 1956 and simultaneously added section 111A to the Act.

In a recent decision of division bench of Bombay High Court in the case of Messer Holing, It is held that private arrangement between the shareholders conferring the right of first refusal means restriction on transfer of shares, is valid and not contrary to the section 111A. However the decision is not conclusive for corporate world and some questions yet to find their standing. Get into the subject, it is useful to have a vivid picture and close analysis of following five decisions by Supreme Court and different High Courts.

1. V B Rangaraj Vs. V B Gopalkrishnan (1992) 1 SCC 160, a decision by the Supreme Court.

2. Mafatalal Industries Ltd Vs. Gujarat Gas Co Ltd (1997), a decision of Gujarat High Court.

3. M.S.Madhusoodhanan Vs. Kerala Kaumudi Pvt. Ltd 2003 Vol.117 Company Cases 19, a decision by the Supreme Court of India.

4. Twin judgments of Bombay High Court in the case of WMDCL Vs. Bajaj Auto Ltd, dated February 15, 2010 and Messer Holding Ltd Vs. Shyam Madnmohan Ruia & Others, decided on September 1, 2010).

It is very important to identify what exactly these decisions hold and relevant to each others and for a public company. It is also necessary to consider the legislative history of Section 111A of the Act and the position of transferability of share in common law.

V B RANGARAJ Vs. V B GOPALKRISHNAN (1992) 1 SCC 160

We should begin with the decision of Supreme Court in the Case of V B Rangraj. In this Case shareholders of a private limited company were two branch of family and it was agreed orally in 1951, it means in backdrop of Independence and partition, that the proportion of the shareholding of respective branches would not change, and further agreed that for this purpose, any member of a branch want to sell his shares must first offer the share to his own branch. The crux in this case is the oral agreement about restriction was not incorporate in Articles. Referring its own earlier relevant decision in Kalinga Tubes, the Supreme Court held that the shares are “freely transferable”  and that a private agreement imposing restriction on transfer of shares which is not stipulated in Articles of association is neither binding to the Company nor to shareholders. It means such kind of agreement is void in toto. One thing very clearly established in this case is any restriction on share transfer must be incorporated in the Articles of the Company otherwise it will not have any effect and aggrieved shareholder can not have any legal remedy against violation of such restrictive provisions of agreement or understanding.

The later part of the decision – that it does not bind the company is not new and is an accepted rule of English Rule. However that it does not bind the shareholders was something strange to Indian Law.

MAFATLAL INDUSTRIES LTD. Vs GUJARAT GAS CO. LTD (1997) – GUJARAT HIGH COURT

The decision of Gujarat High Court in the case of Mafatlal Industries in 1997 is an other important precedent relating to subject matter. This was the case relevant to a public limited company. In this case a shareholder disposes the 3.87% share holding in the open market in violation of the agreed terms. Very interestingly and according to the author, rightly argued that “free transferability” refers to absence of restriction which may be imposed by the third parties, but it cannot exclude the right of a shareholder to impose restrictions on himself in the matter of transfer of shares to another person. This argument was rejected by the then Judge Mr. Shah who pointed out that ratio laid down in the case of V B Rangara by the Apex Court is having much greater force and can be applied to public company also. This decision had changed the whole scenario for public company.

M. S. MADHUSOODHANAN Vs. KERALA KAUMUDI PVT. LTD 2003 VOL.117 COMPANY CASES 19

Now coming on the case of Madhusoodhanan which was decided by the Supreme Court in the year of 2002. This is also in reference to a private limited company. This case arose out of a complex family dispute in Kerala and specifically out of a karar / agreement that provided that “there would be no change in the existing share structure among the family” of the private limited company. It further provided that the shares of two members would pass to Madhusoodanan in a certain percentage on their death. The facts of the case to some extent similar to the case of Rangaraj however the Court had different view and distinguished Rangara and Kaling tubes case and held that this restriction was not on a share as a class but on specific, identified shares between specific and identified members to which the company need not be a party.

WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LIMITED Vs. BAJAJ AUTO LIMITED – FEBRUARY 2010 – BOMBAY HIGH COURT

Now the time bring us to twin important judgment of Bombay High court in the Case of Bajaj Auto Ltd decided in February 2010 and the case of Messer Holding decided in September 2010.

