Section 637B
CONDONATION
OF DELAY
COMPANIES ACT
[1995] 5 SCL 212 (KAR.)
v.
RAJENDRA BABU, J.
WRIT PETITION NOS. 6162 TO 6178 OF 1988
MARCH 20, 1995
Section 637B of the Companies Act, 1956 read with article 226 of the Constitution of India - Condonation of delays in certain cases - Whether exercise of discretion by CLB in granting condonation of delay in filing appeal by respondent could be interfered with in a proceeding under article 226 -Held, no
Section
111 of the Companies Act, 1956 - Register of members - Rectification of - Board
of directors of petitioner-company declined to register certain shares acquired
by respondent - CLB allowed respondents appeals on grounds, Inter alia, that
(a) shares were fully paid up; (b) price paid by transferees was not higher
than price paid in respect of certain forfeited shares; (c) payment of higher
price was not to detriment to company - Whether CLB was justified - Held, yes -
Whether company could exercise no power other than available under articles of
association or Act - Held, yes - Whether even assuming that there was residuary
power either in Act or articles, when company found reasons for its refusal to register
transfer of shares that reason alone would have to be examined as good or bad
and CLB had done that in instant case -Held, yes
The petitioner-company at the Board of Directors'
meeting decided not to register certain shares said to have been acquired by
the first respondent on the ground that one RP had been making attempts to
corner the shares by offering exorbitant price therefor. The CLB held that the
petitioner had not made out a case to establish that the respondents were
undesirable persons warranting refusal of registration of transfer of shares in
their names and that the high consideration paid for the transfer was not
justifiable ground for refusing to register the shares. According to the CLB,
the company should not feel aggrieved because of any particular amount being
mentioned as consideration in the instrument of transfer since such
consideration amount was of no significance insofar as the finances or the
paid-up capital of the company were concerned. They also took the view that there
was no material to hold that the respondent was acting at the instance of RP.
The CLB accordingly allowed the respondents' appeal after condoning the short
delay in filing the same.
On writ:
Section 111(4) enables a transferee who has purchased
shares and applies for registration to prefer an appeal on intimation of
refusal by a company as provided therein within a period of two months thereof.
Such an appeal will have to be filed before the Central Government. At the
relevant time the Central Government delegated the power under section 111 to
be exercised by the CLB subsequently. Hence, in these circumstances appeals
were filed before the CLB. Thus, all the powers which vested with the Central
Government in the matter of an appeal under section 111 could be exercised by
the CLB in that regard. Therefore, if power under section 637B was available to
the Central Government, the same power was available to the CLB as well In that
view of the matter, there was no substance in the contention urged on behalf of
the petitioner that in these cases section 637B could not be applied.
Condonation of delay in section 637B is with reference to an application. An
appeal could be filed by a memorandum or a petition or an application or in any
other manner. If an application could be understood in a generic sense as a
prayer made to an authority for some relief to set aside an order of another
authority and such an application is under the statute, it would amount to an
appeal. Section 637B squarely applies to the proceedings before the CLB. If
that provision is applicable, the exercise of discretion by the Board in that
regard could not be interfered with because it had given certain cogent reasons
such as the shortness of delay and advancing cause of justice by removing
hardship that might arise, if delay was not condoned. Thus, such an order could
not be interfered with in a proceeding under article 226 of the Constitution.
Further in
the instant case, the reasons given by the Board of Directors were that the shares
had been sold at a high price and, therefore, it would not be in the interest
of the company to allow the transfer. Possibly what lurked in their minds was
that RP had been behind the sales but that was not spelt out in any of the
resolutions. All that was stated in the resolutions was that in view of the
legal opinion tendered it would not be appropriate to transfer the shares and
the legal opinion tendered had been considered in detail by the CLB, i.e., that
the transaction could not be considered to be genuine in view of the high price
paid for the shares. It was not at all stated that high price for the shares
were given by RP for and on behalf of the transferees and transferees were
holding the same benami That was not the case put forth by them at the time
when the Board of Directors passed the resolutions. Therefore, in the instant
case, when reasons were set out by the company for refusal to transfer the
shares, the question of placing further material before the CLB might not arise
because reasons had already been disclosed by them. If reasons had not been
disclosed, perhaps the CLB would have called upon them to disclose the reasons
or company itself could have disclosed the reasons. However, the material
sought to be placed before the CLB had also been considered by the CLB.
The CLB took
note of the following circumstances: shares were fully paid up, the price paid
by the transferees was not higher than the price paid in respect of certain
forfeited shares. The payment of higher price was not to the detriment of the
company. No material was placed that the transfer of shares had taken place at
the instance of RP and even if it were held that they were held benami, it
could not allow the transaction. None of these reasons could be said to be not based
on material on records; it could not be said that the CLB's decision was not
based on irrelevant material or had any relevant material eschewed from
consideration. In that view of the matter, the view taken by the CLB in this
regard was not incorrect. The company cannot exercise any power other than
available under articles or Act. Neither the Act nor articles gives any power
which is residuary in character. Even assuming that there is residuary power,
when the company was found reasons for its refusal to register transfer of
shares, that reason alone will have to be examined as good or bad. That was
exactly what the CLB had done in this case. Hence, the petitions were to be
dismissed.
Lingamma v.
State of Karnataka AIR 1982 Kar. 18, Nagendranath Dey v. Suresh Chandra Dey AIR
1932 PC 165, Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) of 1986], Ossor
Estates v. Union of India [W.A. No. 1335 of 1988 dated 9-1-1991], Coalport
China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021,
Weinbergers. Inglis [1918-19] All E.R. Rep. 1263, Smith & Fawcett
Ltd., In re [1942-l] All E.R. 542, Charles Forte Investments Ltd v. Amanda
[1963-2] All E.R. 940, Luxmi Tea Co. Ltd v. Pradip Kumar Sarkar [1990] 67 Comp.
