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V.B. RANGARAJ V V.B. GOPALAKRISHNAN

V.B. Rangaraj vs V.B. Gopalakrishnan And Others AIR 1992 SC 453, 1992

ISSUE:

  • Whether the shareholders can among themselves enter into an agreement which is contrary to or inconsistent with the Articles of Association of the company?

RULE:

  • Shareholder’s Agreement is the agreement made between the shareholders of the company among themselves. This case is related to the validity of provisions of shareholder’s agreement which is in contravention to the Article of Association.

FACTS:

  • There were appeals filed by defendant 1 and by defendants 4 to 6, against the decision of Madras High Court. Defendant 3 was a private limited company that had a total shareholding of 50.
  • There was jointly family, which were the plaintiffs in the present case. They were group of minority shareholder holding 13 shares and the remaining 37 shares were held by people from outside. Later on, the joint family acquired the remaining 37 shares.
  • This family consisted of Baluswamy and Guruviah Naidu who were brothers, wherein both held 25 shares each in company. The plaintiffs said that in 1951 there was an oral agreement between Baluswamy and Guruviah Naidu. The agreement said that each branch of family would always continue to hold equal number of shares, which are, 25. If any member in either of branches wished to sell his share, then he would give first option of purchase to members of that branch. Only if the offer made was not accepted, the shares would be sold to others.
  • The plaintiffs, defendant no. 1 and 2 and Selvaraj are the sons of Baluswamy Naidu whereas 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.
  • Defendant 1 who was one of the son of Baluswamy Naidu made a contrary decision as to the agreement as he sold shares to son of defendant 4 to 6 who are sons of Guruviah Naidu.
  • Trial Court passed a decree in the present suit and held that sale of the shares were invalid. The sale was not binding on plaintiffs and defendant no. 2. The court also directed both defendant no. 1 and defendants 4 to 6 to transfer the said shares to the plaintiffs and also granted a permanent injunction. The appeals which were filed by defendant no. 1 and defendants 4 to 6 were dismissed.
  • High Court held that the Sale of the shares by defendant no. 1 in favor of defendants 4 to 6 was invalid and therefore plaintiffs and defendant no. 2 became entitled to purchase the shares, the agreement made was binding on the company and the company was bound in law to register the shares in the name of plaintiffs.

HELD:

  • The court looked in to the article in the agreement which was related to restriction on shares of the company. The article read that: “No new member shall be admitted except with consent of majority of members on death of any member of his heir or heirs or nominee shall be admitted as a member. If such heirs or nominees are unwilling to become members, such share capital shall be distributed at par among members equally or transferred to any new member with the consent of the majority of the members.”
  • So, the court after looking at the article said that the private agreement which is relied upon by plaintiffs, there is restriction on living member to transfer his shareholding only to branch of family to which he belongs in terms imposes two restrictions which are not stipulated in the Article.
  • Firstly, it imposes a restriction on a living member to transfer the shares only to the existing members and secondly the transfer has to be only to a member belonging to the same branch of family. The agreement obviously, therefore, imposes additional restrictions on the member’s right to transfer his shares which are contrary to the provisions of the Article. They are, therefore, not binding either on the shareholders or on the company.
  • Therefore, the appeals of the defendants were allowed and the decree of the High Court was set aside.