2005 PLP 1875 (CLD)

UMAR ATA BANDIAL, J.

By this petition filed under section 152 of the Companies Ordinance, 1984 ("Ordinance") the petitioner seeks to set aside the transfer of shares made by respondent No.2, the current Chief Executive of respondent No.1, a family owned private limited company ("Company"), in favour of persons who were at the time non-members of the Company. The petitioner asserts that such transfers are in violation of the Company's Articles of Association which confer a right upon its members to pre-empt a transfer of shares of the Company proposed in favour of non-members.

2. Respondent No.2 entered upon the office of Chief Executive of the Company as a successor to her late husband Khurshid Ahmed Soofi ("Mr. Soofi") who was the dynamic founder of the Company but died at a young age. At the time of Mr. Soofi's demise on 24-4-2001 the share holding of the Company was distributed chiefly among himself, his widow/ respondent No.2 and their 3 minor daughters: there being no male issue of Mr. Soofi. The petitioner Saghir Ahmed Soofi is a brother of Mr. Soofi. According to calculations by the directors of the Company, the petitioner's share in the estate of Mr. Soofi, inter alia, included entitlement to 13613 shares of the Company. The petitioner did not at first accept that his share in the inheritance was limited to the said number of shares and therefore launched proceedings against the Company and its management, in particular respondent No.2, inter alia, through C.O. 1 of 2003 advancing his version of entitlement in the inheritance of Mr. Soofi. That matter was concluded by a consent order, not challenged by either party, which approved the figure given by the management. This litigation is discussed later.

3. Presently, the petitioner alleges that under Islamic law his share in the estate of Mr. Soofi devolved on the date of the demise of the latter. As this estate included shares of the Company therefore the petitioner maintains that his entitlement in the share holding of the Company was also transmitted to him on the date of Mr. Soofi's demise. The petitioner has then presumed that the date of transmission of shares in the Company to him is also the date of his admission to the membership of the Company that is the date of demise of Mr. Soofi. Based upon, that notion, the petitioner has challenged two sets of share transfers made by respondent No. 2 on 24-4-2001 and 1-1-2003 respectively. These transfers are alleged to be in violation of Article 11 of the Articles of Association of the respondent-Company which provides that:-- "

11. Save as hereby otherwise provided, no shares shall be transferred to any person who is not member of the Company so long as any member is willing to purchase the same at the fair value which shall be determined by the Directors on the opinion of the Auditors."

4. It is stated that the first disputed transfer took place on 24-4-2001, 'the very date of demise of Mr. Soofi, when the respondent No.2 transferred 1000 shares to respondent No.3, a brother of Mr. Soofi, and another 1000' shares to her own mother, the respondent No.4. On 1-1-2003, the respondent No.2 carried out the second disputed transaction, transferring 1000 shares each to the respondents Nos.5 to 8, who are her two sisters and their respective spouses. On the dates of the respective transfers none of the aforesaid transferees were members of the Company. As the petitioner claims to be a member of the Company with effect from the date of demise of Mr. Soofi, therefore his learned counsel contends that the said transfers made on and subsequent to the said date were subject to pre-emption by the petitioner under Article 11 (supra) which right was denied to the petitioner and therefore these transfers are illegal and void. Hence this petition under sections 152 and 153 of the Ordinance for rectification of the register of members seeking the removal of respondents Nos.3 to 8 therefrom.

5. To support his case learned counsel for the petitioner relies on the judgment of the Hon'ble Supreme Court in case of Mst. Ameeran Khatoon v. Mst. Shamim Akhtar and others (2005 SCMR 512) for the proposition that the rules of inheritance under Sharia apply fully to an estate comprising shares in a company. Learned counsel adds that the right of the legal heirs of a deceased member to enforce the articles and memorandum of association of a company is recognized by section 31 of the Companies Ordinance, 1984 which is reproduced as under:-- "

31. Effect of memorandum and articles (1) The memorandum and articles shall when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs, and legal representatives, to observe and be bound by all the provisions of the memorandum and of the articles, subject to the provisions of this Ordinance. (2)

" (Underlying provided) The binding effect of the articles of association upon the heirs of a member of a company is claimed to confer a corresponding right upon such heir to enforce the articles of association. In the same way, section 302 of the Ordinance reproduced below, is claimed to impose the liability of membership of a company upon the legal heir 'of a deceased member, namely, as a contributory:-- "

