This application under Order XXI, rule 58 read with sec-tion 151, C. P. C. arises out of an order dated the 15th of March 1969, by which all the shares held by the judgment-debtor in French Wine Stores Limited were ordered to be attached on an application under Order XXXIX, rules 1 and 2, C. P. C. and Order XXI, rule 43, C. P. C. filed by the decree-holder.
2. The facts giving rise to the present application may briefly be set out as follows :- The decree-holder was carrying on business in partnership with the judgment-debtor which partnership was eventually dissolved by a deed of dissolution dated the 3rd of September 1966.
Under this deed, the decree-holder was to receive from the judgment debtor a sum of Rs, 19,000 and also to take over the assets and liabilities of the concern. However, the name of the partnership and the tenancy rights in the business premises continued to vest in the judgment- debtor. The decree-holder had received a cheque for the sum of Rs, 19,000 which cheque failed to be honoured by the Bank on presentation. In these circumstances the decree-holders filed Suit No, 161 of 1967 for the recovery of the sum of Rs, 19,C00 covered by the cheque in question. The suit was decreed by this Court on the 23rd of May 1968. It may be mentioned that the Agricultural Development Co-operative Bank Limited of Karachi had guaranteed the payment of the decretal amount. Accordingly, on the 9th of January 1969, the decree-holder filed an execution application against the judgment-debtor and Agricultural Development Co-operative Bank Limited for realization of the decree. On the 17th of February 1969, the Court ordered execution to issue initially against the judgment-debtor as prayed.
3. On the 3rd of March 1969, the Decree Holder made an application under section 151, C. P. C. for an order directing the writ of attachment to be executed with Police Aid despite a change in the Signboard of the French Wine Stores to French Wine Stores Limited. On the 5th of March 1969, a further application was filed under Order XXXIX, rules 1 and 2, C. P. C. and Order XXI, rule 43, C. P. C. for attachment of all the shares of French Wine Stores Limited held by the judgment-debtor in his hands and a further order restraining him from transferring such shares pending disposal of the execution proceedings. Both these applications, as mentioned earlier, were allowed by the Court as prayed on the 25th of March 1969. Then on the 16th of April 1969, whilst the original execution application filed on the 9th of January 1969 was yet pending, the decree-holder presented a fresh execution application seeking execution of her decree by attachment of all the shares issued by French Wine Stores Limited in the name of Mr. & Mrs. Anwarul Islam and Mr. & Mrs. Merwan Mondi lying with Mr. & Mrs. Merwan Month. Before, however, the last mentioned execution application was filed, the present intervenors filed their application on the 26th of March 1969 under Order XXI, rule 58 read with section 151, C. P. C. objecting to the attachment of the shares held by them as well as by the judgment-debtor and his wife. This application was in fact directed against the decree- holder's application under Order XXXIX, rules 1 and 2, C. P. C. filed on the 5th of March 1969, which had been allowed by the Court on the 25th of March 1969. Later on the 13th of May 1969, the present intervenors filed their objections to the attachment of even the shares held by the judgmentdebtor and his wife on the plea that the said shares had been pledged with the intervenors for valuable consideration. Lastly, on the 4th of December 1969, the intervenors filed a further affidavit producing there with certain documents relevant to the issues involved in this case.
4. I have heard Mr. P. D. Ramchandani, Advocate for the intervenors and Mr. Nathulal Advocate, for the decree-holder.
5. French Wine Stores Limited is a private company limited by shares and registered under the Companies Act, 1913 on the 1st of June 1968. It has a subscribed and paid up capital of Rs, 30,000. Of this share capital, shares of the value of Rs, 15,000 are held by Mr. & Mrs. Merwan Mondi while the remaining shares of an equal value are held jointly by the judgment-debtor and his wife. The first contention raised by Mr. P. D. Ramchandani on behalf of the interveners is that the shares of a private limited company cannot be attached in execution of a decree where such attachment would entail the sale of the said shares to an outsider, and the Articles of association of the company prohibit such sale.
