[1977] 47 COMP. CAS. 185
(SC)
v.
Kedar Nath Khetan
A.N. RAY C.J., M.H. BEG AND JASWANT SINGH JJ.
CIVIL APPEALS NOS. 1805 TO
1808 OF 1968.
NOVEMBER 25, 1976
JUDGMENT
Ray C.J.—These four appeals by certificate
raise two questions. First, whether the provisions of section 108 of the
Companies Act, 1956, are mandatory in regard to transfer of shares. Second, can
a company having been served with notice of attachment of shares register
transfer of shares in contravention of the order of attachment.
The appellant, Mannalal Khetan and the respondents,
Kedar Nath Khetan and Durga Prasad Khetan, are members belonging to two
branches of the Khetan family. The respondent, Lakshmi Devi Sugar Mills Private
Ltd. is a private company. It was incorporated on 7th April, 1934, under the
Indian Companies Act, 1913.
The Khetan family held shares in the
respondent-company and in two other companies, Maheshwari Khetan Sugar Mills
Private Ltd. and Ishwari Khetan Sugar Mills Private Ltd. The shares stood in
the names of: (1) M/s. Ganeshnarayan Onkarmal Khetan, (2) M/s. Sagarmal Hariram
Khetan, (3) Sri Mannalal Khetan, and (4) Sri Radhakrishna Khetan.
The members of the Khetan family did partnership
business at various places. Civil Suit No. 337 of 1948 was filed in the Bombay
High Court for dissolution of the partnership and for taking the accounts. On
3rd July, 1953, the official receiver of the Bombay High Court was appointed
receiver of the properties of the partnership firms.
There were large income-tax arrears and other tax
liabilities outstanding against the firms and individual partners. For the
realisation of the income-tax dues the income-tax department issued in 1950 a
notice under section 46(5)(a) of the Indian Income-tax Act, 1922, requiring the
respondent-company to pay any amount due to the firm of Ganesh Narayan
Onkarnath or its partners to that department.
On 16th June, 1953, a receiver was appointed by the
Collector of Bombay in execution of the tax recovery certificate issued by the
Income-tax Officer, S. VI,
The Additional Collector of Bombay issued to the
Collector of Deoria two certificates under which on 8th March, 1954, and
18/31st October, 1955, certain shares of the respondent-company belonging to
the Khetans were attached under Order 21, rule 46 of the Code of Civil
Procedure.
On 31st July, 1957, the members of the Khetan family
entered into agreement among them for exchange of blocks of shares held by them
in the respondent-company and other companies in settlement of their
differences and disputes. These agreements provided for transfer of shares in
the respondent-company and in the Maheshwari Khetan Sugar Mills Private Ltd.
belonging to Sagarmal Hariram and Ganesh Narayan Onkarnath groups to which the
appellants belonged to the group of Kedarnath Khetan to which respondents Nos.
1 and 2 belonged. These transfers were in lieu of shares in Ishwari Khetan
Sugar Mills Private Ltd. to be transferred by the group of respondents Nos. 1
and 2 to the group of the appellant. It is significant to notice that the
agreements recited that the shares in the respondent-company were under
attachment of the income-tax authorities, and, therefore, they could not be
immediately transferred. The agreement was that as soon as the transfer of the
shares became permissible or if the income-tax authorities so permitted,
transfers as agreed and contemplated would be effective.
On 8th April, 1958, and 3rd October, 1959, the board
of directors of the respondent-company passed a resolution for transfer of the
shares belonging to the appellant group to the group of respondents Nos. 1 and
2. These resolutions were passed on the applications made on behalf of
respondents Nos. 1 and 2 and others of their group. The shares were thereafter
entered in the respondent-company's register in the names of respondents Nos. 1
and 2 and others of their group.
On 14th January, 1962, the appellant along with Kamla
Prasad Khetan and Mataden Khetan gave notice to respondent No. 1 and Durga
Prasad Khetan that the shares of the Ishwari Khetan Sugar Mills Private Ltd.
which were under attachment of the income-tax authorities had been sold by the
Additional Collector of Bombay on 23rd September, 1961. The notice stated that
the agreements had become impossible of performance and the consideration of
reciprocal promises disappeared. The notice further stated that the
power-of-attorney executed in favour of the respondent-company by the appellant
in respect of their shares in the Maheshwari Khetan Sugar Mills Private Ltd.
and Laxmi Devi Sugar Mills Private Ltd. were revoked and cancelled. The notice
concluded by saying that the respondents had no right, authority or power to
act on behalf of or in the name of the appellants in pursuance of the said
power-of-attorney.
By another notice dated 14th January, 1962, the
appellants informed the respondent-company that the transfer of shares in the
company's register had been made illegally and without authority because no
proper instruments of transfer duly stamped and executed by and/or on behalf of
the appellants were delivered to the respondent-company and that the shares
were under attachment by the Collector of Deoria for recovery of income-tax
arrears on the certificate issued by the Additional Collector of Bombay. The
notice to the respondent-company also said that certain shares in blank
transfer forms were in the possession of the receiver appointed by the
Additional Collector of Bombay in the income-tax recovery proceedings. The notice
concluded by stating that the respondent-company was informed that the alleged
transfer of shares from the names of the appellants as well as the deletion of
their names from the register was illegal and void.
Respondent No. 1 and Durga Prasad Khetan contended in
answer to the notice that the appellant had no right, title or interest in the
shares mentioned in the notice, that the shares had not been transferred but
had been transmitted subject to the orders of the income-tax authorities under
section 46(5)(a) of the Income-tax Act, and that the shares of the Ishwari
Khetan Sugar Mills Ltd. were sold by the Additional Collector of Bombay in
recovery of the income-tax arrears in spite of the protests lodged by the
respondent and that the power-of-attorney in respect of the shares could not be
cancelled by the appellant. The respondents denied that the transfers were
illegal and without authority.