302. Contributories in case of death of member (1) If a contributory dies either before or after he has been placed on the list of contributories; his legal representatives shall be liable, in a due course of administration, to contribute to the assets of the company in discharge of his liability, and shall be contributories accordingly. (2) If the legal representatives make default in paying any money to be paid by them, proceedings may be taken administering the property of the deceased contributory, and of compelling payment thereout of the money due." (Underlining provided)

6. The foregoing provisions of the Ordinance coupled with the judgment of the Apex Court given in the case of United Liner Agencies of Pakistan (Pvt.) Ltd., Karachi and 4 others Vs Miss Mahenau Agha and 8 others (2003 SCMR 132) holding to the effect that the transfers of shares made contrary to the provisions of article of association are invalid transactions, are relied to demonstrate the existence of a legal right of the petitioner to claim the benefit of Article 11 (supra) and consequently to pre-empt the impugned transfers made by respondent No.2 in favour of the respondents Nos.3 to 8 after the date of demise of Mr. Soofi and therefore to receive an order for the rectification of register of members of the Company.

7. Learned counsel for the respondents has rebutted the foregoing argument by seeking firstly to place the events in context. An earlier round of litigation reflected in C.O.No.1 of 2003 had also been initiated by the petitioner against the Company and its management. That petition too was framed under sections 152 and 153 of the Ordinance, which sought correction of the register of members of the Company for enlarging the petitioner's share in the estate of Mr. Soofi beyond the 13613 shares of the Company that were offered to him by the Board of Directors. The petitioner's claim therein alleged, inter alia, that 37,47,720 shares of the Company belonging to Mr. Soofi has been fraudulently registered during his life in the names of his wife and daughters. The petitioner claimed that these shares also formed part of Mr. Soofi's estate, and consequently a portion thereof to have devolved upon the petitioner. Rectification of the register of Members of Company was prayed accordingly. This petition was filed on 6-1-2003 and was ultimately decided by a judgment of the, learned Company Judge dated 16-3-2004. In the result, contrary to his claim, the petitioner accepted 13613 shares of the Company as his rightful share in the estate of Mr. Soofi, which is the number that was being given to him by the management from the outset. Learned counsel for respondents emphasized that the substantial difference between the number of shares claimed by the petitioner in C.O.No.1 of 2003 and the number of shares upon which he ultimately settled shows that his claim was actually speculative and predatory nature.

8. The present claim filed by the petitioner is alleged by learned counsel for the respondents to be coloured by the same motive of harassing the management to improve the petitioner's shareholding and voting power in the Company. Turning to the legal proposition that arises for determination in the case, learned counsel for the respondents has contended that a claim based on Article 11 (supra) is maintainable only if the petitioner establishes that he is a member of the Company. The term "member" is defined by section 2(21) of the Ordinance. "2(21) 'member' means, in relation to a company having share capital, a subscriber to the memorandum of the company and every person to whom is allotted, or who becomes the holder of, any share, scrip or other security which gives him a voting right in the company and whose name is entered in the register of members, and, in relation to a company not having a share capital, any person who has agreed to become a member of the company and whose name is so entered."