Cas. 518 (SC) and Bajaj Auto Ltd. v.
N.K. Firodia AIR 1971 SC 321.
S.G. Sundaraswamy and Naganand for the
Petitioner. T.K. Seshadri and K.A. Ariga for the Respondent.
1. These petitions are directed against an order made by the
Company Law Board (hereinafter referred to as 'CLB') in appeals filed before it
under section 111 of the Companies Act, 1956 (for short the Act) against the
decision of the Board of Directors of the petitioner-company (hereinafter
referred to as BOD of 'Company') declining to register certain shares of the
company said to have been acquired by the first respondent in each of these
cases.
2. Before the CLB the petitioner contended that the appeals
filed by first respondent in each of these cases before it were barred by
limitation, as the same were not filed within a period of two months from the
date of receipt of the petitioner's letter regarding refusal to transfer
shares. On this aspect of the matter, the Board classified the appeals into
three categories :
(i) that there are certain appeals in which there was no delay at all;
(ii) certain
appeals in which there was delay; and
(iii) certain other appeals have been forwarded to the Board within
the prescribed time, but reached the Board a little late.
On an overall consideration of the matter it held
that in order to avoid undue hardship to the appellants before it, the CLB was
inclined to condone the 'short delay'.
3. Attacking this finding, the learned
counsel for the petitioner urged that there is no specific provision for condonation
of delay in the matter of an appeal filed under section 111 of the Act on any
ground including one of hardship. Elaborating his submission, the learned
counsel for the petitioner stated that section 111 provides for power to refuse
registration and also the appeal that could be filed against such refusal. The
decision as to refusal of registration of transfer of any share should be
communicated within two months from the date of delivery of intimation of such
refusal and if there is any default in complying with the aforesaid provision,
the company and every officer of the company would be punishable with fine,
which may extend to Rs. 50 per day during the period of default continues. He
invited my attention to section 111(4) thereof. It provides that in case an
appeal is filed against such refusal to transfer the shares, the same should be
made within a period of two months from the date of receipt of the notice of
refusal. In the present case it is submitted that at the relevant time there
was no provision made in the Rules framed by the Central Government for the
conduct of the business of the CLB empowering them to condone the delay. It is
also submitted that under section 637 of the Act there should be a specific
delegation of powers to the CLB by the Central Government to exercise such
powers. Neither section 111 nor section 637B is subject-matter of delegation.
Rules framed under section 642 do not provide for condonation of such delay. It
is therefore submitted that there is no scope for condoning the delay at all in
the case of the appeals which are filed beyond the time fixed in section 111(4)
of the Act. He further contended relying upon a decision of this Court in
Lingamma v. State of Karnataka AIR 1982 Kar. 18, that when there is no specific
power conferred upon an authority functioning under a special statute no
inherent power is available for condonation of delay, however hard the
circumstances in a given case may be.
4. The learned counsel for the first respondent in each of these cases submitted that this is a case where CLB had exercised its powers squarely under section 637B of the Act, which opens with a non obstante clause and has overriding effect on all other provisions of the Act and that the power that is exercised by the CLB is that of the Central Government itself in the matter of entertaining an appeal and therefore that provision would be attracted. He explained that section 637B of the Act though refers to an application includes an appeal and for that purpose relied upon a decision in Nagendranath Dey v. Suresh Chandra Dey AIR 1932 PC 165. He further submitted that there is only one case in which there is one day's delay, that is M. Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) 1986], and all appeals were filed in time or communication in that regard had already been despatched by the party within the time prescribed under law and in that context relied upon a decision of this Court in Ossor Estates v. Union of India [W.A. No. 1335 of 1988, dated 9-1-1991], wherein this Court held that what is required in the relevant provision is to make an appeal and not actual presentation of an appeal. The moment the party concerned despatches such an appeal by post, it must be deemed that such an appeal has been made. Based on that principle enunciated by this Court, the learned counsel contended that in these cases there is no difficulty at all in coming to the conclusion that appeals had been made within that time.
5. Since at least in one of the cases I have to decide that question as to whether an appeal is in time or not, I need not embark upon a discussion on the aspect as to when an appeal is said to have been filed. I would rest content by referring to the provisions of the Act to find out in cases of time barred appeals whether any delay in filing them could be condoned.
6. Section 111(4) of the Act enables a transferee who has purchased shares and applies for registration and on intimation of refusal by a company can prefer an appeal as provided therein within a period of two months thereof. Such an appeal will have to be filed before the Central Government. At the relevant time the Central Government delegated the power under section 111 to be exercised by the CLB subsequently. Hence, in these circumstances appeals were filed before CLB. Thus, all the powers which vested with the Central Government in the matter of an appeal under section 111 of the Act could be exercised by the CLB in that regard. Therefore, if power under section 637B was available to Central Government, the same power was available to the CLB as well. In that view of the matter, I think there is no substance in the contention urged on behalf of the petitioner that in these cases section 637B could not be applied. Condonation of delay in section 637B is with reference to an application. An appeal could be filed by a memorandum or a petition or an application or in any other manner. If an application could be understood in a generic sense as a prayer made to an authority for some relief to set aside an order of another authority and such an application is under the statute, would amount to an appeal. The Privy Council considered this very question as to whether an application could be understood as an appeal in Nagendranath Dey's case (supra) and stated that in the absence of definition of an appeal or an application, there cannot be a doubt that an application would include an appeal asking the Appellate Court to set aside an order made by any authority and, therefore, the ordinary connotation of the expression application would include an appeal. Hence, I am of the view that section 637B squarely applies to the proceedings before the CLB. If that provision is applicable, the exercise of discretion by the Board in that regard cannot be interfered with by this Court because it has given certain cogent reasons such as the shortness of delay and advancing cause of justice by removing hardship that may arise, if delay is not condoned. I do not think that such an order could be interfered with in a proceeding under article 226 of the Constitution. Hence, I reject the first contention advanced on behalf of the petitioner.
