Masters in Business Administration- International Business (MBA-IB)

Course: Legal Aspects of Business (LAB)

Faculty: Prof. Parul Gupta

GROUP CASE DISCUSSION: SESSION 8

Case 1: K E Ltd.v. SG
Mr. R, Mrs. S, Mr. DP and Mrs. M were the holders of 50 equity shares of K E Ltd.(the
company) and, out of those 50 shares, eight equity shares were proposed to be transferred to the
various transferees. The board of directors of the company noted that the transferees in the above
group were not holding any shares at that time. The board, after having considered the matter in
detail, came to following conclusion;

The acceptance of an application for transfer of less than 50 equity shares of the company,
unless it was covered by one of the exceptions mentioned in Article 47A of the articles of
association of the company, was not in the interest of the company as the cost of service to
such shareholder would far exceed the amount of dividend payable on such shares and such
costs were disproportionate to the face value and the present market value of the shares.
The board also had the opinion that such transfers were also not in the interest of the investor as
it would create odd lots for which the market quotations were less than the normal quotations and
hence such transfers were also not in the bona fide interest of the investors and appeared to be
with ulterior motive.

The board also noted that the Government and stock exchanges had prescribed a minimum
lot of 50 equity shares for shares having a face value of Rs. 10 each ; in refusing such transfers,
the balance of convenience is in favour of the company. The board further noted that the
provisions of Section 36 of the Companies Act, 1956, according to which the articles constituted
an agreement between the members and the company and the provisions of the same were
binding on the transferees of shares also.

The board of directors having considered all the above facts formed an opinion in good faith that
the approval of the board would be contrary to the provisions of Article 47A of the articles of
association ; and hence contrary to law and, accordingly, decided to refuse the transfer.
The decision of the board for not allowing the transfer of shares was challenged on the ground
that a listed company could not refuse transfer of shares even if it is below the specified limit
prescribed under the articles of association in violation of the stock exchange listing
requirements.

Discussion Point
Could the board restrict the transfer of shares of a Public Limited Company on the
grounds mentioned in the case?
Judgment & Explanation
It was ordered that transfer of shares must be registered by Kinetic Engineering Limited within
ten days from the date of receipt of the order. The Company Law Board held that if any
provision of the articles or the memorandum is contrary to any provisions of any law, it will be
invalid.
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Case 2: G v. LCI
Mr. W was a director of LCI (the company). The company took the advice of a takeover
consultant where Mr. W was the main consultant. The company paid £5.2 m as the fee for the
consulting services provided. Mr. W did not disclose the fact to the company that he was the
main consultant and receiver of this amount.
The articles of association of LCI (the company) provided that a director who had an interest in a
contract with the company should make disclosure ‘in accordance with Section 317. The
company argued that, as W, a director, had not made such a disclosure in respect of a contract to
provide advice to the company as a takeover consultant, the company was entitled to a
repayment of the sum of £5.2 m which W had been paid.

Discussion point
Was the company entitled to receive the repayment of £5.2 m from Mr. W?
Judgment & Explanation
It was held that if there is any conflict between the terms of the memorandum and the articles,
those of the memorandum shall prevail and by statutory provisions such as the Companies Act of
1985, section 125 which makes it possible to entrench rights by writing them into the
memorandum with a prohibition or restriction on their alteration. Whilst the memorandum
proclaims the world the external aspects of its constitution, the articles are concerned with
matters of internal organization which are primarily of interest to its own members and officers
for example the procedure for paying the subscription price for shares, and directors meetings,
the appointment, removal of, remuneration of directors and the payment of dividends.

Case 3: Bv. SB& Co. Ltd.

The articles of SB& Co. Ltd.. (the company) contained a clause that on the bankruptcy of a
member his shares would be sold to other persons and at a price fixed by the directors. Mr. B
was a shareholder of the company who was adjudicated bankrupt. Referring to the articles of
association, the company demanded to sell his shares at a price to be fixed by the company. Mr.
B’s trustee in bankruptcy did not agree with the settlement and claimed that Mr. B was not bound
by these provisions and should be at liberty to sell the shares at their true value.
Thus there arouse a dispute between the company and trustee of Mr. B.

Discussion Point
Was the trustee bound by the provisions of the articles of company?
Judgment & Explanation
It was held that the trustee was bound by the articles and the shares were to be sold as laid down
by the article. It was clarified that since the shares were purchased by Mr. B in terms of the
articles, the trustee of Mr. B was also bound by the provisions under the article for the sale of
shares. The company bound the members since the articles constituted a contract binding the
company to its members in their capacity as members, a member could bring an action against
the company for infringement by it of the memorandum or articles. For example, an individual
member can sue the company for an injunction restraining it from improper payment of
dividend.

Case 4: Eley v. PLIC.

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The articles PLIC. (the company) provided that the solicitor to the company would not be
removed from office except for misconduct. Mr. Eley acted as solicitor to the company for a
number of years and also became a member of the company. The company discontinued his
services on certain grounds other than misconduct.

Mr. Eley argued that his removal from the post of solicitor on a ground other than misconduct
was against the provisions of articles of the company. He further argued that by that provision of
articles he entered into a contract with the company which suggested he could be removed only
on the ground of misconduct. Thus his removal was a breach of contract. On the other hand the
company argued the provision in the article was not a contract between the company and Mr.
Eley and company was free to remove him on any appropriate ground. Mr. Eley sued the
company for damages for breach of contract.

Discussion Point
Could the provision in the article be treated as a contract between the company and Mr.
Eley?
Judgment & Explanation
It was held that Mr. Eley had no cause of action because the articles did not constitute any
contract between the company and himself. His action was dismissed. Later, it was realised that
the rule was rather harsh and so the courts modified the same.

Case 5: M v. EHM Co..,

EHM Co.'s (the company) bank made payments based on a formal copy of a resolution of the
board authorizing payments of cheques signed by any two of three named "directors" and
countersigned by the named "secretary". The copy was itself signed by the secretary.
Subsequently it was discovered that neither the directors nor the secretary had ever been formally
appointed. According to the articles of the company, the directors were to be nominated by the
subscribers to the memorandum and the cheques were to be signed in such manner as the board
might determine. In fact the cheques should have been signed by any two of the three named
directors and by the secretary.
After the payment was made against the cheques, the company sued the bank for the amount
paid against the cheques. The company argued that the cheques were not signed by the
authorised persons and it was the duty of the bank to enquire further before making a payment
for the cheques. The bank contended that since it received a formal copy of the resolution passed
in this regard, there was no further requirement of the enquiry.

Discussion Point
Was the bank responsible for wrong payment as it did not conduct a further enquiry?
Judgment & Explanation
It was held that non appointment of the authorised persons for the signing of cheque was to a
matter of internal management, and the third parties who received those cheques were entitled to
presume that the directors had been properly appointed, and cash the cheques. Since the bank
had received formal notice in the ordinary way of the board's decision, it was not bound to
enquire further.