In the Bajaj Auto, In the year 1974, Western Maharashtra Development Corporation Limited and Bajaj auto Limited entered into agreement to incorporate of a JV company named Maharashtra Scooters Limited (MSL) and accordingly the Company was incorporated under the Companies Act as a Public Company. The share of the Company are listed on the BSE and NSE. Western Maharashtra Development Corporation held 27%, Bajaj Auto held 24% and public holding is 49%. In this case there is a Protocol Agreement dated October 2, 1994 (“Agreement”) between the two promoter shareholders restricting transfer of their respective shares which is also incorporated in the Articles of Association. As per the Agreement, if either party desire to sell its shares, such party shall give the first offer to purchase the share to other party at such price as may be agreed. If within 30 days of such intention, the party agrees to purchase the shares then the selling party bound to sell the shares. If the other party willing to purchase the shares however the proposed price is not acceptable to it, the question of the price should be referred to arbitration.

Later, the Petitioner wants to dispose its holding and accordingly offered the shares to the Bajaj Auto at a price of Rs. 232.20 per share which was not acceptable to it. In terms of the Agreement the issue to determine price was referred to the sole arbitrator. The Arbitrator after considering the matter through arbitration award directed to sell share to Bajaj Auto at a price of Rs. 151.63 per share. Aggrieved, the petitioner filed an application before the Hon’ble Bombay High Court.

The Petitioner inter alia argued thatThe Agreement regulating transfer of shares was illegal and void on the ground that (a) the Agreement was a forward contract prohibited by the Securities Contract Regulation Act; and (b) The agreement contained restrictions on the transferability of the shares of MSL which were violative of the provisions of Section 111A read with Section 9 of the Companies’ Act, 1956 and hence void. The Petitioner contended that in terms of section 111A of the Companies Act 1956 which provides for ‘free transferability of shares’ in a public company, the agreement providing for restrictions on share transfer and restrictions embodied in Articles of Association was illegal and therefore any determination there under and arbitral award was void. Section 34 of the Arbitration and Conciliation Act 1996 provides for set aside an arbitration award in some circumstances.  It defines the parameters of recourse to a Court against an arbitral award. Section 28(1) (a) mandates that the arbitral tribunal must decide the dispute in accordance with the substantive law in India. In the case of ONGC vs. Saw Pipes the Supreme Court held that if an award is in contravention of the provisions of any Act, it is subject to judicial intervention and can be set aside.

From other side in response, the counter argument of Bajaj Auto / Respondent was that the restriction imposed by the agreement was valid because it did not bind all shareholders, but only two shareholders in a specific contingency. The restriction has also been incorporated in the Articles of Association of the Company. Based on decision in the case of Madhoosudhanam, It was further argued that section 111A of the Act does not prohibit restriction on transferability when agreed between specific shareholders regarding specific shares.

Single Judge of the Bombay High Court held that the principle of free transferability must be given a broad dimension in order to fulfill the object of the law. The word “transferable” is of the widest possible import and Parliament by using the expression “freely transferable”, has reinforced the legislative intent of allowing transfers of shares of public companies in a free and efficient domain. The Court further held that the Agreement and provision in Articles of Association restricting the transfer shares is violative of section 111A read with section 9 of the Companies Act and therefore it is void and accordingly the award is contrary to substantive provisions of law and is patently illegal.

MESSER HOLDING LIMITED Vs. SHYAM MADANMOHAN RUIA AND OTHERS (September 2010) – BOMBAY HIGH COURT

Now, the latest and most important decision of the division bench of the Bombay High Court in the case of Messer Holding decided in September 2010 has changed the way to negotiate share transfer restrictions in a public company. The decision by the single judge in Bajaj Auto case that restriction on transfer of shares in a public company is contrary to section 111A of the Act, has been now overruled to some extent by the division bench in the case of Messer Holding by declaring that Section 111A is not a law dealing with the right of the shareholders to enter into consensual arrangement/agreement by way of pledge, preemption/sale or otherwise and accordingly such agreement in relation to the specific shares can be enforced like any other agreement. That does not impede the free transferability of shares in a public company at all.