7. The next contention urged on behalf of the petitioner is one touching upon the merits of the matter.
8. It is the contention of the petitioner that one
Ratnavarma Padival had been making attempts to corner the shares and was
offering exorbitant price thereto and therefore the company considered after
obtaining legal advice that it was not in the interest of the company to allow
the transfer of shares; that as long as reasons had been assigned by the
authority concerned and those reasons are germane to the refusal of the
transfer of the shares and such exercise of power is bona fide, it would not at
all be open to the CLB to interfere with such a matter and in this context
relied upon the following decisions :
(1) Coalport China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021;
(2) Weinberger v. Inglis [1918-19] All E.R. Rep. 1263;
(3) Smith & Fawcett Ltd., In re [1942-1] All E.R. 542;
(4) Charles Forte Investments Ltd. v. Amanda [1963-2] All E.R. 940
that it was not at all open to the CLB to substitute
its views to that of the BODs of 'Company' who had ample authority under the
Articles of Association to refuse to transfer the shares and such power as long
as exercised by them in a proper manner could not be interfered with by any
authority; that the CLB had misdirected itself in wrongly casting the burden
upon the petitioner that it should prove that its decision was valid, while it
should have placed such onus upon the transferee; that a commercial reality is
within the knowledge of BODs and not of the CLB; that in this context referred
to the object behind article 15 of the Articles of Association, which restrict
the extent of holding of shares of the company and also referred to section 182
of the Act; that the CLB could not have ignored the material placed by them in
the matter of non-suitability or desirability of not transferring the shares in
favour of the first respondent in each of these cases though not disclosed in
the resolution, which was not within its purview at the time when it decided
the matter.
9. The learned counsel for the first respondent in each of
these cases submitted that in the light of the decision of the Supreme Court in
Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp. Cas. 518 it is no
longer open to any party to contend that in the matter of transfer of shares of
a Public Limited Company the Board of Directors could refuse to transfer the
shares unless such power is traced either under the Act or under any particular
provision in Articles of Association; that in the present case, the only
provision that could be pointed out was Article 20 of Table-A of Companies Act,
1913, as it was applicable to the company in question when it was incorporated;
that in the case where shares had been fully paid up, the question is only one
of want of suitability of the person and no other question would arise in such
a case; that in a case where lien is held in respect of shares it is open to
the company to refuse to register the shares; that except in these two
circumstances, in no other circumstances it is open to the BODs of 'Company' to
refuse to transfer the shares. He also explained the scope of powers of the CLB
to refuse to transfer the shares by reference to Bajaj Auto Ltd. v. N.K.
Firodia AIR 1971 SC 321 and W.P. No. 776/78 and connected matters, disposed of
by the Madras High Court, wherein the situation was almost identical. He
further brought to my notice certain observations made by this Court in Ossor
Estates' case (supra) particularly in the context of the contention advanced on
behalf of the petitioner that one Ratnavarma Padival wanted to corner all the
shares and the transferees are merely holding those shares benami on his behalf
or on its associates. He also pointed out that the only material before the
BODs of 'Company' on the relevant date when they refused to transfer the shares
was that certain shares had been sold at an exorbitant price, but he countered
the same by pointing out that there was enough material to show that the
company itself has sold certain shares at Rs. 1,000 while the shares
transferred was only of the value of Rs. 950 and thus contended that the
interference by the CLB in this regard was perfectly in order.
10. The CLB in this case after referring to article 20 of
Table-A of Companies Act, 1913 held that the petitioner had not made out a case
to establish that the first respondent in each of these cases are undesirable
persons warranting refusal of registration of transfer of shares in their name.
They noticed that the reason given in the letter of refusal is that the
consideration of transfer is high. They went through the legal opinion placed
before them also. They were of the opinion that the high consideration paid for
the transfer is not justifiable ground for refusing to register the shares.
They referred to the forfeited shares having been issued by the company at a
high price of Rs. 1,000 per share and also its earlier decision in Appeal No.
9/77 that it is not for the company or its management to sit in judgment as to
in the shares of which company and in what price an investor should invest his
funds. The company should not feel aggrieved because of any particular amount
being mentioned as consideration in the instruction of transfer since such
consideration amount is of no significance in so far as the finances or the
paid-up capital of the company are concerned. They took the view that there was
no material to hold that the first respondent in each of these cases was acting
at the instance of the said Ratnavarma Padival. That the emphasis in such
matters is on the personal objections to the transferee and not to the
transferor on the ground that the transferee is the nominee of someone whom
they consider objectionable. They also referred to certain legal proceedings
between Ratnavarma Padival and others against the company and the same was
found to be irrelevant to the case on hand. They took note of the scope of
article 15 of the Articles of Association that no member can hold shares
exceeding 1/10th of the total number of shares and the contention of the
counsel for the company was on the assumption that the shares were not held for
and on behalf of the said Padival. On that basis they rejected the stand of the
company and allowed the appeals.