9. This definition specifies the attributes that qualify a person to be a member of a company. To elaborate the point learned counsel has referred to the judgment of the Hon'ble Sindh High Court given in the case of Muhammad Anwar Monoo v. Muhammad Waqas Monoo 1997 CLC 1943. That ruling holds that the right of a shareholder to participate in the annual general meeting of the Company accrues after the entry of his name in the register of members of the company. On the other hand, the petitioner is seeking in the present case to enforce for himself a member's right under Article 11 in respect of a period prior to the entry of his name on the Register of Members of the Company. Learned counsel relied upon an extract from Pennington's Company Law Fifth Edition, Butterworths 1985 to explain the object of registration of transfer of shares of a company. The passage reads:-- "It has often been assumed in judicial reasoning that the legal title to registered shares does not pass to the transferee until the transfer is registered in the company's register of members. When he has presented his transferor's share certificate and the transfer to himself for registration and has fulfilled any other conditions set out in the company's articles of association, the transferee has a legal right against the company to have the transfer registered, but until the transfer is actually registered, it is assumed that his title to the shares is still inchoate, and that the legal title remains vested in his transferor. This line of reasoning was reinforced by the Companies Act, 1948, Table A, Art.22, which provided that until the name of the transferee was entered in the register of members, the transferor should be deemed to remain the holder of the shares transferred, thus clearly contemplating that the legal title remained vested in him. Nevertheless, it is doubtful whether the judicial assumption that the legal title to shares passes on registration of the transfer and not before has any real foundation. The purpose of registering the transfer is to notify the company of it, so that the transferee may require the company to pay him future dividends and allow him to vote at shareholders' meetings. On registration the transferee acquires legal rights against the company, but it does not follow that the legal title to the shares has not already passed from his transferor to him by virtue of the executed share transfer and the transferor's share certificate being delivered to him, so making his right to the shares effective against all interested persons except the company. Historically it appears more likely that the legal title to shares passed at common law by delivery of the executed instrument of transfer." (Underlining provided)

10. On the basis that the petitioner was not a registered member of the Company at the time of the impugned transfers, learned counsel for the respondents has urged that the petitioner has no locus standi to maintain the present petition claiming members rights. The petitioner's reliance upon section 31 and section 302 of the Ordinance is said to be misplaced because both these provisions create obligations for heirs of a member of a Company rather than provide rights to them. Thus the rights presently claimed by the petitioner have no nexus with the said legal provisions. Therefore a prayer has been made by the learned counsel for the respondents for dismissal of this petition on the ground of absence of locus standi of the petitioner.

11. The creative arguments by the learned counsel for the petitioner and their analytical rebuttal by the learned counsel for the respondents have been noted and considered carefully.

12. The devolution of property forming the estate of a deceased to his heirs in their ordained shares occurs automatically at the moment of death of a propositus. A statement of this principle of Islamic law is given aptly by the Hon'ble Supreme Court in Ghulam Ali and others v. Mst. Ghulam Sarwar (PLD 1990 SC 1) in the following words:-- "As soon as an owner dies, succession to his property opens. There is no State intervention or clergy's intervention needed for the passing of the title C immediately, to the heirs. Thus it is obvious that a Muslim's estate legally and judicially vests immediately on his death in his or her heirs and their rights respectively come into separate existence forthwith. The theory of representation of the estate by an intermediary is unknown to Islamic Law of inheritance as compared to other systems. Thus there being no vesting of the estate of the deceased for an interregnum in anyone like an executor or administrator, it devolves on the heirs automatically, and immediately in definite shares and fraction."

13. According to the foregoing rule, the legal title of the 13613 shares of the Company passed to the petitioner on 24-4-2001, the date of demise of Mr. Soofi. The question with reference to the present controversy is whether and if so, what member's rights did such a legal interest create for the petitioner? Reliance on the provisions of section 31 and section 302 of the Ordinance by the learned counsel for the petitioner is analogically inappropriate. These provisions recognize that it is the status of a member that creates rights and obligations between the company and its shareholders. However section 31 and section 302 (supra) carve an exception to that principle by directing expressly that the liabilities of a deceased member shall bind his estate although no person has replaced and succeeded the deceased as a member. This exceptional treatment is given by the statute to the liabilities of the deceased member, but not to his rights. The rationale behind the statutory rule fs explained by the Hon'ble Supreme Court in an instructive discourse rendered in the case of Government of Pakistan v. Indo-Pak Corporation Limited and others (PLD 1979 SC 723). At the time of the judgment the afore-referred statutory provisions were not in vogue in the late Companies Act, 1913. Accordingly whilst interpreting the concept of a "member" under company law his Lordship Dorab Patel, J. disagreed with the Allahabad High Court to approve the view of Lindley, L.J., expressed in the case of New Zealand Gold Extraction Company (Newberyvautin Process) Limited v. Peacock (1894) I Q B Ch. 622) which is reproduced in the report as follows:-- ' The question is whether under these circumstances his executors are liable to pay the call out of his assets. Let us go by steps. He became a member, but his executors did not become members, and were not bound to become members against their will. The Articles are so drawn that they do not provide for dead men, nor for notice to dead man, nor for notice to anybody in the place of dead men. It is said that it is part of the bargain between the shareholders and the Company that if a member dies and the Company are going on and have no notice of his death, his estate cannot be called upon to pay calls. On the construction of the articles, I think .it is obvious that no such bargain was intended. We must put a reasonable construction on the articles, and I have no doubt that the key to the difficulty is to be found in the suggestion made by Mr. Buckley, and that until notice of his death reaches the Company calls may be made in respect of his shares by notices sent to his registered address just as if he were still a member. I have no doubt at all that is the true construction of the articles. In order not to make these articles absurd, we must hold that a deceased member remains a member until notice is given."