The facts in brief, Bombay Oxygen Ltd is defendant no 2 company was listed on BSE. Messer holding was the major shareholder of the Company. It entered into agreement dated June 23, 1997 where under the German company to acquire shares and management of the company and provide some technology to company. It was condition in the agreement that either party want to sale its share then offer first to other party except some situation as provided in the agreement. In this case, the arguments were (a) the agreement was void because of fraud and misrepresentation (b) the agreement was void because it was in violation of SEBI rules and regulation and (c) the agreement was void as it restrict free transferability in term of section 111A of the Companies Act and recent decision of Bombay High Court in the case of Bajaj Auto.

First time the Court went into legislative history of section 111A of the Act. It was observed that in 1986 Section 22A was introduced in Security Contract Regulation Act 1956. It provides free transferability of shares in a registered company. However a Company can refuse transfer of shares on four specified grounds. The section was introduced in backdrop of series of complaints regarding arbitrary power exercised by the board of directors in refusing or non consideration of request for transfer and transmission of shares. The Court noted that suffice it observe that the intention behind introducing Section 22 A in 1986 was to regulate the right of the Board of Directors to refuse transfer of members share and it was not to impose restriction on the right of shareholder to deal with his shares by entering into consensual arrangement with the third party to which the company need not be a party.

Section 22A was deleted by Depositories Act 1996 and at the same time section 111A of the Companies Act come into picture. The proviso to subsection (2) reinforces the position that Section 111 A is to regulate the powers of the Board of Directors of the company regarding transfer of shares or debentures and any interest therein of a company. The Board of Directors cannot refuse to register transfer of shares unless there is sufficient cause to do so.

The expression “freely transferable” therein is in the context of the mandate against the Board of Directors to register the transfer of specified shares of the members in the name of the transferee, unless there is sufficient cause for not doing so. The said provision cannot be construed to mean that it also intends to take away the right of the shareholder to enter into consensual arrangement/agreement with the purchaser of their specific shares.

If the legislature intended to take away that right of the shareholder, it would have made an express provision in that regard. Reliance has been rightly placed on the decision of the Apex Court in the case of Byram Pestonji Gariwala vs. Union Bank of India (1992) I SCC  which takes the view that the freedom of contract generally, the legislature does not interfere except when warranted by public policy, and the “legislative intent is expressly made manifest” That means it is open to the shareholders to enter into consensual agreements which are not in conflict with the Articles of Association, the Act and the Rules, in relation to the specific shares held by them; and such agreement can be enforced like any other agreement. That does not impede the free transferability of shares at all. Further, such consensual agreements between particular shareholders relating to their shares can be enforced like any other agreements. It is not required to be embodied in the Articles of Association.

In respect to the section 9 of the Act, the Court noted that Clause (a) thereof, which refers to any agreement executed, is in respect of an agreement executed by the company; and not by the shareholder with third party which is a private agreement to which the company is not a party.

As aforesaid, Section 111A is not a law dealing with the right of the shareholders to enter into consensual arrangement/agreement by way of pledge, preemption/sale or otherwise. If that right is not covered by Section 111 A of the Act as has been found by us, then consensual arrangement/agreement between shareholder and third party or shareholders inter se to which company is not a party, Section 9 of the Act will not come into play at all. Thus, the expression “freely transferable” in Section 111A does not mean that the shareholder cannot enter into consensual arrangement/agreement with the third party in relation to his specific shares. If the company wants to even prohibit that right of the shareholders, may have to provide for an express condition in the Articles of Association or in the Act and Rules, as the case may be, in that behalf. The legal provision as obtained in the form of Section 111 A of the Companies Act does not expressly restrict or take away the right of shareholders to enter into consensual arrangement/agreement in respect of shares held by him.

Viewing the decision of Bombay High Court in the case of Messer Holding, as of now it can be concluded that agreements between particular shareholders relating to and regulating transfer of their shares in a public company can be enforced like any other agreements and it does not impede the free transferability of shares in terms of section 111A of the Act. Further it is not required to be embodied in the Articles of Association.