11. The parameters of the powers of a company in the matter of
transfer of shares is available in Bajaj Auto Ltd.'s case (supra). The Supreme
Court noticed that if the articles permit the Directors to decline to register
transfer of shares without stating the reasons, the Court would not draw
unfavourable inferences against the Directors because they did not give
reasons. On the other hand, the Court would assume in such cases that the
Directors acted reasonably and bona fide and those who allege to the contrary
would have to prove and establish the same by evidence. Where however the
Directors gave reasons the Court would consider whether they were legitimate
and whether the Directors proceeded on a right or wrong principle.
12. Further, I may refer to another decision of the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra), wherein the entire scope of the provisions relating to transfer of shares in a Public Limited Company has been considered by the Supreme Court. It was noticed therein that a shareholder has a right to transfer his share correspondingly in the absence of any impediment in this behalf. The transferee of a share can get the transfer effected and that right of the transferee cannot be defeated by the company or by its Directors except in pursuance of power vested in them in this behalf, which is specifically provided for - it may be residuary, but it should be provided for and traceable to some provision either in the Act or in the Articles of Association of the company. The registration of a transferred share cannot be refused arbitrarily or for any collateral purpose and can be refused only for a bona fide reason in the interest of the company and the general interest of the shareholders. If neither a specific nor residuary power of refusal has been so provided, such power cannot be exercised on the basis of the so-called undeclared inherent power to refuse registration. In view of the declaration of law made by the Supreme Court in these cases it is not necessary to refer to the decisions relied upon by the learned counsel for the petitioner in any detail.
13. In the present case, the reason given by the BODs is that
the shares had been sold at a high price and therefore it would not be in the
interest of the company to allow the transfer. Possibly what lurked in their
minds was that Ratnavarma Padival had been behind the sales but that was not
spelt out in any of the resolutions. All that was stated in the resolutions was
in view of the legal opinion tendered it would not be appropriate to transfer
the shares and the legal opinion tendered had been considered in detail by the
CLB that the transaction could not be considered to be genuine in view of the
high price paid for the shares. It was not at all stated that the high price
for the shares were given by Ratnavarma Padival for and on behalf of the
transferees and transferees were holding the same benami. That was not the case
put forth by them at the time when the BODs passed the resolutions. Therefore,
in the present case when reasons are set out by the company for refusal to
transfer the shares, the question of placing further material before the CLB
may not arise because reasons had already been disclosed by them. If reasons
had not been disclosed, perhaps the CLB would have called upon them to disclose
the reasons or company itself could have disclosed the reasons. However, the
material sought to be placed before the CLB has also been considered by the
CLB. The learned counsel for the petitioner contended that the valuation given
by the Chartered Accountant on 3-10-1987 should be taken note of. However the
said valuation was not and could have been in contemplation of the company as
it decided refusal to grant registration long prior to the date of the said
valuation. The CLB felt, the mere circumstances that the shares are likely to
be held benami would not itself be a circumstance to refuse to transfer the
shares. That view finds support in the decision of this Court in Ossor Estates'
case (supra).
14. The
CLB took note of the following circumstances :
(1) Shares were fully paid up.
(2) The price paid by the transferees was not higher than the price paid in respect of certain forfeited shares.
(3) The payment of higher price was not to the detriment of the company.
(4) No material was placed that the transfer of shares had taken place at the instance of Padival.
(5) Even if it were held that they were held benami, it could not allow the transaction.
None of these reasons could be said to be not based
on material on records, it is not based on irrelevant material or has any
relevant material eschewed from consideration. In that view of the matter, I do
not think the learned counsel for the petitioner can contend that the view
taken by the CLB in this regard is in any way is incorrect.
15. The contention advanced on behalf of the petitioner that the
CLB could not have decided the matter sitting in the arm chair of the BODs of
'Company' since commercial reality is not within their knowledge, but that of
the Company. I do not think this argument has any substance because the CLB
considered the scope of article 20 and was of the view that unless it could
have held that except in case of matters personal to the transferees, on no
other ground could they have refused to transfer the shares, particularly when
there are fully paid up shares. However, learned counsel for the petitioner
wanted me to read article 20 in a different manner. He wanted me to split the
article into two categories :
The Directors may decline to
register :
(a) any
transfer of shares, not being fully paid shares, to a person to whom they do
not approve.
or
(b) any
transfer of shares on which the company has a lien.
Contention of this nature is futile. Even on the
basis of the argument of the learned counsel, the language of article 20, the
company could not have refused to register transfer of shares, firstly that the
shares are fully paid up and company has no lien. Thus neither first para nor
second para is applicable as argued by the learned counsel for the petitioner.
In view of the law declared by the Supreme Court in Luxmi Tea Co. Ltd.'s case
(supra) and Bajaj Auto Ltd.'s case (supra), the company could not exercise any
power other than available under articles or Act. Neither the Act nor Articles
give any power which is residuary in character. Even assuming that there is residuary
power, when the company find reasons for its refusal to register transfer of
shares, that reason alone will have to be examined as good or bad. That is
exactly what the CLB has done in this case. Hence, I find no merit in any of
the contentions of the learned counsel for the petitioner.
16. The other submission raised is that a proceeding arising under Companies Act is pending for rectification of registers and hence this matter could not be decided. I do not think I can put off consideration of this matter for in no proceeding arising under Companies Act can correctness of the order of CLB be examined. If that is so, it would be proper to decide this matter now.
17. Thus, I find no substance in these petitions. Petitions are therefore dismissed. Rule discharged.
18. In the circumstances, the company will have to comply with the order of the CLB within a period of two weeks from today.
COMPANIES ACT
[1995] 5 SCL 212 (KAR.)
v.