In this background the appellant on 17th July, 1962,
filed a petition in the High Court of Allahabad under section 155 of the
Companies Act, 1956, referred to as "the Act", against the
respondents. The appellant contended first that the transfers of all the shares
in the respondent-company's register were illegal because the transfers were
without any proper instrument of transfer. The appellant also contended that
the transfers were in contravention of the mandatory provisions of section 108
of the Act and articles of the respondent-company. The second contention of the
appellant was that no legal transfer of the shares in question should have been
made because at the time of the alleged transfer the shares had been
surrendered along with blank transfer forms to the receiver appointed by the
Collector of Bombay in execution proceedings for recovery of the income-tax dues.
The appellant also alleged that other shares had been attached by the Collector
of Deoria in pursuance of the two certificates issued by the Collector of
Bombay under Order 21, rule 46, of the Code of Civil Procedure.
The learned single judge directed the
respondent-company to rectify the register of its members by removing the names
of respondents Nos. 1 and 2 and to restore the names of the original
shareholders. The learned single judge rejected the contention of the
respondents that it was a case of transmission of shares. The learned judge
said that the transmission of shares occurred only by operation of law and this
was a case of transfer by voluntary act of the parties which could not amount
to transmission. The learned judge also held that although the transferees
divested themselves of all powers and control in respect of the shares in
question by executing irrevocable powers-of-attorney in favour of the
transferees, mere transfer of control did not amount to transfer of possession.
The learned judge further held that the agreements to which reference has
already been made were not instruments of transfer and the transfer of shares
which were under attachment in pursuance of the certificate issued by the
Additional Collector under Order 21, rule 46 of the Code of Civil Procedure was
illegal and void. The transfer of the shares which had been surrendered to the
receiver appointed by the Collector of Bombay was also held by the learned
judge to be bad on the same ground.
The respondents preferred an appeal. The Division
Bench of
the High Court set aside the order passed by the company judge and dismissed
the applications of the appellant. The Division Bench held that the provisions
contained in section 108 of the Act were directory and not mandatory. The
Division Bench also held that the provisions of section 64 of the Code of Civil
Procedure and Order 21, rule 46, prevailed over the prohibitory order contained
in Form No. 18 in Appendix E of Schedule I of the Code. The Division Bench held
that the appointment of the receiver did not divest a party of his right to
property and the mere fact that shares were handed over to the receiver with
blank instruments of transfer did not make any difference.
The provision contained in section 108 of the Act
states that, "a company shall not register a transfer of shares...unless a
proper instrument of transfer duly stamped and executed by or on behalf of the
transferor and by or on behalf of the
transferee...has been delivered to the company along with the certificate
relating to the shares or debentures...or, if no such certificate is in
existence, along with the letter of allotment of the shares". There are
two provisos to section 108 of the Act. We are not concerned with the first,
proviso in these appeals. The second proviso states that nothing in this
section shall prejudice any power of the company to register as shareholder or
debenture-holder any person to whom the right to any shares in, or debentures
of, the company has been transmitted by operation of law. The words "shall
not register" are mandatory in character. The mandatory character is
strengthened by the negative form of the language. The prohibition against
transfer without complying with the provisions of the Act is emphasised by the
negative language. Negative language is worded to emphasise the insistence of
compliance with the provisions of the Act. (See State of Bihar v.
Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1952] SCR 889, 988-89, K.
Pentiah v. Muddala Veeramallappa [1961] 2 SCR 295, 308 (SC) and imreported
decision dated 18 April, 1976, in Criminal Appeal No. 279 of E975,
etc.—Additional District Magistrate, ]abalpur v. Shivakant Shukla, AIR 1976 SC
1207). Negative words are clearly prohibitory and are ordinarily used as a
legislative device to make a statutory provision imperative.
In Raza
Buland Sugar Co. Ltd. v. Municipal Board, Rampur [1965] 1 SCR 970 (SC), this
court referred to various tests for finding out when a provision is mandatory
or directory. The purpose for which the provision has been made, its nature,
the intention of the legislature in making the provision, the general
inconvenience or injustice which may result to the person from reading the
provision one way or the other, the relation of the particular provision to
other provisions dealing with the same subject and the language of the
provision are all to be considered. Prohibition and negative words can rarely
be directory. It has been aptly stated that there is one way to obey the
command and that is completely to refrain from doing the forbidden act.
Therefore, negative, prohibitory and exclusive words are indicative of the
legislative intent when the statute is mandatory. (See Maxwell on the
Interpretation of Statutes, 11 th edition, page 362, et. seq., Crawford
Statutory Construction, Interpretation of Laws, page 523 and Seth Bikhraj
]aipuria v. Union of India [1962] 2 SCR 880, 893-94 (SC)).
The High
Court said that the provisions contained in section 108 of the Act are
directory because non-compliance with section 108 of the Act is not declared an
offence. The reason given by the High Court is that when the law does not
prescribe the consequences or does not lay down penalty for non-compliance with
the provisions contained in section 108 of the Act, the provision is to be
considered as directory. The High Court failed to consider the provision
contained in section 629A of the Act. Section 629A of the Act prescribes
the penalty where no specific penalty is provided elsewhere in the Act. It is a
question of construction in each case whether the legislature intended to
prohibit the doing of the act altogether, or merely to make the person who did
it liable to pay the penalty.