14. The statutory rule contained in section 31 and section 302 of the Ordinance relieves a company from facing the objection that the legal heirs of a deceased member who are not registered with the company shall not discharge the obligations or debts of the deceased member towards the company. Otherwise, such an objection would leave in limbo the unperformed obligations that accrue in the name of a dead member. Therefore section 31 and section 302 have limited application meant to protect the interests of a company.

15. The present case, however, cannot benefit from the rule expressed by the foregoing provisions of the statute. The petitioner is claiming entitlement to a member's right as a legal heir of a deceased member rather than seeking to assume obligations of a deceased member. In the absence of clear statutory intendment to the contrary, the express requirements of section 2(21) of the Ordinance reproduced above, setting out F the essential attributes of a member cannot therefore be disregarded. In order to become a member of a company, a holder of the shares of such a company must also have his name entered on the register of its members. Although a legal heir of a deceased member by virtue of his legal interest becomes the holder of shares in a company, he does not become a member of that company until his name is entered in the register of its members.

16. It may be noted, however, that legal precedent has relaxed the strictness of the above rule in respect of financial rights of a legal heir of a deceased member. Otherwise such rights would stand forfeited if the shares transmitted to a legal heir have not been registered with the company. This relief actually operates to prevent abuse of corporate power to obtain an advantage or cause disadvantage by withholding registration of a legal heir and thereby protects the vested right of members. Thus the right to receive dividends or rights shares that arise from the statute cannot be defeated only because a legal heir of a deceased member is not registered as a member. A common feature of such pecuniary or proprietary rights is that they are amenable to accumulation for the benefit of a legal heir. By assuming a deceased member to be a deemed member, the Courts have endeavoured to protect the vested rights of their legal heirs. However, the time for their grant to a legal heir occurs when he becomes a member of a company. This view is noted by the Hon'ble Supreme Court in the Indo-Pak Corporation case (supra) by its approval of the principle expressed in the case of Jameg v. Auena Ventura Nitrate Grounds Syndicate Limited [(1896) 1 Ch. 4561 wherein the entitlement of a widow of a deceased member of a company to obtain rights shares was upheld without she being registered as a member of that company. Quoting Lord Herschell the report at page 135 reads as under:-- "It is no doubt the fact that, strictly speaking, although Mr. James's name was, at the time of the resolution of April, 1893, still on the register, he was not, being dead, a member of the Company. It seems to me, however, perfectly clear that the word "member", as used in some of the articles of the company, must be held to include those whose names are on the register, though they are no longer living. The Article, for example, which in the case of this company is substituted for Article 72 of the Table A authorized the directors to distribute the profits of the Company "between the members" by way of dividend. It cannot be doubted that they would be warranted in paying the proportionate share of the profits to the representative of a deceased member, although the word "member" only is used, or that such representative would be entitled to claim that dividend. For this purpose the deceased member must still be regarded as a member within the meaning of the article. In a somewhat similar case the late Lord Justice James said "the estate is the member". This is, of course, a metaphorical expression, but it sufficiently indicates the legal situation of the parties. Again, where a liability arises with respect to the shares

as, for example, where a call is made on the "members"

it seems equally free from doubt that the liability attaches to the estate of the deceased member, and must be discharged by his representative, even though, being deceased, he is no longer, strictly speaking, a member of the Company. Other instances might be cited where the articles require this effect to be given to the use of the word "member", but those 1 have given will suffice. I can see no sufficient reason why the estate of a deceased member should be subject to the burdens of membership and should not have every pecuniary benefit accruing to the shares in respect of which he is registered." (Underlining provided)

17. Notwithstanding the fact that legal heirs are not registered members of a company the Courts have extended them recognition so that they may secure their statutory and other legal rights in a company. In the case Muhammad Fikree v. Fikree Development Corporation PLD 1988 Karachi 446 the Sindh High Court entertained an application under section 290 of the Ordinance submitted by the unregistered legal heirs of a deceased member and directed the company to transfer shares of such member to the unregistered petitioner.

