All India Bar Examination (AIBE) 3-III Previous Year Question Papers with Answers

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88.

The articles of association of ABC Private Limited provide that its members shall transfer shares to a third party only after first having offered such shares to the other existing members, on a pro rata basis, at the existing market value of such shares. D, a member of ABC Private Limited, gets an offer from E, who is not an existing member of ABC Private Limited, to purchase all the shares held by D in ABC Private Limited for two times the market value of the shares. D transfers the shares to E on the terms offered by E. The board of directors of ABC Private Limited refuses to record the transfer o shares on the grounds that the transfer is ultra vires the articles of association of ABC Private Limited refuses to record the transfer of shares on the grounds that the transfer is ultra vires the articles of association of ABC Private Limited. E goes to court against ABC Private Limited to enforce and record the transfer of the shares. Which of the following statements most accurately applies the principle below ?


Principle :

The doctrine of constructive notice provides that every outsider who deals with a company is deemed to have notice of the contents of the memorandum of association and the articles of association of such company.

A: The transfer of shares shall be upheld because E paid more than the fair market value of the shares, and is therefore exempt from the requirement of the articles of association.
B: The transfer of shares shall be upheld because D should have secured the approval of the board of directors of ABC Private Limited prior to transferring the shares to E, and therefore E is not at fault.
C: The transfer of shares shall not be validated as the principal of 'caveta venditor' (seller beware) is applicable in all contracts of purchase in India.
D: The transfer of shares shall be upheld because ABC Private Limited will be deemed to have had constructive notice of the sale of shares.
E: The transfer of share shall not be validated, as E had constructive notice that D needed to offer the shares to the existing members of ABC Private Limited prior to transferring the shares to E.

The answer is: E

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Explanation

The correct option is E: The transfer of share shall not be validated, as E had constructive notice that D needed to offer the shares to the existing members of ABC Private Limited prior to transferring the shares to E.

Explanation:

According to the principle of constructive notice, every outsider who deals with a company is deemed to have notice of the contents of the memorandum of association and the articles of association of such company. These documents are public and binding on the company and its members.

The articles of association of ABC Private Limited clearly provide that its members shall transfer shares to a third party only after first having offered such shares to the other existing members, on a pro rata basis, at the existing market value of such shares. This is a restriction on the transferability of shares and is valid and enforceable.

D violated this restriction by transferring the shares to E without offering them to the other existing members. E, as an outsider, had constructive notice of this restriction and therefore cannot claim ignorance or good faith. E cannot enforce the transfer of shares against ABC Private Limited, as it is ultra vires the articles of association.

The other options are incorrect because they either ignore or contradict the principle of constructive notice or the articles of association. The price, approval, or doctrine of 'caveta venditor' are irrelevant in this case. ABC Private Limited does not need to have notice of the sale of shares, as it is not bound by it.