Where a contract, express or implied, is expressly or
by implication forbidden by statute, no court will lend its assistance to give
it effect. (See Melliss v. Shirley and
Freemantle Local Board of Health [1886] 16 QBD 446 (CA)), A contract is
void if prohibited by a statute under a penalty, even without express
declaration that the contract is void, because such a penalty implies a
prohibition. The penalty may be imposed with intent merely to deter persons
from entering into the contract or for the purposes of revenue or that the
contract shall not be entered into so as to be valid at law. A distinction is
sometimes made between contracts entered into with the object of committing an
illegal act and contracts expressly or impliedly prohibited by statute. This
distinction is that in the former class one has only to look and see what acts
the statute prohibits ; it does not matter whether or not it prohibits a
contract; if a contract is made to do a prohibited act, that contract will be
unenforceable. In the latter class, one has to consider what act the statute
prohibits, but what contracts it prohibits. One is not concerned at all with
the intent of the parties ; if the parties enter into a prohibited contract,
that contract is unenforceable (See St. John Shipping Corporation v. Joseph
Rank Ltd. [1957] 1 QB 267 (OB)). (See also Halsbury's Laws of England, third
edition, volume 8, page 141).
It is well established that a contract which involves
in its fulfilment the doing of an act prohibited by statute is void. The legal
maxim a pactis privatorum publico juri non derogatur means that private
agreements cannot alter the general law. Where a contract, express or implied,
is expressly or by implication forbidden by statute, no court can lend its assistance
to give it effect. [See Melliss v. Shirley and Freemantle Local Board of Health
[1886] 16 QBD 446 (CA)]. What is done in contravention of the provisions of an
Act of the legislature cannot be made the subject of an action.
If anything is against law, though it is not
prohibited by the statute but only a penalty is annexed, the agreement is void.
In every case where a statute inflicts a penalty for doing an act, though the
act be not prohibited, yet the thing is unlawful, because it is not intended that
a statute would inflict a penalty for a lawful act.
Penalties are imposed by statute for two distinct
purposes : (1) for the protection of the public against fraud, or for some
other object of public policy ; (2) for the purpose of securing certain sources
of revenue either to the State or to certain public bodies. If it is clear that
a penalty is imposed by statute for the purpose of preventing something from
being done on some ground of public policy, the thing prohibited, if done, will
be treated as void, even though the penalty imposed is not enforceable.
The provisions contained in section 108 of the Act
are, for the reasons indicated earlier, mandatory. The High Court erred in
holding that the provisions are directory.
Some of the shares were attached by the Collector of
Deoria pursuant to two certificates issued by the Collector of Bombay. Other
shares were surrendered along with blank transfer forms to the receiver
appointed by the Collector of Bombay in execution proceedings.
Order 21, rule 46 of the Code of Civil Procedure lays
down that in the case of shares in the capital of a corporation the attachment
shall be made by a written order prohibiting, in the case of the share, the
person in whose name the share may be standing, from transferring the same. In
the present case, in addition to the prohibition issued under Order 21, rule
46, a separate prohibitory order was issued to the company in Form No. 18 in
Appendix E of the First Schedule of the Code of Civil Procedure. Therefore, the
company by registering the transfer of shares was obviously permitting the
transfer and such action on the part of the company being in violation of the
prohibition is contrary to law.
Shares which had not been attached but had been
surrendered to the receiver appointed by the Collector of Bombay came from the
possession of the receiver in the partnership suit. The receiver in the
partnership suit took possession of the shares along with blank transfer forms
in the year 1953. When the receiver held the scrips and the transfer forms it
was not open to the persons in whose names the shares originally stood to
exercise rights of ownership in respect, thereof or to transfer their ownership
to anyone else.
For the foregoing reasons we set aside the decision
of the High Court. The order of the learned single judge dated 5th March, 1963,
is restored. There will be no order as to costs.
Appeals allowed
[1958] 28 COMP. CAS. 29 (PUNJ.)
V.
CHOPRA,
J.
FEBRUARY
8, 1957
CHOPRA, J.
- This is a petition by the Union of India under section 38 of the Indian
Companies Act, 1913, (section 155 of the present Act of 1956), for
rectification of the register of members of the respondent-company, Kulu Valley
Transport Ltd. Ram Dial and Gurdial, respondents Nos. 2 and 3, are brothers and
Mst. Vidya Bati, respondent No. 4, is the wife of Ram Dial. Tam Dial holds four
shares in the company, No. 39 to 42. Two shares each are held by the Gurdial
and Vidya Vati, their numbers being 14 and 43 and 44 and 45 respectively. All
these shares are fully paid-up and of the value of Rs. 4,000 each. The facts
shared by the petitioner, who already holds a large numbers of shares in the
company, are these : In the year 1952, the business of the company practically
came to a standstill and for that reason the value of the shares went down to
nil. In a meeting of the company held on 29th December, 1952, Ram Dial and
Gurdial, respondents, on behalf of themselves and on behalf of respondent No.
4, agreed t sell to the petitioner all the eight shares held by them on any
value that may be fixed by the three respondents were handed over to the
petitioner. The General Manager, Northern Railway,
Ram Dial has
not appeared to oppose the petition, the proceedings against him are ex parte.
Gurdial and Vidya Vati, respondents Nos. 3 and 4, in their written statements,
claim themselves to continue as the shareholders of the company, on the grounds
that there had been no valued and completed transfer in favour of the
petitioner and no price therefor had been settled or paid. MRs. Perry,
respondent No. 5, denies all knowledge of the facts stated by the petitioner
and claims herself to be a pledgee of the shares of Ram Dial in the amount of Rs.
35,000. The company is alleged to have acknowledged her deceased husband, Mr.