18. In the Indian jurisdiction also the learned Supreme Court of India held the equitable remedy under sections 397 and 398 of the Indian Companies Act, 1956 (which is similar to the remedy under section 290 of the Ordinance) to be available to the legal heirs of a deceased member. The case of Messrs Worldwide Agencies (Pvt.) Limited and another v. Mrs. Margarat T. Desor and others (AIR 1990 Supreme Court 737) reflects the judicial attitude that the definitional element of a member contained in section 2(21) of the Ordinance may not be applied strictly in cases where the controllers of a company are I delinquent in granting or recognizing the rights of legal heirs of a deceased member. In this case after quoting Pennycuick, J. in Re. Jermyn Street Turkish Baths Ltd. (1971) 3 All ER 57 the learned Indian Supreme Court observed as follows:-- "We are clearly of the opinion that having regard to the scheme and the purpose of sections 397 and 398 of the Act, the reasoning on a pari materia provision of the English Act would be a valuable guide. The said construction, appears to us, to further the purpose intended to be fulfilled by petitions under section 397 and 398 of the Act. It facilitates solution of problems in case of oppression of the minorities when the member is dead and his heirs or legal representatives are yet to be substituted. This is an equitable and just construction. This construction, as suggested by Pennycuick, J. does not militate against either equity or justice of the such situation. We would therefore, adhere to that construction."

19. A careful scrutiny of the facts of the present case shows that none of the aforesaid situations apply here. There is no claim of dividends, rights shares, bonus shares or pecuniary rights by the petitioner nor is there any allegation of oppression or delinquency by the management of the Company. The petitioner is asserting a claim to exercise of a personal right available to a member for pre-empting a sale of shares that occurred before the petitioner became a member' of the Company. To exercise the option to pre-empt a sale of shares under Article 11 supra is to exercise a choice which is time bound to the date of a specific transaction which unless pre-empted timeously can lawfully be finalized. The Company has a duty under law and its Articles to notify pre-emptible transactions to persons who are its members. The petitioner's claim expects the Company to also inform persons who merely have the prospect of becoming members of the Company such an expectation would place a speculative and impossible obligation upon the Company apart from involving strangers in the internal affairs of the Company, who may in fact never choose to become its members. Accordingly notice by the Company to non-members neither contemplated by law nor is a practicable measure. Therefore time bound rights which have to do with the personal choice of a member fall into a category that is completely distinct from matters involving pecuniary and proprietary rights of a member. In this context the judgment of the Sindh High Court relied by the learned counsel for the respondent in the case of Muhammad Anwar Monoo v. Muhammad Waqas Monoo 1997' CLC 1943 makes eminent good sense. That ruling does not grant representative status to a legal heir of a deceased member for the purposes of participating in the annual general meeting of his company. Clearly the right to vote available to a member is a personal right of choice for which he should be duly registered with his company according to the criteria of its membership. Unlike a pecuniary or proprietary right of a member, the right to vote cannot be accumulated and is time bound for exercise at the meeting convened for the purpose whereafter this right expires.

20. It is likewise in the case of the petitioner who was not known to the Company as its member at the time of impugned transactions of shares by respondent No.2 therefore, the option to pre-empt those transactions which was available at that point of time expired. That right of pre-emption could not be accumulated or reserved for the petitioner to exercise after he was recorded in the books of the Company as a member. The petition also does not allege oppression or delinquency against the management of the Company to make out a case on equitable grounds. Accordingly, when the petitioner did become a member of the Company subsequently there is no reason for the right under Article 11 (supra) to be resurrected for him to reopen a past and closed sale transaction made by the respondent No.2.

21. In the result the petitioner does not have any right under Article 11 (supra) to pre-empt transactions of sale of shares of the Company entered prior to his becoming a member of the Company. Accordingly there is no merit to the present petition which is dismissed with no order as to costs. M.B.A./S-430/L Petition dismissed.