RAJENDRA BABU, J.
WRIT PETITION NOS. 6162 TO 6178 OF 1988
MARCH 20, 1995
Section 637B of the Companies Act, 1956 read with article 226 of the Constitution of India - Condonation of delays in certain cases - Whether exercise of discretion by CLB in granting condonation of delay in filing appeal by respondent could be interfered with in a proceeding under article 226 -Held, no
Section
111 of the Companies Act, 1956 - Register of members - Rectification of - Board
of directors of petitioner-company declined to register certain shares acquired
by respondent - CLB allowed respondents appeals on grounds, Inter alia, that
(a) shares were fully paid up; (b) price paid by transferees was not higher
than price paid in respect of certain forfeited shares; (c) payment of higher
price was not to detriment to company - Whether CLB was justified - Held, yes -
Whether company could exercise no power other than available under articles of
association or Act - Held, yes - Whether even assuming that there was residuary
power either in Act or articles, when company found reasons for its refusal to
register transfer of shares that reason alone would have to be examined as good
or bad and CLB had done that in instant case -Held, yes
The petitioner-company at the Board of Directors'
meeting decided not to register certain shares said to have been acquired by
the first respondent on the ground that one RP had been making attempts to
corner the shares by offering exorbitant price therefor. The CLB held that the
petitioner had not made out a case to establish that the respondents were
undesirable persons warranting refusal of registration of transfer of shares in
their names and that the high consideration paid for the transfer was not justifiable
ground for refusing to register the shares. According to the CLB, the company
should not feel aggrieved because of any particular amount being mentioned as
consideration in the instrument of transfer since such consideration amount was
of no significance insofar as the finances or the paid-up capital of the
company were concerned. They also took the view that there was no material to
hold that the respondent was acting at the instance of RP. The CLB accordingly
allowed the respondents' appeal after condoning the short delay in filing the
same.
On writ:
Section 111(4) enables a transferee who has purchased
shares and applies for registration to prefer an appeal on intimation of
refusal by a company as provided therein within a period of two months thereof.
Such an appeal will have to be filed before the Central Government. At the
relevant time the Central Government delegated the power under section 111 to
be exercised by the CLB subsequently. Hence, in these circumstances appeals
were filed before the CLB. Thus, all the powers which vested with the Central
Government in the matter of an appeal under section 111 could be exercised by
the CLB in that regard. Therefore, if power under section 637B was available to
the Central Government, the same power was available to the CLB as well In that
view of the matter, there was no substance in the contention urged on behalf of
the petitioner that in these cases section 637B could not be applied.
Condonation of delay in section 637B is with reference to an application. An
appeal could be filed by a memorandum or a petition or an application or in any
other manner. If an application could be understood in a generic sense as a
prayer made to an authority for some relief to set aside an order of another
authority and such an application is under the statute, it would amount to an
appeal. Section 637B squarely applies to the proceedings before the CLB. If
that provision is applicable, the exercise of discretion by the Board in that
regard could not be interfered with because it had given certain cogent reasons
such as the shortness of delay and advancing cause of justice by removing
hardship that might arise, if delay was not condoned. Thus, such an order could
not be interfered with in a proceeding under article 226 of the Constitution.
Further in
the instant case, the reasons given by the Board of Directors were that the
shares had been sold at a high price and, therefore, it would not be in the
interest of the company to allow the transfer. Possibly what lurked in their
minds was that RP had been behind the sales but that was not spelt out in any
of the resolutions. All that was stated in the resolutions was that in view of
the legal opinion tendered it would not be appropriate to transfer the shares
and the legal opinion tendered had been considered in detail by the CLB, i.e.,
that the transaction could not be considered to be genuine in view of the high
price paid for the shares. It was not at all stated that high price for the
shares were given by RP for and on behalf of the transferees and transferees
were holding the same benami That was not the case put forth by them at the
time when the Board of Directors passed the resolutions. Therefore, in the
instant case, when reasons were set out by the company for refusal to transfer
the shares, the question of placing further material before the CLB might not
arise because reasons had already been disclosed by them. If reasons had not
been disclosed, perhaps the CLB would have called upon them to disclose the
reasons or company itself could have disclosed the reasons. However, the
material sought to be placed before the CLB had also been considered by the
CLB.
The CLB took
note of the following circumstances: shares were fully paid up, the price paid
by the transferees was not higher than the price paid in respect of certain
forfeited shares. The payment of higher price was not to the detriment of the
company. No material was placed that the transfer of shares had taken place at
the instance of RP and even if it were held that they were held benami, it
could not allow the transaction. None of these reasons could be said to be not
based on material on records; it could not be said that the CLB's decision was
not based on irrelevant material or had any relevant material eschewed from
consideration. In that view of the matter, the view taken by the CLB in this
regard was not incorrect. The company cannot exercise any power other than
available under articles or Act. Neither the Act nor articles gives any power
which is residuary in character. Even assuming that there is residuary power,
when the company was found reasons for its refusal to register transfer of
shares, that reason alone will have to be examined as good or bad. That was
exactly what the CLB had done in this case. Hence, the petitions were to be
dismissed.
Lingamma v.
State of Karnataka AIR 1982 Kar. 18, Nagendranath Dey v. Suresh Chandra Dey AIR
1932 PC 165, Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) of 1986], Ossor
Estates v. Union of India [W.A. No. 1335 of 1988 dated 9-1-1991], Coalport
China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021,
Weinbergers. Inglis [1918-19] All E.R. Rep. 1263, Smith & Fawcett
Ltd., In re [1942-l] All E.R. 542, Charles Forte Investments Ltd v. Amanda
[1963-2] All E.R. 940, Luxmi Tea Co. Ltd v. Pradip Kumar Sarkar [1990] 67 Comp.