Perry’s lien on the said four shares of Ram Dial in their letters (exhibits R-9
and R-10) dated 12 August, 1947, and 7th May, 1948. Respondent company takes up
a neutral position and states that the petitioner;s name was not entered in the
books of the company`because of the dispute between the petitioner and
respondents Nos. 2 to 4 and also because the company had ceased to function in
between the time of the alleged transfer and the present petition.
The pleadings
gave rise to the following issues:
(1) Have the respondents Nos.
2,3,and 4 sold the shares in dispute to the petitioner, namely the Union of
India?
(2) If so, is
the petition not maintainable?
(3) Has respondent No. 5, Mrs. G.R.Perry, a lien on the shares in
dispute and was notice of the lien sent the company? What is the effect?
As regards the
alleged sale, the case against Gurdial and Vidya Vati, respondents, is
distinguishable from that of Ram Dial and has, therefore, to be considered
separately. Execution of the blank transfer deeds on their behalf and the
handing over of the scrips relating to their shares are not denied. On behalf
of the petitioner, it is contended that this alone was sufficient to complete a
valid transfer in favour of the petitioner. It is further submitted that the
price, according to the agreement between the parties, was o be fixed by the
Railway Administration. The latter fixed the same at 10 per cent. of the face
value of the shares and the same was accepted by Ram Dial on behalf of himself
and the other respondents. The fact that the price had not been actually paid
was of no consequence, for the petitioner was all along willing, and is even
now prepared to pay the same to the respondents.
Ordinarily, a
sale of shares becomes complete and binding on the parties when scrips with
respect to those shares are handed over to the purchaser along with blank
transfer deeds signed by the seller. Price may be paid at the time or agreed to
be subsequently paid. The parties may also agree that the price shall be fixed
by the purchaser himself and paid after such fixation. The facts in the present
case are, however, slightly different. The document passed on to the Railway
Administration were accompanied by a letter from each of the shareholders.
These letters (P-3 and P-4) bear the date when the documents are alleged to
have been handed over, viz., 29th December, 1952. They are in identical terms
and state:
“I, .....
seller hereby submit a signed transfer deed for the sale of .....(number of
shares) shares of the face value of Rs. 4,000 (rupees four thousand only) each
of the Kulu Valley Transport Ltd., Pathankot, and request the Railway
Administration to pay me any amount that it considers just and reasonable. this
is in no way binding on the Railway Administration to make the purchaser.”
The concluding
portion of the letter clearly indicates that it was not meant to be an outright
sale, but amounted only to an offer to sell on the specified terms. It remained
open to the Railway Administration to accept the offer or not, and also to fix
the price to be paid for the shares. Ram Dial respondent was then the managing
d9rector of the company. He presented the letter together with the transfer
deeds in the general meeting held on 29th December, 1952. In the minutes of
that meeting (P-1) notice of this offer was taken in the following terms:
“M/s. Ramdial
and Gurdial have letters in writing stating they would like the Railways to buy
their shares at any price which they considered just and reasonable, so that
the company could be revived and not allowed to go into liquidation.”
Mr. B.T.Singh
(P.W.I.), Deputy Chief Commercial Superintendent, Northern Railway, Delhi, who
presided at the meeting and to whom the offer was made, describes what took
place that day as follows :
Mrs. Ram Dial
and Gurdial on their own behalf and on behalf of Mrs. Ram Dial agreed to sell
their 8 shares in all to the Union of India ad to that effect they gave letters
Exhibits P, 2, P. 3 and P. 4 which were handed over to me in that meeting by
Messrs. Ram Dial and Gurdial Transfer deeds Exhibits P.5 P.6 and P.7 along with
six original shares scrips were also handed over to me.”
Obviously, the
parties did not take it as a completed contract; they regarded it as an offer
to be accepted by the petitioner.
Section 2(7)
of the Indian Sale of Goods Act regards “stock and shares” as falling within
the definition of “goods” for the purpose of the Act. Under section 5 of the
Act, a contract of sale is made by an offer to buy or sell goods for a price
and the acceptance of such offer. A completed contract for sale does not come
into existence till there is an acceptance of the offer.
To the same
effect are the provisions of the Contract Act. Communication of an acceptance
to the person making an offer is necessary to complete a contract under section
4, communication of an acceptance is complete-
as against the
propose, when it is put in a course of transmission to him, so as to be out of
the power of the acceptor;
as against the
acceptor, when it comes to the knowledge of the propose.
According to
section 5, a proposal may be revoked at any time before the communication of its
acceptance is complete as against the proper, but not afterwards. Section 6
provides, inter alia, that a proposal is revoked-
(1) by the
communication of notice of revocation by the proposer to the other party;
(2) by the lapse of the time prescribed in such proposal for its
acceptance, if no time is so prescribed by the lapse of a reasonable time
without communication of the acceptance ; or
(3) by the
failure of the acceptor to fulfil a condition precedent to acceptance.
It is implied
term in an offer that it shall promptly and within a reasonable time be
accepted. Section 7 lays down that in order to convert a proposal into a
promise the acceptance must be absolute and unqualified. A contract binding on
both the parties, therefor, does not arise until the communication is complete,
as against both of them. It is a well established principle of law that the
minds of the two parties must be brought together by mutual communication. An
acceptance which actually remains in the breast of the acceptor without being
actually or by legal implication communicated to the offer or is no binding
acceptance. Here, the petitioner is not in a position to specify the date when
the Railway Administration decided to accept the offer not as to when it
decided upon the price to be paid. All that can be said that it `was done some
time before 12th February, 1953, when the transfer deeds and the share
certificate were placed in a meeting of the board of directors of the company.
