NCLAT Delhi Sets Aside Transfer Of Assam Medical Corporation Shares For Articles Of Association Breach

The New Delhi National Company Law Appellate Tribunal (NCLAT) on 5 August held that a private company cannot transfer shares without complying with the procedure prescribed under its Articles of Association, including requirements relating to notice, valuation, and existing shareholders' right to purchase the shares before they are offered to outsiders.

A Bench comprising Officiating Chairperson Justice Yogesh Khanna and Technical Member Ajai Das Mehrotra set aside the transfer of 117 shares held by the Dr. Kalicharan Das Trust in Assam Medical Corporation Pvt. Ltd. (AMC), holding that the company had failed to comply with Article 15 of its Articles of Association. It observed:

“The company has not followed Article 15 of Articles of Association “in toto” from the very beginning of these transfers. The sellers have not given any notice to the Board, the Board was neither asked nor performed as agent of the selling shareholders. The Board also did not determine the 'agreed' price of shares neither the auditor discovered price of subject shares, as required under Article 15.”

The NCLAT was hearing four appeals against the order dated 13 January 2020 passed by the Guwahati Bench of the National Company Law Tribunal (NCLT), which had set aside the sale and transfer of 117 shares held by the Dr. Kalicharan Das Trust in AMC.

AMC originated from a nursing home established by Dr. Kalicharan Das in 1953 and was incorporated as a private company in 1961. In 1981, Dr. Das created the Dr. Kalicharan Das Trust and transferred 117 shares, representing nearly one-fourth of AMC's share capital, to the trust.

After Dr. Das's death, the trust continued to hold the shares. In 2017, due to financial difficulties, the trustees decided to sell the shares. Agreements were executed with incoming shareholders from the Agarwal and Khemani groups, following which AMC's Board approved the transfers in January 2018.

Existing shareholder Balendra Choudhury objected to the transfer, claiming that AMC had not followed Article 15 of its Articles of Association. He argued that the provision required the selling shareholders to first notify the Board, after which existing members were required to be given an opportunity to purchase the shares at an agreed price or a price determined by the auditor.

Choudhury and another shareholder, S.M.B. Baruah, approached the NCLT, which set aside the transfer of shares held by the Dr. Kalicharan Das Trust but upheld the transfers made by individual shareholders. The order was challenged before the NCLAT by different parties.

Before the NCLAT, Choudhury and Baruah contended that the transfer of shares held by the Dr. Kalicharan Das Trust was invalid as AMC had not followed Article 15. They argued that the Articles conferred pre-emptive rights, meaning existing shareholders had the first opportunity to acquire shares before they were transferred to outsiders.

They further argued that the objections raised by them were ignored during the Board meetings and alleged that the incoming shareholders intended to use AMC's land for real estate purposes, which would affect the company's healthcare objectives. They also contended that transfers of shares held by individual shareholders violated Article 15.

AMC argued that the appellants had waived their right to purchase shares under Article 15 and that Balendra Choudhury had participated in the Board meeting where the resolution approving the sale of shares by individual shareholders to outsiders was passed unanimously.

It was further argued that a transfer made without following Article 15 was not void but only voidable. AMC also submitted that whether the Dr. Kalicharan Das Trust could transfer its shares was a matter to be decided in a civil suit and that the NCLT lacked jurisdiction.

The incoming shareholders argued that the Dr. Kalicharan Das Trust had the same status as any other shareholder and that the sale was necessary to infuse funds into AMC. They contended that the NCLT had wrongly applied different standards to shares held by the trust and shares held by individuals.

The Tribunal examined Article 15 of the Articles of Association and found that AMC had not followed the prescribed procedure. It noted that the selling shareholders had not issued notice to the Board, the Board had not acted as an agent for the sale, and no offer had been made to existing shareholders. The Bench observed:

“From the submissions of the company, the trust, incoming shareholders and the original petitioners it is clear that the procedure prescribed in Article 15 was not followed. No notice was given by the selling shareholders to the board of directors, the board was not made an agent in the sale and no offer for sale has been made to the existing members of the company. Thus, the entire procedure and manner of sale is contrary to the Articles and ultra vires. A transfer in complete violation of the Articles is void”

Accordingly, the NCLAT set aside the transfer of 117 shares held by the Dr. Kalicharan Das Trust and directed AMC to reverse the transaction in its registers and notify the concerned authorities. It also cancelled the directorship of any director linked to those shares unless such director held other valid shares in the company.