Cas. 518 (SC) and Bajaj Auto Ltd. v.
N.K. Firodia AIR 1971 SC 321.
S.G. Sundaraswamy and Naganand for the
Petitioner. T.K. Seshadri and K.A. Ariga for the Respondent.
1. These petitions are directed against an order made by the
Company Law Board (hereinafter referred to as 'CLB') in appeals filed before it
under section 111 of the Companies Act, 1956 (for short the Act) against the
decision of the Board of Directors of the petitioner-company (hereinafter
referred to as BOD of 'Company') declining to register certain shares of the
company said to have been acquired by the first respondent in each of these
cases.
2. Before the CLB the petitioner contended that the appeals
filed by first respondent in each of these cases before it were barred by
limitation, as the same were not filed within a period of two months from the
date of receipt of the petitioner's letter regarding refusal to transfer
shares. On this aspect of the matter, the Board classified the appeals into
three categories :
(i) that there are certain appeals in which there was no delay at all;
(ii) certain appeals in which there was
delay; and
(iii) certain other appeals have been forwarded to the Board within
the prescribed time, but reached the Board a little late.
On an overall consideration of the matter it held
that in order to avoid undue hardship to the appellants before it, the CLB was
inclined to condone the 'short delay'.
3. Attacking this finding, the learned
counsel for the petitioner urged that there is no specific provision for
condonation of delay in the matter of an appeal filed under section 111 of the
Act on any ground including one of hardship. Elaborating his submission, the
learned counsel for the petitioner stated that section 111 provides for power
to refuse registration and also the appeal that could be filed against such
refusal. The decision as to refusal of registration of transfer of any share
should be communicated within two months from the date of delivery of
intimation of such refusal and if there is any default in complying with the
aforesaid provision, the company and every officer of the company would be
punishable with fine, which may extend to Rs. 50 per day during the period of
default continues. He invited my attention to section 111(4) thereof. It
provides that in case an appeal is filed against such refusal to transfer the
shares, the same should be made within a period of two months from the date of
receipt of the notice of refusal. In the present case it is submitted that at
the relevant time there was no provision made in the Rules framed by the
Central Government for the conduct of the business of the CLB empowering them
to condone the delay. It is also submitted that under section 637 of the Act
there should be a specific delegation of powers to the CLB by the Central
Government to exercise such powers. Neither section 111 nor section 637B is
subject-matter of delegation. Rules framed under section 642 do not provide for
condonation of such delay. It is therefore submitted that there is no scope for
condoning the delay at all in the case of the appeals which are filed beyond
the time fixed in section 111(4) of the Act. He further contended relying upon
a decision of this Court in Lingamma v. State of Karnataka AIR 1982 Kar. 18,
that when there is no specific power conferred upon an authority functioning
under a special statute no inherent power is available for condonation of
delay, however hard the circumstances in a given case may be.
4. The learned counsel for the first respondent in each of these cases submitted that this is a case where CLB had exercised its powers squarely under section 637B of the Act, which opens with a non obstante clause and has overriding effect on all other provisions of the Act and that the power that is exercised by the CLB is that of the Central Government itself in the matter of entertaining an appeal and therefore that provision would be attracted. He explained that section 637B of the Act though refers to an application includes an appeal and for that purpose relied upon a decision in Nagendranath Dey v. Suresh Chandra Dey AIR 1932 PC 165. He further submitted that there is only one case in which there is one day's delay, that is M. Naveen Kumar v. Jaganjiva Hegde [Appeal No. 6 (SR) 1986], and all appeals were filed in time or communication in that regard had already been despatched by the party within the time prescribed under law and in that context relied upon a decision of this Court in Ossor Estates v. Union of India [W.A. No. 1335 of 1988, dated 9-1-1991], wherein this Court held that what is required in the relevant provision is to make an appeal and not actual presentation of an appeal. The moment the party concerned despatches such an appeal by post, it must be deemed that such an appeal has been made. Based on that principle enunciated by this Court, the learned counsel contended that in these cases there is no difficulty at all in coming to the conclusion that appeals had been made within that time.
5. Since at least in one of the cases I have to decide that question as to whether an appeal is in time or not, I need not embark upon a discussion on the aspect as to when an appeal is said to have been filed. I would rest content by referring to the provisions of the Act to find out in cases of time barred appeals whether any delay in filing them could be condoned.
6. Section 111(4) of the Act enables a transferee who has purchased shares and applies for registration and on intimation of refusal by a company can prefer an appeal as provided therein within a period of two months thereof. Such an appeal will have to be filed before the Central Government. At the relevant time the Central Government delegated the power under section 111 to be exercised by the CLB subsequently. Hence, in these circumstances appeals were filed before CLB. Thus, all the powers which vested with the Central Government in the matter of an appeal under section 111 of the Act could be exercised by the CLB in that regard. Therefore, if power under section 637B was available to Central Government, the same power was available to the CLB as well. In that view of the matter, I think there is no substance in the contention urged on behalf of the petitioner that in these cases section 637B could not be applied. Condonation of delay in section 637B is with reference to an application. An appeal could be filed by a memorandum or a petition or an application or in any other manner. If an application could be understood in a generic sense as a prayer made to an authority for some relief to set aside an order of another authority and such an application is under the statute, would amount to an appeal. The Privy Council considered this very question as to whether an application could be understood as an appeal in Nagendranath Dey's case (supra) and stated that in the absence of definition of an appeal or an application, there cannot be a doubt that an application would include an appeal asking the Appellate Court to set aside an order made by any authority and, therefore, the ordinary connotation of the expression application would include an appeal. Hence, I am of the view that section 637B squarely applies to the proceedings before the CLB. If that provision is applicable, the exercise of discretion by the Board in that regard cannot be interfered with by this Court because it has given certain cogent reasons such as the shortness of delay and advancing cause of justice by removing hardship that may arise, if delay is not condoned. I do not think that such an order could be interfered with in a proceeding under article 226 of the Constitution. Hence, I reject the first contention advanced on behalf of the petitioner.