It shall have to be admitted that the acceptance of the Railway Administration
and its fixation of the price was never communicated to Gurdial and Vidya Vati
respondents the petitioner in this connection relies upon the letter (P.8) of
Ram Dial 5th February, 1953, and the statement of Mr. B.T.Singh (P.W.I). The
letter was addressed to the General Manager, Northern Railway, Delhi, and it
says:
“I agreed to
accept ten per cent. of the face value of the Kulu Valley Transport Ltd. shares
which my family members and myself held and for which transfer deeds have
already been signed.”
Shree
B.T.Singh does not profess to have had any talk or communication with Vidya
Vati. As regards Gurdial, but Ram Dial had been asked by him it negotiate on
his behalf. At the time when he handed over the documents, Gurdial said that
Ram Dial would look after his interest.” Ram Dial did not hold any power of
attorney to act on behalf of Gurdial or Vidya Vati. H9is relationship with them
could not confer any such authority. The shares were held by Gurdial and Vidya
Vati in their individual capacity and stood in their own names. the proposal,
through separate letters, having been made by them, the acceptance also ought
to have been communicated to them. So far as they are concerned, communication
of the acceptance to Ram Dial could be of no avail and was not binding as
against them. For the same reason, acceptance by Ram Dial of the price at 10
per cent. of the face value of the shares, in his letter (P-8), did not amount
to its acceptance by Gurdial and Vidya Vati. Since the petitioner’s acceptance
was not conveyed to Gurdial and Vidya Vati they had the right to revoke the
proposal.
The Railway
Administration was to fix the price and pay the same while communicating the
acceptance. This too, not having been done, the proposal could be revoked, or
of itself it stood revoked after the expiry of a reasonable time. In Ramsgate
Hotel Co. v. Montefiore an offer to buy share made on 8th June was held to have
elapsed on 23rd November, when acceptance was signed as the interval was not regarded
as reasonable. In Ramlalsao Gupta. Malak, an offer made on 24th December, 1934,
was regarded as having lapsed by operation of section 6(2) of the Contract Act
on 26th August, 1935, when it was accepted.
Mst. Vidya
Vati,in her letter dated 28th December, 1953 (R.5), informed the petitioner
that since no price had been fixed she wanted the full amount, Rs. 4,000, on
each share t be p[aid to her with respect to her shares. A letter in identical
terms (R.1), was sent by Gurdial to the petitioner on 31st December, 1953.
Letters to the same effect (R.3 and R. 6) were again addressed by them on 22nd
February, 1954, and 14th October, 1954. These letters amounted to revocation of
the original proposal expressing their willingness to accept any price fixed by
the Railway Administration. The letters which wee written before he acceptance
was communicated to them put an end to the original proposal. I am, therefore,
of opinion that there was no completed sale with respect to the shares of
Gurdial and Vidya Vati in favour of the petitioner.
Mr. Tuli,
learned counsel for the respondent, further contends that the transfer deeds
were not duty stamped and also that the stamps were not properly cancelled.
Article 62 of Schedule 1 of the Indian STamp Act, as amended in the Punjab by
Act No. XXVII of 1949, provides the proper stamp duty on a transfer of shares
in an incorporated company to be “one half of the duty payable on a mortgage
deed with possession for the amount equal to the value of the shares.” The
transfers of two shares each by Gurdial and Vidya Vati bear adhesive stamps of
Rs. 6 each, and the transfer of four shares by Ram Dial bears stamps worth Rs.
15. The dispute is regarding the meaning of the phrase “value of the shares,
“in article 62. If “value” means the consideration mentioned in the deed, the
transfers are properly stamped. Mr. Tuli, however, contends that the transfers
should have been stamped according to the face value of the shares, i.e., Rs.
4,000 each, and not according to the consideration mentioned in the transfers.
I do not see any force in the contention. The phrase “value of the shares”
cannot be read as “face value of the shares”. If that were the intention of the
Legislature, it could have been precisely expressed by using a slightly different
language. In my view, “value” means the price that the shares would fetch at
the time of the transfer and not the face value of the shares. the
consideration actually paid or agreed to be paid can safely be regarded as the
value of the shares. So long as there is nothing to indicate that the
consideration was not truly stated in the transfer, the mentioned therein shall
be accepted as the consideration that was, or is, to be paid. I would
therefore, hold that the transfer deeds are properly stamped.
Stamps on the
transfer deed executed by Ram Dial have been only cancelled but those on the
transfer deeds executed by Gurdial and Vidya Vati do not bear any mark of
cancellation at all. They are left blank and may at any time be removed and
used again. Under section 12 of the stamp Act, any instrument bearing an
adhesive stamp which has not been cancelled so that it cannot be used again
shall, so far as stamp is concerned, be deemed to be unstamped. Mr. Gosain
meets the objection by submitting that since it was the Government who was
liable to pay the duty chargeable on the instruments, the instruments need not
have been stamped at all, and the stamps which were unnecessarily placed need
not have been cancelled. One of the provisos to section 3 of the Stamp Act lays
down that no duty shall be chargeable in respect of any instrument executed by,
or on behalf of, or in favour of, the Government in cases where, but for this
exemption, the Government would be liable to pay the duty chargeable in respect
of such instrument. Section 29 specifies the persons by whom the duty shall be
payable. According to this section, the expenses of providing the proper stamps
in respect of transfer of shares is to be borne “by the person drawing making
or executing such instrument.” Regulation 19 (adopted by article 1 of the
articles of the respondent company) provides that the instrument of transfer of
any share in the company shall be executed by or on behalf of both the
transferor and the transferee. The argument is that since the instrument were
to be executed by the Government as transferee of the shares the Government was
liable to pay the duty chargeable thereon, and therefore, the documents need
not have been stamped. I do not feel impressed by the argument and am not inclined
to accept it. Regulations 20 gives the form of an instrument of transfer; the
transfer deeds in this case are in that form. The main and operative part of
the instrument is required to be drawn up and executed by the transferor, all
that the transferee is required to do is to accept it. The transferee simply
places his signatures on the instrument signifying acceptance of the transfer
by nothing down his acceptance on the instrument itself, he cannot be regarded
as drawing up or executing the instrument. In the absence of an agreement to
the contrary, the expenses of providing the proper stamps for an instrument are
to be borne by its executant the executants in this case were the respondents.