Goods that are liable to attachment and sale in execution of a decree have been generally described in section 6) of the Civil Procedure Code. The principle which appears to qualify a property for being attached and sold in execution of a decree is that it must be a property belonging to the judgment-debtor or over which, or the profits of which, the judgment-debtor has disposing power. The argument that has been advanced on behalf of the intervenors briefly is that shares of a private company, which by its very articles restricts their sale, are not saleable properties within the meaning of section 60, C. P. C. nor has the owner thereof an unqualified power to dispose them of. The question, therefore, which arises for consideration is whether the shares of a private company constitute saleable property.
6.In order to be able to answer the above question, one has to understand the nature of interest that a share in a limited company represents. Section 2(16) of the Companies Act, 1913 defines the word "share" to mean share in the share capital of the company and, as observed by Farwell, J. in Borlands' Trustee v. Steel Brothers , it represents the interest of the shareholder in the company, measured, for the purposes of liability and dividend, by a sum of money, but consisting of a series of material covenants entered into by all the share-holders, inter se, in accordance with the provisions of the Companies Act and made up of various rights. The shares are invariably held subject to the Articles of Association of the company which represent the material covenants. The effect of the articles of association has been spelt out in section 21 of the Companies Act, 19131 which makes them binding on the company and the members thereof to the same extent as if they had respectively been signed by each member and contained a covenant on the part of each member, his heirs and legal representatives, to observe all the provisions of the articles.
7. Now section 28 of the Companies Act, 1913 describes the shares of a limited company to be movable property and transferable in manner provided by the articles of the company. Read in isolation this provision does no doubt indicate that the shares of a company are movable property and saleable in the wider context of the term 'transferable' used in the section. It would also appear that the words 'in a manner provided by the articles of the company' have reference to the procedure governing the sale and are not intended to detract from the basic transferability of the share themselves. However for reason which I will presently state, it does not seem to me that the above principle as visualised by section 28 is of universal application. There seems to be a clear exception made in respect of private companies limited by shares by subsection (13) of section 2 of the Companies Act, 1913. This subsection defines a private company as a company which by its articles-- (a)Restricts the right to transfer the shares if any ; and (b)Limits the number of its Members to 50 not including persons who are in the employment of the company ; and (c)Prohibits any invitation to the public to subscribe for the shares, if any, or debentures of the company.
8. It would appear from a perusal of the above definition of a private company that a restriction on the right to transfer the shares is one of the essential features of the company, and to the extent that such restriction is adopted in the articles, it knocks out their free transferability. The corporate character of a private limited Company is vastly different from a public company. The former, as the very word 'private' signifies, is frequently an enterprise of a family or of persons intimately known to each other and commanding mutual confidence. It is more in the nature of a partnership venture and has all the exclusive features of a firm. It is not entirely the soundness of the enterprise which brings persons together in a private company. More often it is the personal equation and mutual confidence which is known to impel the formation of such companies and the continuance of such confidence is essential to any profitable pursuit of the venture. This view of a private limited Company has gained recognition of the Supreme Court of Pakistan in the case of Ladli Prasad jaiswa l v. Karnal Distillery Co. Ltd. where their Lordships note with approval that the tendency of the Courts has uniformly been to treat a private company more or less as a partnership. Although this observation was made in relation to the principles applicable in the winding up of a private company, the concept itself has its roots in the peculiar structure of a private company and the exclusiveness of people associating therein. I find it impossible to resist the suggestion that the share-holders of a private limited company are in a relationship resembling that of partners and the same reasons which induce a Court to decline forcing a partner on persons who are reluctant to accept him as such, apply equally in the case of a share- holder in a private limited company as is known to exist in this country. It is precisely in the context of this approach that section 2(13) of the Companies Act, 1913 visualizes a restriction on the right to transfer the shares as one of the prime features of a private company. This principle has been accepted by the French Wine Stores Limited in Articles 3, 7 and 8 of its Articles of Association. These articles may be reproduced for convenience of reference : "3. The Company is a private limited company within the meaning of section 2(13) of the Companies Act, 1913 and accordingly (a) no invitation shall be issued to the public to subscribe for the shares or debentures of the Company (b) the number of members of the company (exclusive of the persons who are for the time being in the employment of the Company and/or persons who having been formerly in the employment of the Company were while in such employment) shall be2 limited to fifty provided that for the purpose of this provision where two or more persons hold one or more shares of the Company jointly they shall be treated as a single member and (c) the right to transfer the shares shall be restricted in manner and to extent hereinafter appearing.
