Tribunal holds that transfer of shares belonging to a trust cannot be treated like ordinary share transfers and must follow the procedure prescribed under the company’s Articles
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has delivered an important ruling concerning the transfer of shares held by a trust in a private company. The Tribunal examined whether shares belonging to a trust could be transferred to outside parties without strictly following the procedure prescribed under the Articles of Association (AoA) of the company.
The judgment was delivered in a batch of appeals, including Company Appeal (AT) Nos. 102, 103, 104 and 113 of 2020, arising out of proceedings before the National Company Law Tribunal (NCLT), Guwahati Bench. The dispute related to the transfer of shares of Assam Medical Corporation Pvt. Ltd. and the legality of the appointment of new shareholders and directors following such transfers.
The matter originated from the transfer of shares held by Dr. Kali Charan Das Trust, which was a shareholder of Assam Medical Corporation Pvt. Ltd. The Trust had originally received shares from the founder of the institution, Dr. Kali Charan Das, who had established the healthcare institution with the objective of serving society.
The case involved the transfer of 117 shares held by the Trust to incoming shareholders. The NCLAT examined whether such transfer was legally valid and whether the company had complied with the requirements contained in its Articles of Association before approving the transfer.
Background of the Dispute
Assam Medical Corporation Pvt. Ltd. was originally established as a healthcare institution. The judgment records that late Dr. Kalicharan Das, a medical practitioner and philanthropist, started a small nursing home which later developed into a larger healthcare institution serving the people of Guwahati and nearby areas.
The company was incorporated as Assam Medical Corporation Limited in 1960 and was later converted into a private limited company. Subsequently, Dr. Kalicharan Das created the Dr. Kali Charan Das Trust through a Trust Deed dated 11.05.1981 and transferred his shareholding in the company to the Trust.
Over time, the financial condition of the company deteriorated, and the need for additional funds arose. The trustees decided to sell the shares held by the Trust. An agreement for transfer of shares was executed between the Trust and certain incoming shareholders for transfer of the entire 117 shares held by the Trust.
Following the proposed transfer, new shareholders entered the company and certain changes were made in the composition of the Board of Directors. However, objections were raised by existing shareholders, who alleged that the transfer was carried out without following the mandatory procedure under the Articles of Association of the company.
Objection Regarding Violation of Articles of Association
The primary issue before the Tribunal was whether the transfer of shares was carried out in accordance with Article 15 of the Articles of Association of the company.
Article 15 prescribed a procedure for transfer of shares, under which any member intending to transfer shares was required to give written notice of such intention to the Board. The Board was required to act as an agent for sale of such shares to existing members at an agreed price or at a value determined according to the procedure mentioned in the Articles.
The appellants argued that the company failed to follow this procedure and directly approved the transfer of shares to outsiders. According to them, existing shareholders had preferential rights under the Articles and the transfer could not have been approved without following the prescribed mechanism.
The NCLAT considered the minutes of the Board meeting where objections were raised regarding the transfer of Trust shares. The Tribunal noted that although objections were recorded, the explanation provided to the objecting shareholder was not properly recorded in the minutes of the meeting.
NCLT Had Earlier Set Aside Transfer of Trust Shares
The NCLT, Guwahati Bench, had earlier examined the dispute and held that the transfer of 117 shares belonging to Dr. Kali Charan Das Trust was not carried out in accordance with law.
The NCLT observed that the Trust shares could not be transferred in the same manner as ordinary shares held by individual shareholders. The Tribunal held that proper legal formalities were required to be followed for transfer of shares belonging to a trust.
The NCLT accordingly set aside the transfer of 117 Trust shares and directed the company to reverse the transfer in its records and communicate the same to statutory authorities.
However, the NCLT did not interfere with transfers made by individual shareholders and confirmed certain appointments of directors.
NCLAT Examines Role of Articles in Share Transfer
While considering the appeals, the NCLAT analysed the legal importance of Articles of Association in a private company.
The Tribunal noted that a private company has the right to restrict transfer of shares through its Articles of Association. Such restrictions are recognised under company law and are binding on the company and its shareholders.
The Tribunal examined Article 15 and observed that the provision clearly required a particular procedure before shares could be transferred to outsiders. The company was required to ensure compliance with the Articles before approving any transfer.
The NCLAT observed that the company had not followed the procedure prescribed under Article 15 while approving the transfers. The sellers had not given the required notice to the Board, and the Board had not acted as an agent for sale of shares as contemplated under the Articles.
Trust Shares Cannot Be Treated Like Ordinary Shares
A significant aspect of the judgment was the distinction drawn between ordinary shareholders and shares held by a trust.
The Tribunal noted that the 117 shares belonged to the Dr. Kali Charan Das Trust, which was created by the founder of the institution. Therefore, the transfer of such shares required greater scrutiny and could not be treated as a routine commercial transaction.
The Tribunal observed that the respondents failed to establish that the necessary legal requirements for transfer of Trust shares had been complied with. The burden of proving a valid transfer was placed upon the parties relying on such transfer.
The Tribunal found that the shares were transferred in a routine manner by relying upon the majority decision of the Board, without ensuring compliance with the Articles of Association.
Decision of NCLAT
After examining the facts and legal submissions, the NCLAT upheld the decision regarding the invalidity of transfer of Trust shares. The Tribunal confirmed that the transfer of 117 shares belonging to Dr. Kali Charan Das Trust was not in accordance with law and upheld the direction to set aside the transfer.
The Tribunal also considered the challenge relating to other reliefs and appointments. It observed that all claims made by the appellants could not be granted and restricted relief only to the extent of invalid transfer of Trust shares.
The NCLT’s direction setting aside the transfer of Trust shares was therefore maintained.
Importance of the Judgment
The ruling carries significance for private companies where Articles of Association contain restrictions on transfer of shares.
The judgment reinforces that shareholders and companies cannot bypass procedures prescribed under the Articles merely because a majority of directors approve a transaction. The decision also highlights that shares held by trusts, charitable institutions, or founder-related entities may require additional care before transfer, especially where such shares are connected with the original objectives of the institution.
The ruling serves as a reminder that internal governance documents of a company have legal importance and must be strictly followed while dealing with ownership and management rights. The NCLAT judgment in the Assam Medical Corporation matter reiterates the importance of compliance with the Articles of Association while transferring shares in a private company.
The Tribunal made it clear that corporate decisions, even when approved by the Board, cannot override mandatory procedures prescribed under the company’s governing documents. The decision strengthens shareholder protection and emphasises transparency, due process, and adherence to corporate governance principles while dealing with transfer of shares.