In Jainarain Ram Ludia v. Surjamull Sagarmull, it was held that ordinarily and
as matter of law in the case of transfer of shares of a company, it is the
vendor by whom the stamp duty is payable. Consequently, the stamps on the
transfer deeds executed by Gurdial and Vidya Vati having not been cancelled,
the documents ought to be regarded as unstamped.
Section 108(1)
of the Indian Companies Act, 1956,lays down-
“A company
shall not register a transfer of shares in or debentures of, the company,
unless a proper instrument of transfer duly stamped and executed by or on
behalf of the transferor and by or on behalf of the transferee and specifying
the name, and occupation, if any, of the transferee, has been delivered to the
company along with the certificate relating to the shares or debentures, or if
no such certificate is in existence, along with the letter of allotment of the
shares of debentures.”
The proviso
which follow are not relevant for the purposes of this case. The status is
mandatory in its terms. The company could not legally give effect to the
transfers and register the shares in the name of the petitioner. Under section
155 of the Indian Companies Act, rectification can only be ordered if the
company without sufficient cause enters or omits to enter the name of any
person in the register of its members. TO order rectification in a case where
there is no duly stamped transfer deed in favour of the petitioner would amount
to ordering the company to act in contravention of the statute.
In New Citizen
Bank of India v. Asian Assurance Co. Ltd., it was held that before a person can
claim that his name be entered on the register of the company as a shareholder
he has to submit the share scrips and a properly executed and duly stamped
transfer form, and that the requirements of sub-section (3) of section 34 of the
Companies Act, 1913 (section 108 of the new Act) having not been complied with,
the company would have been breaking the law if they had registered the
transfer. The petition so far as it relates to the shares of Gurdial and Vidya
Vati has to be rejected on this score as well.
As regards the
shares of Ram Dial, Mrs. Perry, respondent No. 5, states that they were pledges
with her husband in 1947for the money due to him from Ram Dial. I do not see
sufficient grounds to disbelieve her statements so far s it relates to shares
Nos. 39 and 40 of which the share certificates are still with her. Ram Dial
assured the petitioner that he would hand over the share scrips after getting
them from Mrs. Perry with whom they were pledged. Exhibit R. 8 is a copy of the
letter dated 8th August, 1947, which Mr. Perry wrote to the company for nothing
down his first lien on the shares held by Ram Dial. Exhibit R. 9 dated 12th
August, 1947, is the reply on behalf of the company, which recites that Ch. Ram
Dial had also written to them on subject and that they had noted down the
pledge in favour of Mr. Perry. R. 19 is another letter addressed by the company
to Mrs. Perry respondent, after the death of her husband. This letter is dated
7th Mat, 1948, and it reads:
“We are in
receipt of your letter on the subject of your lien on shares. We have noted
that you have the first lien on 4shares Nos. 39 to 42 held by Ch. Ram Dial in
the Kulu Valley Transport Ltd. Ch. Ram Dial also has informed us of your lien
on these shares.”
These letters
are under the signature of Shri Shiv Kumar, the then secretary of the company.
Shiv Kumar examined as the respondents’ witness admits that these letters were
written by him in reply to the letters received from Mr. and MRs., Perry. the
fact that they were written, as stated by him, under the instructions of Ram
Dial who was then the company’s managing director, or that no entry was in fact
made in the company’s registers, as stated by Mr. M.L.Puri (P.W.1), the present
secretary of the company, is of no consequence. I do not see any force in Mr.
Gosain’s half- hearted contention that the letters are spurious. They are duly
numbered. the petitioner has not produced the relevant registers of the company
which might of to show that they were not actually written on the dates of
despatched at the numbers noted on the letters.
It is an
admitted fact that the scrips with respect to the shares Nos. 30 and 40 were
not handed over to the petitioner and that they were not produced before the
company along with the transfer deeds in favour of the petitioner. Under
section 108 (1) of the Companies Act, the transfer with respect to these shares
could not be registered without production of the share certificates. Article
11 of the company’s articles also enjoins that the instrument of transfer must
be accompanied by the certificate of shares. Printed forms of the company’s
share certificate bear the following note:
“No transfer
of any of the above shares will be registered without production of this
certificate.”
The fact that
the share certificates were with Mrs. Perry as a pledgee and the petitioner’s
failure to produce them with the transfer deeds disentitled the petitioner to
claim any registration with respect to these shares. the petitioner’s prayer
with respect to these share has, therefore, to be rejected.
In the result,
the petition so far as it relates to the shares (Nos. 14, 43, 44 and 45) held
by Gurdial and Vidya Vati and shares (Nos. 39 and 40) standing in the name of
Ram Dial, is rejected. The petition is accepted with respect to the remaining
two shares (Nos. 41 and 42) held by Ram Dial, and it is directed that these
shares shall be registered in the name of the petitioner on payment of Rs. 800
by the petitioner to Ram Dial. The petitioner shall pay one set of costs to
respondent Nos. 3 to 5 and get its proportionate costs from Ram Dial. counsel
fee shall be Rs. 200.