POSITION AFTER MESSER HOLDING CASE

It is pertinent to note that in the case of Messer Holding, the Bombay High Court has decided the issue in context of shareholders inter se and not shareholders and a Company. The Court kept Company aside by holding that “… shareholders inter se to which company is not a party…”. The effect of the decision is that an agreement between shareholders restricting transfer of shares in a public company is a valid agreement and not repugnant to section 111A of the Act. It signifies that such restrictions in joint venture agreement will remain only as contractual between the shareholders. This implies that they can find only place in agreement but not in Articles of a public company and accordingly its binding to the shareholders and not the Company. In case of violation of such agreement, aggrieved shareholder has to resort lengthy civil jurisdiction.

After the Messer Holding’s judgment, the fundamental difference between private and public company as far as share transfer restrictions are concerned remained the same. In case of private company, restrictions are contractual as well as constitutional provisions as provided in Articles and hence binding and enforceable against all the shareholders and the private company. However the same will not be case for a public company.

The decision in the case of Messer Holing provided some relief to shareholders of a public company however not resolved issues and concerns of corporates and joint venture parties. Some questions yet to find their stands. Without a company being a party to the agreement between the shareholders, its terms cannot be inserted in to Articles and even in case its incorporated in the Articles, the validity of restriction on share transfer in a public company would not be sustained and uphold looking the decisions delivered so far. In such circumstances, since shareholders agreement is not biding to a Company, a shareholder cannot restrict the company from transferring shares which is in violation of the agreement. Unless and until the role of the company and such restrictions validly find the place in Articles, Company Law Board would not have jurisdiction for civil breach. Therefore remedy available for aggrieved shareholder is to approach civil court which is costly and lengthy and many times parties reluctant to prefer it in joint venture business. a crux question comes is what a civil court will do with the company to which the agreement is not binding and it is difficult to declare that the transfer of shares is void when the purchaser is  guarded under  the principle of bona fide purchaser. Effectively a civil court would grant relief in form of compensation or damage for civil breach.

RESTRICTION ON TRANSFER OF SHARES AND COMPANIES BILL 2009

The Companies Bill 2009 (the Bill) intending to make over Indian corporate laws and to replace the Companies Act 1956 with drastic changes was referred to the Standing Committee on September 9, 2009 for examination and report thereon. Probably revised Companies Bill based on the Committee’s report dated August 26 (“Report”) is expected going on table soon. It is interesting to know what would be the standing of the Government about the restriction on transfer of shares in a public company in back drop of the aforesaid twin judgment of the Bombay High Court.

Clause 32 and 52 of the Bill are relevant for issue relating to restriction on transfer of shares in a public company. unlike the section 111A of the Companies Act, 1956, the Bill 2009 does not provides clearly for free transferability of shares in a company however simultaneously it does also not keep much space for such issue. Clause 32 is akin to Section 82 of the Companies Act 1956. It provides that “The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.” Clause 52 of the Bill deals with power of a Company for refusal to transfer of shares. Legislature intended to make separate provisions for public and private limited company. Sub-clause (1) of clause 52 of the Bill 2009 provides for private company and it is clearly recognized that a private company can have any kind of restriction in its articles on share transfer. Sub-clause (3) of clause 52 deals with transfer of shares in public company, which provides that a public company can refuse transfer of shares on sufficient cause. It is not clear whether any provisions or restriction on share transfer in Articles of a public company would be considered as “sufficient cause”. Viewing the Bill and comparing these two sub clauses, it seems that the Legislature yet to clearly provides in the Bill about restriction on transfer of shares through articles of a public company. In absence of provision in the Bill about free transferability of shares in a public company, ratio and ruling established by the higher courts so far will carry its effect, may be in different footage, in the regime of proposed new corporate laws.

CONCLUSION

In the back drop of the twin judgment of the Bombay High Court – Bajaj Auto and Messer Holding, the Companies Bill 2009 should make clear provisions recognizing the restriction on share transfer in a public company considering present requirement of business in the form of Joint Venture Company. Until the restrictions on share transfer is legally finds place in the corporate laws, the possible way is to have well pre-defined arbitration mechanism in the shareholders agreement. Ruling and findings of the Bombay High Court in the case of Messer Holding, recognizing the private agreement between shareholders is expected to be valid and acceptable even in reference to the Companies Bill 2009.