7. No transfer of any shares in the capital of the Company shall be made or registered without the previous sanction of the directors who may without assigning any reason decline to give any such sanction but such right shall not be exerciseable in the case of any transfer made pursuant to Articles 12 hereof except for the purpose of ensuring that the number of members does not exceed fifty. The directors may also suspend the registration of transfer during the fourteen days immediately preceding the ordinary general meeting in each year. The Directors may decline to recognise any instrument of transfer unless (a) such fee not exceeding rupee one per share as the directors may from time to time determine is paid to the Company in respect thereof (b) the instrument of transfer is accompanied by the certificate of the shares to which "it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer and the transfer is in the form approved by the directors. The directors may decline to register any transfer of any shares on which the Company has a lien.
8. Save as provided in Article 12 hereof no share shall be transferred to any person who is not a member so long as any member is willing to purchase the same at the fair value which shall be determined as hereinafter provided."
A. s would be evident from a perusal of the above articles the intervenor company has declared itself to be a private limited company within the meaning of section 2(13) of the Companies Act, 1913 and has inter alia adopted the restrictions relating to the right to transfer its shares Article 7, lays down that no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the Directors, who may, without assigning any reason, decline to give any such sanction. Lastly, Article 8 provides that except to the extent allowed in Article 12 (i,e, to relations and to the legal representatives of a deceased member) no share should be transferred to any person who is not a member so long as any member is willing to purchase the same at the fair value to be determined as provided in the Articles.
9. Mr. Nathu Lal, the learned counsel for the decree-holder, strenuously argued that these restrictions will not apply to compulsory sales ordered by the Court in a situation as is existent in the present case. In support of this argument he pressed into service the provisions of Rules 46, 76, 79 and 80 of Order XXI, C. P. C. Before I proceed to deal with the foregoing provisions I may mention that in the case before me the decree-holders had made their initial application for attachment of the subject shares under Order XXXIX, rules 1 and 2 and or Order XXI, rule 43, C. P. C. and the said attachment was granted under these provisions. Subsequently when the second execution application was filed on the 16th of April 1969, Rule 46 of Order XXI was relied upon by the decree-holder. Be that as it may, I do not think there is anything in Rules 46, 76, 79 and 80 of Order XXI which would help in any way to resolve the problem that seems to be set the present case. The said rules no doubt, indicate that a share the capital of a corporation is amenable to attachment and sale in execution of a decree That position is hardly in contest. The point here is whether a share in the capital of a corporation can be coercively transferred without regard to the structure of the corporation and the terms and conditions as set out in its articles of association under which such shares are held. My own view is that the Court may attach and sell only such shares of a company in relation to whose transferability the articles do not prescribe restrictions. The question that faces us in the present case had come up for consideration in the case of Manilal Briflal Shah v. The Gordhan Shipping & Manufacturing Company Ltd. . In this case Batchelor, Actg C. J. observed, that notwithstanding that the appellants purchase was made through the Court, the Director's powers under the memorandum of association to refuse to accept the appellant as a share-holder was unaffected. For, unless this was so, nothing would be easier than to over-ride3 those provisions of the articles of association which invest the Directors with a discretion to refuse to admit undesirable persons to membership of a company. The learned Judge went on to observe that if the contrary view was correct then a person whose professed object might be to wreck or damage the company could nevertheless oust the Directors, discretion and compel them to register him by the simple process of purchasing shares of the company through the Court after a collusive decree. Shah, J. while agreeing with the view expressed by Batchelor Actg. C. J. in the same case observed that the position of a purchaser at a Court sale cannot be any better than a private purchaser in view only of the existence of Rule 79 of Order XXI. In the case of T.
Nagabhushanam and others v. S. Ramachandra Rao and others a Division Bench of the said Court agreed with the view expressed in the last mentioned Bombay case and held that notwithstanding a sale by Court, there still was a discretion in the Directors to recognise or not to recognise purchasers in execution of decrees.