7. The next contention urged on behalf of the petitioner is one touching upon the merits of the matter.
8. It is the contention of the petitioner that one
Ratnavarma Padival had been making attempts to corner the shares and was
offering exorbitant price thereto and therefore the company considered after
obtaining legal advice that it was not in the interest of the company to allow
the transfer of shares; that as long as reasons had been assigned by the
authority concerned and those reasons are germane to the refusal of the
transfer of the shares and such exercise of power is bona fide, it would not at
all be open to the CLB to interfere with such a matter and in this context
relied upon the following decisions :
(1) Coalport China Company (John Rose & Co.) Ltd., In re [1895-9] All E.R. Rep. 2021;
(2) Weinberger v. Inglis [1918-19] All E.R. Rep. 1263;
(3) Smith & Fawcett Ltd., In re [1942-1] All E.R. 542;
(4) Charles Forte Investments Ltd. v. Amanda [1963-2] All E.R. 940
that it was not at all open to the CLB to substitute
its views to that of the BODs of 'Company' who had ample authority under the
Articles of Association to refuse to transfer the shares and such power as long
as exercised by them in a proper manner could not be interfered with by any
authority; that the CLB had misdirected itself in wrongly casting the burden
upon the petitioner that it should prove that its decision was valid, while it
should have placed such onus upon the transferee; that a commercial reality is
within the knowledge of BODs and not of the CLB; that in this context referred
to the object behind article 15 of the Articles of Association, which restrict
the extent of holding of shares of the company and also referred to section 182
of the Act; that the CLB could not have ignored the material placed by them in
the matter of non-suitability or desirability of not transferring the shares in
favour of the first respondent in each of these cases though not disclosed in
the resolution, which was not within its purview at the time when it decided
the matter.
9. The learned counsel for the first respondent in each of
these cases submitted that in the light of the decision of the Supreme Court in
Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp. Cas. 518 it is no
longer open to any party to contend that in the matter of transfer of shares of
a Public Limited Company the Board of Directors could refuse to transfer the
shares unless such power is traced either under the Act or under any particular
provision in Articles of Association; that in the present case, the only
provision that could be pointed out was Article 20 of Table-A of Companies Act,
1913, as it was applicable to the company in question when it was incorporated;
that in the case where shares had been fully paid up, the question is only one
of want of suitability of the person and no other question would arise in such
a case; that in a case where lien is held in respect of shares it is open to
the company to refuse to register the shares; that except in these two circumstances,
in no other circumstances it is open to the BODs of 'Company' to refuse to
transfer the shares. He also explained the scope of powers of the CLB to refuse
to transfer the shares by reference to Bajaj Auto Ltd. v. N.K. Firodia AIR 1971
SC 321 and W.P. No. 776/78 and connected matters, disposed of by the Madras
High Court, wherein the situation was almost identical. He further brought to
my notice certain observations made by this Court in Ossor Estates' case
(supra) particularly in the context of the contention advanced on behalf of the
petitioner that one Ratnavarma Padival wanted to corner all the shares and the
transferees are merely holding those shares benami on his behalf or on its
associates. He also pointed out that the only material before the BODs of
'Company' on the relevant date when they refused to transfer the shares was
that certain shares had been sold at an exorbitant price, but he countered the
same by pointing out that there was enough material to show that the company
itself has sold certain shares at Rs. 1,000 while the shares transferred was
only of the value of Rs. 950 and thus contended that the interference by the
CLB in this regard was perfectly in order.
10. The CLB in this case after referring to article 20 of
Table-A of Companies Act, 1913 held that the petitioner had not made out a case
to establish that the first respondent in each of these cases are undesirable
persons warranting refusal of registration of transfer of shares in their name.
They noticed that the reason given in the letter of refusal is that the
consideration of transfer is high. They went through the legal opinion placed
before them also. They were of the opinion that the high consideration paid for
the transfer is not justifiable ground for refusing to register the shares.
They referred to the forfeited shares having been issued by the company at a
high price of Rs. 1,000 per share and also its earlier decision in Appeal No.
9/77 that it is not for the company or its management to sit in judgment as to
in the shares of which company and in what price an investor should invest his
funds. The company should not feel aggrieved because of any particular amount
being mentioned as consideration in the instruction of transfer since such
consideration amount is of no significance in so far as the finances or the
paid-up capital of the company are concerned. They took the view that there was
no material to hold that the first respondent in each of these cases was acting
at the instance of the said Ratnavarma Padival. That the emphasis in such
matters is on the personal objections to the transferee and not to the
transferor on the ground that the transferee is the nominee of someone whom
they consider objectionable. They also referred to certain legal proceedings
between Ratnavarma Padival and others against the company and the same was
found to be irrelevant to the case on hand. They took note of the scope of
article 15 of the Articles of Association that no member can hold shares
exceeding 1/10th of the total number of shares and the contention of the
counsel for the company was on the assumption that the shares were not held for
and on behalf of the said Padival. On that basis they rejected the stand of the
company and allowed the appeals.