Order
accordingly.
[1933] 11 COMP. CAS. 334 (MAD)
HIGH COURT OF
v.
P. Saraswathi Ammal
CIVIL REVISION PETITIONS NO. 1255
OF 1937 AND 540 OF 1938
DECEMBER 10, 1940
K. S. Sankara Iyer and A. K. Sreeraman, for the Petitioner.
K. Kuttikrishna Menon and C. Vasudeva Mannadiar, for the Respondent.
These revision petitions both arise out of an order of a Bench of the
Turning to the merits of these two revision petitions, the facts of the
case are that the plaintiff desired to acquire certain shares in a company
which were owned by Mr. Ratna Mudaliar who was the father-in-law of defendant
1. The plaintiff therefore paid a sum of money to the defendants and took from
them a promissory note which is the basis of the present suit. At the same time
he gave them a letter (Ex. 1) in which he promises to return the promissory
notes duly cancelled as soon as the defendant got Mr. Ratna Mudaliar's 20
shares transferred to the plaintiff or his nominee. This was on the 17th
February 1934. On the 26th February, 1934, Mr. Ratna Mudaliar executed an
agreement which is Ex. 2 in which he undertakes to transfer to the plaintiff
the shares in question and the agreement goes on: "I herewith hand over to
you duly endorsed the share certificates," and there are further recitals
as to the liabilities under the transfer. This agreement purports to be signed
by Mr. Ratna Mudaliar on the 26th February and to be countersigned by the
plaintiff on the same date. The actual share certificate is Ex. III and this
certificate contains an endorsement of transfer signed by Mr. Ratna Mudaliar
and dated the 26th February transferring the shares to the plaintiff; but the
spaces for the signature of the transferee and of the company's officials are not
filled. A few days after this transaction Mr. Ratna Mudaliar resigned his
position in the management of the company and the plaintiff became its
chairman. Nothing more was done in the matter of the transfer of the shares
until the company got into difficulties and went into liquidation in November.
Then we have Ex. IV dated the 20th November, 1934, which is a lawyer's notice
to the two defendants claiming payment of the amount due under the promissory
note.
The suit on the promissory note was tried by the learned second Judge of
the Small Cause Court who came to the conclusion that the transfer endorsement
on the share certificate Ex. III was not signed by Mr. Ratna Mudaliar on the
26th February, that the agreement Ex. II was taken back by defendant I from the
plaintiff after countersignature and was never afterwards delivered to the
plaintiff, that Ex. III was not delivered or even tendered to the plaintiff and
that the plaintiff did not as alleged request defendant 1 to keep in his
custody Exs. 2 and 3 until the return of the promissory note. On these findings
the learned Judge came to the conclusion that the ownership of the shares
remained with Mr. Ratna Mudaliar, that the defendants had not done that which
was obligatory upon them if they wanted the promissory note to be cancelled and
that they could not require the plaintiff to take a transfer of the shares
after such unreasonable delay when the company had gone into liquidation and
that the defendants were therefore obliged to pay the amount due under the
promissory note. There was an application for a fresh trial which, as I have
stated, was heard by the Chief Judge along with the trial Judge. This Bench
gives a finding that the share certificates standing in the name of Mr. Ratna
Mudaliar was duly endorsed to the plaintiff on the 26th February 1934 which
finding is of course in direct conflict with the conclusion of the. trial
Judge. They also come to the conclusion that Exs. II and III show that the
shares were transferred on the 26th February 1934 and somehow they seem to
think that the crucial question in the case is whether there was a valid
agreement to transfer the shares and that this would depend upon whether Mr.
Ratna Mudaliar's acceptance of the plaintiff's offer was communicated to the plaintiff.
It was for a decision ox these questions that a new trial was ordered. It is
conceded on both sides before me that the questions formulated for decision at
the fresh trial are not the real questions which arise in the case and it is
also not seriously disputed that the Bench has given findings of facts which
are in conflict with those of the trial Judge and that it is on the basis of
these findings of facts that the fresh points for determination have been
formulated. It has been held by this Court, Sikandar Rowther v. Ghouse Mohideen
Marakayar,
that a Full Bench of the Small Cause Court under Section 38 does not exercise
appellate powers and has no jurisdiction to decide questions of fact. If it
comes to the conclusion that the findings of fact by the trial Court are
unsupported by evidence and are such as to justify interference in revision the
proper procedure is not to give fresh findings of fact but to order a retrial
at which the facts may be gone into afresh. Moreover, there is no serious
dispute between the parties, so far as I have been able to gather, as to the
validity of the agreement to transfer these shares or as to the fact of the
communication of Mr. Ratna Mudaliar's agreement to transfer to the plaintiff.
The real question in issue between the parties is whether Mr. Ratna
Mudaliar at the time when this agreement was communicated to the plaintiff
completed the endorsement of transfer so far as he was able to do so and
thereby appropriate the particular shares for the performance of his contract
with the plaintiff and converted those shares into specific goods in a
deliverable state so as to satisfy Sections 20 and 23 of the Sale of Goods Act.
If on that date Mr. Ratna Mudaliar not only signed Ex. II but also signed the
transfer endorsement and communicated to the plaintiff the fact that the shares
were in a deliverable state so that the plaintiff could complete the
formalities by handing over the cancelled promissory note and getting the
transfer registered in the company's books there was nothing more for Mr. Ratna
Mudaliar to do and title in the shares would pass to the transferee : vide
Manekji Pestonji v. Wadilal Sarabhai & Co., I am not
prepared to take the view that Ex. II by itself would amount to a transfer deed
sufficient to cause title to pass. It purports to be an agreement of transfer
accompanying the actual instrument of transfer and if the instrument of
transfer has not been completed so far as the transferor could complete it, Ex.