10. In a latter case, however, of T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. before Srinivasa Ayyangar and Ananthakrishna Ayyar, JJ. the same question came up for reconsideration.
It was a case relating to the claim of the plaintiff to require the defendant-company to register, in his name certain shares purchased by him at a sale held by Court in execution of a decree and subsequently confirmed. It would appear that in that particular case the company had refused to register the Court sale in favour of the plaintiff. The argument advanced for gaining recognition of the Court sale was that shares in the capital of a Corporation were property in the eye of law and, therefore, transferable as indicated by Rules 79 and 80 of Order XXI, C. P. C. The contention was that since the transfer of shares had been legally effected pursuant to an order of the Court the obligation lay on the company to register the shares in the name of the transferee unless the company could successfully refer to some provision in the articles of association which had the effect of denying such rights to the transferee or giving right to the company to refuse to register the shares either in their discretion or in certain given circumstances. Before proceeding further with a discussion of the case it may be appropriate to note that in the case under reference the contention was that there were no provisions in the articles of association of the particular company which vested in the Directors thereof or contained a discretion to refuse to register the shares. In view of the absence of any such provision and by a process of assignment to the expression "transfer" a wider connotation so as to include transfers by operation of law, a category in which a sale in invitum by the Court was understood to be included, the learned Judges or the Madras High Court held that the company, in the case in question, had no right to refuse to register a transfer of shares brought about as a result of sale by a Court. It is needless for me to discuss at length the other aspects dealt with in the second Madras case since that case appears to me to have been considerd largely in the light of articles of association of that particular company which did not seem to invest the company with a right to refuse the registration of a transfer. It is also not known from a perusal of the judgment whether the company in question was a private or a public company. It would seem that reliance for the proposition that a company cannot be compelled to register a transfer in a Court sale was being placed in the above case by reference to the Articles which concerned the transmission and devolution of interest in shares by operation of law. As observed earlier the articles of association -in the case before me are specific on the point. The Articles with which I am concerned prohibit the transfer of any shares in the capital of the company without the previous sanction of the Directors who may, without assigning any reason, decline to give the sanction. This prohibition is contained in Article 7. Articles 9 and 10 circumscribe the voluntary transfers intended to be effected by the share-holders by giving the first option of purchase to an existing share-holder. The contingency of devolution of interest in shares by operation of law has been separately provided for under Article 13 which deals exclusively with cases of devoluticn of interest consequent to death or insolvency of a member and to no others.4 5 Thus the case before me is distinguishable from the case reported in AIR 1928 Mad. 571. This case was followed by the Calcutta High Court in Mahadeo Lal Agarwala and ano her v. The New Darjeeling Union Tea Co. Ltd. and others . Even here the accent was upon the inadequacy of the word `transfer' to include a sale in invitum by a Court, the latter incident being held to be covered more appropriately by the term 'transmission'. Even in this case the decision proceeded mainly on the view that in auction sales held by a Court it was not necessary for the judgment-debtor to sign a transfer deed as was required by the articles of association of that company. I find that none of the Courts have in any sense applied their mind to the principle of imposing an outsider upon an unwilling company. The articles of association of a company have to be read and interpreted not in isolation but in the context of the structure of the company and the basic principles upon which the corporate structure is founded. If the apparent intention of the articles is to avoid a Stranger being interlocked in business with the existing members, then that intention, according to me, cannot become anytheless sanctimonious by the intervention of an order of the Court. With utmost respect to the views of some of the Indian Courts which have held otherwise, I would be slow to demolish the exclusive corporate character of a private limited company by recourse to fine distinctions between the terms like "transfer inter viros" and "devolution of interest by law". I do not for a moment mean to imply that the above two terms are in any sense synonymous but at the same time I am clear in my own mind that if the articles of association of a company are designed to admit to its membership only those who have the approval of its Directors, such approval will not cease to be operative only because of the aid of a Court of law having been sought in bringing about the admission of a member. Indeed there is no answer to the situation visualized in the case of Manilal Brijlal Shah v. The Gordhan Shipping & Manufacturing Company Ltd. of a recalcitrant party circumventing the restrictions imposed in the articles of association by recourse to a collusive decree of the Court. Although the correctness of this Division Bench judgment has been doubted by the Madras High Court but this seems to have been done without meeting the aspects discussed in the judgment.