11. The parameters of the powers of a company in the matter of
transfer of shares is available in Bajaj Auto Ltd.'s case (supra). The Supreme
Court noticed that if the articles permit the Directors to decline to register
transfer of shares without stating the reasons, the Court would not draw
unfavourable inferences against the Directors because they did not give
reasons. On the other hand, the Court would assume in such cases that the
Directors acted reasonably and bona fide and those who allege to the contrary
would have to prove and establish the same by evidence. Where however the
Directors gave reasons the Court would consider whether they were legitimate
and whether the Directors proceeded on a right or wrong principle.
12. Further, I may refer to another decision of the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra), wherein the entire scope of the provisions relating to transfer of shares in a Public Limited Company has been considered by the Supreme Court. It was noticed therein that a shareholder has a right to transfer his share correspondingly in the absence of any impediment in this behalf. The transferee of a share can get the transfer effected and that right of the transferee cannot be defeated by the company or by its Directors except in pursuance of power vested in them in this behalf, which is specifically provided for - it may be residuary, but it should be provided for and traceable to some provision either in the Act or in the Articles of Association of the company. The registration of a transferred share cannot be refused arbitrarily or for any collateral purpose and can be refused only for a bona fide reason in the interest of the company and the general interest of the shareholders. If neither a specific nor residuary power of refusal has been so provided, such power cannot be exercised on the basis of the so-called undeclared inherent power to refuse registration. In view of the declaration of law made by the Supreme Court in these cases it is not necessary to refer to the decisions relied upon by the learned counsel for the petitioner in any detail.
13. In the present case, the reason given by
the BODs is that the shares had been sold at a high price and therefore it
would not be in the interest of the company to allow the transfer. Possibly
what lurked in their minds was that Ratnavarma Padival had been behind the
sales but that was not spelt out in any of the resolutions. All that was stated
in the resolutions was in view of the legal opinion tendered it would not be
appropriate to transfer the shares and the legal opinion tendered had been
considered in detail by the CLB that the transaction could not be considered to
be genuine in view of the high price paid for the shares. It was not at all
stated that the high price for the shares were given by Ratnavarma Padival for
and on behalf of the transferees and transferees were holding the same benami.
That was not the case put forth by them at the time when the BODs passed the
resolutions. Therefore, in the present case when reasons are set out by the
company for refusal to transfer the shares, the question of placing further
material before the CLB may not arise because reasons had already been
disclosed by them. If reasons had not been disclosed, perhaps the CLB would
have called upon them to disclose the reasons or company itself could have
disclosed the reasons. However, the material sought to be placed before the CLB
has also been considered by the CLB. The learned counsel for the petitioner
contended that the valuation given by the Chartered Accountant on 3-10-1987
should be taken note of. However the said valuation was not and could have been
in contemplation of the company as it decided refusal to grant registration
long prior to the date of the said valuation. The CLB felt, the mere circumstances
that the shares are likely to be held benami would not itself be a circumstance
to refuse to transfer the shares. That view finds support in the decision of
this Court in Ossor Estates' case (supra).
14. The
CLB took note of the following circumstances :
(1) Shares were fully paid up.
(2) The price paid by the transferees was not higher than the price paid in respect of certain forfeited shares.
(3) The payment of higher price was not to the detriment of the company.
(4) No material was placed that the transfer of shares had taken place at the instance of Padival.
(5) Even if it were held that they were held benami, it could not allow the transaction.
None of these reasons could be said to be not based
on material on records, it is not based on irrelevant material or has any
relevant material eschewed from consideration. In that view of the matter, I do
not think the learned counsel for the petitioner can contend that the view
taken by the CLB in this regard is in any way is incorrect.
15. The contention advanced on behalf of the petitioner that
the CLB could not have decided the matter sitting in the arm chair of the BODs
of 'Company' since commercial reality is not within their knowledge, but that
of the Company. I do not think this argument has any substance because the CLB
considered the scope of article 20 and was of the view that unless it could
have held that except in case of matters personal to the transferees, on no
other ground could they have refused to transfer the shares, particularly when
there are fully paid up shares. However, learned counsel for the petitioner
wanted me to read article 20 in a different manner. He wanted me to split the
article into two categories :
The Directors may decline to
register :
(a) any
transfer of shares, not being fully paid shares, to a person to whom they do
not approve.
or
(b) any
transfer of shares on which the company has a lien.
Contention of this nature is futile. Even on the basis
of the argument of the learned counsel, the language of article 20, the company
could not have refused to register transfer of shares, firstly that the shares
are fully paid up and company has no lien. Thus neither first para nor second
para is applicable as argued by the learned counsel for the petitioner. In view
of the law declared by the Supreme Court in Luxmi Tea Co. Ltd.'s case (supra)
and Bajaj Auto Ltd.'s case (supra), the company could not exercise any power
other than available under articles or Act. Neither the Act nor Articles give
any power which is residuary in character. Even assuming that there is
residuary power, when the company find reasons for its refusal to register
transfer of shares, that reason alone will have to be examined as good or bad.
That is exactly what the CLB has done in this case. Hence, I find no merit in
any of the contentions of the learned counsel for the petitioner.
16. The other submission raised is that a proceeding arising under Companies Act is pending for rectification of registers and hence this matter could not be decided. I do not think I can put off consideration of this matter for in no proceeding arising under Companies Act can correctness of the order of CLB be examined. If that is so, it would be proper to decide this matter now.
17. Thus, I find no substance in these petitions. Petitions are therefore dismissed. Rule discharged.
18. In the circumstances, the company will have to comply with the order of the CLB within a period of two weeks from today.