Tarlok Chand Khanna v Raj Kumar Kapoor

The concept of mistake and misrepresentation cannot be overemphasized in a contractual agreement. Hence, this article seeks to examine the place of Mistake, Misrepresentation in transfer of shares (if any), as well as the principles governing shares transfer and allotment. It also seeks to examine the position of the Law in removing a director.
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Facts of the Case

An Indian Company called Himalaya Electricals Industries (India) Private Limited, which was incorporated in June 1952, was promoted by Tarlok Chand Khanna,[1]and Ray Kumar Kapoor[2], a close relative of Tarlok Chand Khanna was admitted to the membership of the Company. All this while, the entire issued capital of the company had been held by Tarlok Chand Khanna, his wife, his three sons[3], and Ray Kumar and Kapoor and his wife. In September 1995, the Petitioner one[4], fell seriously ill wherein he became incapacitated and almost lost his sight. According to Tarlok Chand Khanna, he alleged that in his absence, the respondent one[5], took advantage of his absence and took over management of the Company. However, Kapoor claimed he took over management of the company under the adverse circumstances owning to the health of Tarlok Chand Khanna.

Prior to 1976, of the entire issued capital of the company, Tarlok Chand Khanna, his wife, and three sons held 133 shares of the value Rs. 66,500 while Kapoor and his wife[6] held 114 shares of the face value of Rs. 57,000. Also, one Gaur held 4 shares of the value Rs. 2,000.

Owning to the share transfer which increased the number of Kapoor shares to 257.30 in 1976 to 1977, Khanna complained of oppression and mismanagement and sought directions with regards to the conduct of the affairs of the company. He also sought to cancel the transfer and registration of shares belonging to Kanwal Khanna, M.L Gaur and Ramesh Khanna, cancellation of the additional shares issued and allotted to Kapoor and his nominee, removal of the wife of Kapoor from the board, removal of Kapoor from the board, reinstatement of himself on the board and direction for payment of arrears of remunerationas a director.

Several claims were filed by parties involved amongst which Ramesh Khanna filed for rectification of the register with regard to the 27 shares held by him. Also, a counter suit was filed by Parshu Ram, at the instance of Kapoor, to annul the transfer of 30 shares held by him to the wife of Khanna.

The Khanna’s group also sought to carry the dispute beyond adjudication, thereby prosecuting Kapoor for offences which arose from certain returns filed with the register of Companies and applications and affidavits filed in the court.

Parties, in order to support their claims produced evidence through affidavits and documents.

After this, what arose for consideration was the true holding of the parties and the validity of the transfers of the purported shares allegedly made by Gaur (4 shares), Kanwal (10 shares), Ramesh (27 shares) and Parshu Ram (30 shares).

On the validity and non-validity of shares held by Khanna’s sons, Gaur and Parshu Ram and the authenticity of the transfer to Kapoor, it was established that the valid holding of Khanna group which they are entitled to is 96 shares while the valid holding of the Kapoor group which they are entitled to is 114 shares. The 4 shares of Gaur[7]would continue to be held by him while the 10 shares of Kanwal and 27 shares of Ramesh would continue to be registered in their names but having been transferred to the Kapoor group, Kanwal and Ramesh would not be entitled to exercise any right with regard to these shares.  Shares held by Parshu Ram were held to be duly transferred and registered.

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Also,the removal of Khanna from the board was held to be void and it was further held that, he is to remain a permanent Director of the company and Director in terms of the articles until he resigned or is removed. The additional allotment of the 102 shares to Kapoor was subsequently voided.

Issues for Court’s Determination and Analysis

  • Whether the alleged transfer of shares was occasioned as a result of duress, mistake, and misrepresentation or transferred voluntarily.
  • Whether there existed any record of the alleged transfer of shares.
  • Whether a member of a board could be removed with or without a higher share by a former member of the board of a company.

The Concept of Duress, Mistake and Misrepresentation in Ordinary Parlance

In common parlance, the concept of duress exists where one party in respect to an agreement is coerced or compelled contrary to his will to enter an agreement without his volition or occasioned by threats and compulsion.

Mistake in Law simply means an incorrect supposition by one party to a term of agreement with which may invalidate the terms of the agreement or the agreement as a whole. This may either be a mutual mistake, unilateral or common mistake.

