Tag Archives: Company Law

Rights of A Nominee – of A Shareholder

It is quite apparent from a bare reading of the provisions of section 72(1) of the Companies Act, 2013 that every holder of securities has a right to nominate any person to whom his securities shall “vest” in the event of his death. In the case of joint-holders also, they have a right to nominate any person to whom “all the rights in the securities shall vest” in the event of death of all joint holders. Sub-section (3) of section 72 contains a non-obstante clause in respect of anything contained in any other law for the time being in force or any disposition, whether testamentary or otherwise, where a nomination is validly made in the prescribed manner, it purports to confer on any person “the right to vest” the securities of the company, all the rights in the securities shall vest in the nominee unless a nomination is varied or cancelled in the prescribed manner. It is prima facie apparent that vesting is absolute, and the provisions supersede by virtue of a non-obstante clause any other law for the time being in force. Prima facie shares vest in a nominee, and he becomes absolute owner of the securities on the strength of nomination. Rule 19(2) of the Companies (Share Capital and Debentures) Rules, 2014 framed under the Act, also indicates to the same effect. Under Rule 19(8), a nominee becomes entitled to receive the dividends or interests and other advantages to which he would have been entitled to if he were the registered holder of the securities; and after becoming a registered holder, he can participate in the meetings of the company. Aruna Oswal v. Pankaj Oswal, (2020) SCC Online SC 570.

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Petition for Oppression and Mismanagement – Object of Qualifying Percentage of Shares

 In J.P. Srivastava & Sons Pvt. Ltd. and Ors. v. M/s. Gwalior Sugar Co. Ltd. and Ors. AIR 2005 SC 83, the Hon’ble Supreme Court considered the object of prescribing a qualifying percentage of shares to entertain petition under sections 397 and 398 of the Companies Act, 1956. It was held that the object is to ensure that frivolous litigation is not indulged in by persons, who have no legal stake in the company. If the Court is satisfied that the petitioners represents the body of shareholders holding the requisite percentage, the Court may proceed with the matter. It was held as under:

“The object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under sections 397 and 398 of the Companies Act, 1956 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. However, it is of interest that the English Companies Act contains no such limitation. What is required in these matters is a broad commonsense approach. If the Court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused. (See Pratap Singh v. Shri Krishna Gupta (AIR 1956 SC 140). Aruna Oswal v. Pankaj Oswal, (2020) SCC Online SC 570.

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Trade Union – Falls within the Definition of Person Under IBC

A trade union is certainly an entity established under a statute – namely, the Trade Unions Act and would therefore fall within the definition of “person” under Section 3(23) of the Insolvency and Bankruptcy Code. That being so, it is clear that an “operational debt”, meaning a claim in respect of employment, could certainly be made by a person duly authorized to make such claim on behalf of a worman. Rule 6, Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 also recognizes the fact that claims may be made not only in an individual capacity, but also conjointly. Further, a registered trade union recognized by Section 8 of the Trade Unions Act, makes it clear that it can sue and be sued by a body corporate under Section 13 of that Act. Equally, the general fund of the trade union, which inter alia is from collections from workmen who are its members, can certainly be spent on the conduct of disputes involving a member or members thereof or for the prosecution of a legal proceeding to which the trade union is a party, and which is undertaken for the purpose of protecting the rights arising out of the relation of its members with their employer, which would include wages and other sums due from the employer to workmen. J.K. Jute Mill Mazdoor Morcha v. Juggilal Kamlapat Jute Mills Co. Ltd., 2019 (4) AWC 3160.

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Principles of – Lifting the Corporate Veil

The principle of lifting the corporate veil as an exception to the distinct corporate personality of a company or its members is well recognized not only to unravel tax evasion, CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819 but also where protection of public interest is of paramount importance and the corporate entity is an attempt to evade legal obligations and lifting of veil is necessary to prevent a device to avoid welfare legislation, Workmen v. Associated Rubber Industry Ltd., (1985) 4 SCC 114.

The concept of “piercing the veil” in the United States is much more developed than in the U.K. The motto, which was laid down by Sanborn, J and cited since then as the law, is that “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons”. The same can be seen in various European jurisdictions.

In Palmer’s Company Law, this topic is discussed in Part II of Vol. 1. Several situations where the court will disregard the corporate veil are set out. The eighth exception runs as under:

‘the courts have further shown themselves willing to “lifting the corporate veil” where the device of incorporation is used for some illegal or improper purpose….where a vendor of land sought to avoid the action for specific performance by transferring the land in breach of contract to a company he had formed for the purpose, the court treated the company as a mere “sham” and made an order for specific performance against both the vendor and the company.’

It is thus clear that the doctrine of lifting the veil can be invoked if the public interest so requires or if there is allegation of violation of law by using the device of a corporate entity. State of Rajasthan  v. Gotan Lime Stgone Khanij Udyog Pvt. Ltd., (2016) 4 SCC 469.

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