11.It is true that an order for the sale of shares held in a private company which by its articles restricts their transfer will not be void ab initio since one may well conceive of a situation in which the directors may not object to the transfer of the shares ; but in the case before me the company has four members two of them being the judgment-debtor and his wife and the other two Mr. and Mrs. Merwan Mondi. Both these have objected to the transfer of shares. One of these objections relates to the acceptability of the decree-holder as a member of the company on the plea that her son K. G. Bhatia, who has been strenuously pursuing the present execution proceedings, holds interest in another wine store in close proximity of the French Wine Stores Limited, and being a competitor-in-interest, his intention is to wreck the French Wine Stores. This interest has not been denied on behalf of Mr. Bhatia although it has been claimed that it is an exiguous one. Whatever be the merits of this apprehension, it is clear that the objection is not mala fide although it may perhaps be misconceived. In this view of the matter the refusal of the company to give its approval to the transfer of shares is understandable.
12.The other objection taken to the attachment and sale of shares is that the shares of the judgment-debtor which actually stand in the joint names of the judgment-debtor and his wife have been pledged with Mr. and Mrs. Merwan Mondi against the loan of Rs, 15,000 which the latter had advanced to the judgment-debtor and his wife to enable them to purchase the shares. It has thus been argued that the said shares being in custody of Mr. and Mrs. Merwan Mondi as security for the loan advanced, they are not attachable in satisfaction of other debts. The intervenors have filed two certificates dated 3rd December 1969 issued by the Commerce Bank Limited, certifying in each that a cheque for Rs, 7,500 was issued by Mr. M. K. Monde/Mrs. M. K. Monde in favour of Anwarul Islam (judgment-debtor) and was paid by the bank on the 14th of March 1969 through the6 United Bank Limited. The United Bank Limited has also certified that the two cheques for Rs, 7,500 each were deposited in the account of French Wine Stores Limited, on the 14th of March 1969. It is perhaps worthwhile to note that the aforestated advances were made more than a month before the decree-holder applied for attachment of the shares held by the judgment-debtor in French Wine Stores.
Mr. Nathu Lal, the learned counsel for the decree-holder, pressed also for an attachment and sale of the furniture, fixtures and fittings of French Wine Stores Limited, on the plea that there was no evidence of the movable property having been taken over by the limited company. Sub-clause 1 of main clause 3 of the Memorandum of Association of French Wine Stores Limited would show that the object of the company was to acquire and take over the business of French Wine Stores with effect from 1st May 1968. Admittedly on the date the attachment was ordered, French Wine Stores Limited were found to be in possession of the premises and the movable property housed therein.
Keeping in mind the fact that the limited company was registered with the avowed object of acquiring and taking over the business of French Wine Stores with effect from 1-5-1968, the normal presumption upon their being found to be in possession of the said business would be that they have indeed taken the said business over. The absence of a formal agreement does not necessarily imply that the intended taking-over has not come to pass. This prayer of the decree- holder, must also fail.
14.Lastly, the decretal amount, in terms of the decree, is payable in monthly instalments of Rs, 800 each. The significant feature of this decree is that there is no default provision and failure to pay any instalment does not render the entire amount payable forthwith. It would seem that all the instalments payable under the aforesaid decree have not yet become due. In these circumstances the execution application of the decree-holder for the entire amount of Rs, 19,000 is premature.
15.For the reasons mentioned above the intervenors application under Order XXI rule 58, C. P. C. and their objec-tions to the execution of the decree against the French Wine Stores and or against the shares held by the share-holders of the said company or any one of them is upheld and the execution application was filed, therefore, fails. The decree-holder will however, be free to execute his decree in any other manner that is available to him under law.
16.The application under Order XXI, rule 58 filed on behalf of the Agricultural Development Co- operative Bank Limited may now be fixed for hearing and disposal, and also the contempt application. (1901) 1 Ch. 270 PLD 1965 SC 221 I L R 41 Bom. 76 AIR 1923 Mad. 211 AIR 1928 Mad. 571 AIR 1952 Cal 58