Misrepresentation[8] on the other hand is an untrue statement or representation made to a party where such party relies on the representation, thus entering into an agreement with the other party who has made such representation. They may either be a fraudulent, innocent, or negligent misrepresentation.

The Principles Governing Shares Transfer and Allotment

A new shareholder to a company can be introduced either by allotment or transfer. That fact is undisputed. However, procedures governing both differ as both concepts differ in meaning as well.

Allotment of shares is a process by which new shares are issued to already existing shareholders or to third parties. This however can only be done by one who is vested with the authority to do so like the Director of a company.

The company must have sufficient unissued authorized share capital before new shares may be allotted by the director or directors as the case may be. But for such shares to be allotted to the new shareholder, he must apply after which the director would then approve the allotment, write to the register of allotment and register of members, and file with the CRO[9]. It is important that shares certificates be issued to new shareholders.

Under transfer of shares, shareholders can transfer their shares to existing shareholders or third parties. But it is pertinent to note that a share transfer must be approved by the directors and the appropriate stamp duty paid to the revenue commissioner. Just like shares allotment, shares certificate is also required to be issued here.

Further, in a private limited company, directors can refuse any share transfers if and when they feel such refusal is in the best interest of the company.

The major difference between shares allotment and shares transfer is that shares allotment creates new shares which are distributed amongst shareholders when the company is still being set up while share transfer involves transferring already existing shares after the company has been established.

A Non Resident Shareholder

A non-resident shareholder just like the name implies, is deemed as one who has not been resident or does not hold shares with respect to carrying on a business in that particular country.

How can a Director be Removed

The removal of a Director is just as important as the appointment of a Director which requires that the necessary steps are taken and such removal is not done whimsically. In a strict manner, it requires adherence to any existing legislation put in place which guides the affairs and administration of the company.

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By virtue of the Companies Act[10], it provides thus;

“(1) A company may, by ordinary resolution, remove a director (not being a director appointed by the central Government in pursuance of Section 408) before the expiry of his period of office…………..

(2) Special notice shall be required of any resolution to remove a director under this section, or to appoint somebody instead of a director so removed at the meeting at which he is removed”.[11]

From the above and in relation to Khanna’s removal, can it then be said the provisions of the Companies Act was observed which justified his removal from the board or that his removal was valid if it could show an amicable decision by the board of committee, whether or not he was held to be a permanent Director?

Conclusion

Mistake[12] and Misrepresentation can in some cases serve as a relief in contractual agreements which are occasioned by fraud[13]. In shares transfer however, such defense seems minimal, if not non-existent.

From the analysis of contentions raised by Khanna’s son in Tarlok Chand case, Kanwal who claimed he never transferred any shares but a record of the transfer was reflected in the company’s balance sheet, it seems right to consider whether such transfer did occur but was done in an unscrupulous manner which in this case was the failure of Kapoor to return the shares certificate to Kanwal. In most cases, silence does constitute acceptance. Hence, Kanwal’s failure to challenge the alleged transfer until 1978 should not be overlooked as well. Whilst it seems plausible to be in tandem with the court’s decisions that voids the removal of Khanna, consideration should further be put into why he was removed in the first place, the mode of removal and the transfers of shares which respondent one claimed were valid.


[1] Herein referred to as Petitioner no 1

[2] Respondent no 1

[3] Ramesh Khanna, Kanwal Khanna and Ish Kanwal

[4]Petitioner no1is referred to as Khanna

[5]Respondent no 1 is referred to as Kapoor.

[6] Respondent no 2

[7]Note that Gaur has been termed as non-resident, which meant his shares could not be transferred without the prior permission of the reserve Bank in view of his admitted status as a non-resident.

[8]According to Section 18(1) of the Indian Contract Act 1872, ‘Misrepresentation means and includes the positive assertion, in a manner not warranted by the information of a person making it, of that which is not true, though he believes it to be true’.

[9]Companies Registration Office

[10] Section 284 of the Companies Act 1956 [Act No. 1 of 1956]

[11]In ordinary parlance, a director may be removed from his office in events of his failure to attend three board meetings, he resigns himself or is removed by the board of committee.

[12]Section 18 of the Indian Contract Act 1872.

[13]Lack of consent invalidates a contractual agreement. Where it shows the presence of factors such as Mistake, duress, or Misrepresentation in such agreement, the agreement should be deemed invalid.  According to Section 10 of the Indian Contract Act, ‘all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void’.

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