II by itself would be nothing more than an enforceable agreement to convey and
until the transfer endorsement was signed the shares would be unascertained goods
and they would not be in a deliverable state. But if on the 26th February, Mr.
Ratna Mudaliar signed both the agreement Ex. II and the transfer endorsement on
the share certificate and communicated the fact to the plaintiff who
countersigned Ex. II in token of acceptance of the transfer, then it was the
plaintiff's fault that he did not cancel the promissory note and get the
formalities of the transfer completed. In such circumstances the result would
be that title in the shares would pass to the transferee and the plaintiff
would be disenabled from suing on the promissory note. It seems to me therefore
that in view of the contention that the trial Court's finding of fact regarding
the execution of the endorsement of Ex. III is not supported by evidence and
having regard to the fact that the trial Judge himself sitting with the Chief
Judge has arrived at a conclusion on the same materials which is diametrically
opposed to the findings of fact in the actual trial it is desirable that there
should be a fresh trial in the course of which the essential facts may be found
afresh.
The order of the Bench is therefore set aside. There will be a fresh
trial in the course of which the trial Judge will decide whether title in these
shares passed to the plaintiff on the 26th February, 1934, which question will
depend on the further question whether at the time of the execution of Ex. II
by Mr. Ratna Mudaliar he also executed the transfer endorsement on Ex. III and
communicated to the plaintiff the fact that he had executed the transfer
endorsement. The costs throughout will abide the result and the parties will be
free to adduce fresh evidence. The Chief Judge will consider the desirability
of posting this case before a Judge who has not hitherto been concerned with it.
[1958] 28 COMP. CAS. 71 (MAD.)
V.
Kowtha Suryanarayana
Rao
RAJAMANNAR CJ. AND PANCHAPAKESA AYYAR, J.
APRIL 4, 1957
PANCHAPAKESA
AYYAR, J. - This is an
appeal by the Bank of Hindustan Ltd. (now in liquidation) by its joint official
liquidators, the official receiver of this court and Messrs. Brahmayya and Co.,
the first defendant in C. S. No. 525 of 1948 and application No. 1229 of 1951
on the file of this court, against the judgment and decree of RAMASWAMI FOUNDER
J. declaring that the plaintiffs, Kowtha Suryanarayana Rao and the Indian
Commerce and Industries Co. Ltd., represented by him as governing director,
were entitled to have their names, which stood registered in the books of the
appellant company, as holders and owners, cancelled, and omitted in respect of
1,608 partly paid up shares of Rs. 90 each (only Rs. 40 out of each share
having been paid up) standing registered in the name of the first plaintiff,
and of 60 other similar shares standing registered in the name of the second
plaintiff in the books of the company, and directing the name of the second
defendant, Saraf, to be registered as the holder and owner of the above, 1,668
shares in the books of the bank, and restraining the appellant bank and its
liquidators by an injunction from making any call or taking any other
proceedings against the plaintiffs in respect of the said 1,668 shares.
The facts are
briefly as follows : The Bank of Hindustan Ltd., the appellant bank, was a
banking company incorporated under the Indian Companies Act with its registered
office at No. 119 Armenian Street, Madras. The first plaintiff is a landlord
and merchant, carrying on business at No. 95 Broadway, Madras. Till the
beginning of May, 1945, he, admittedly, held 2,508 partly paid up shares of Rs.
100 each (reduced to Rs. 900 in this bank ; and the second plaintiff, of which
the first plaintiff is the governing director, held another 610 shares of Rs.
90 each. These shares admittedly, stood registered in the books of the
appellant bank in the names of the first and second plaintiffs respectively
till May, 1947. The first plaintiff was then not only a director of the
appellant bank, but the managing director thereof, having been an ordinary
director from 1942 of 1944.
On 4th May,
1945, under an unstamped agreement ; Exhibit P. 1, the second defendant, saraf,
a merchant of Sir Phirozshah Mehta Road, Bombay, then considered to be a man of
substance (now said to be a man of no substance), agreed to purchase all the
3,118 shares (noted in Exhibit P. 1 as about 3,200 shares) from the plaintiffs
at Rs. 41-4-0 net per share (as against the Rs. 40 paid up per share). Exhibit
P.1 added that the purchase money calculated at that rate would be paid by
Bhagat, the fourth defendant, a partner of Sarafally Co., Sembudoss Street,
Madras, and that he had agreed to pay the money and to receive 3,118 shares
from the plaintiffs, the fourth defendant being said to have agreed to advance
the amounts to the second defendant who was asked by the first plaintiff to pay
up at once and had no ready cash then but hoped to get it in a few days from
Bombay. Exhibit P. 1 went on to say that, as the first plaintiff had sold away
all his shares and had no more interest as a shareholder in the Bank of
Hindustan Ltd., he should tender his resignation as the managing director,
chairman, and director as agreed to by him. This agreement was to enable the
second defendant to step into his shoes, and defendants Nos. 2 to 4, who were
the other directors the, to run the bank themselves, without the first
plaintiff’s interference. Exhibit P. 1 added that the plaintiffs had agreed to
give blank transfer deeds for each scrip separately from the persons concerned,
that is, the persons in whose names the relative share scrips stood. Exhibit P.
1 did not say to whom the scrips would have to be eventually sold or
transferred by the second defendant, who purchased them, or by the fourth
defendant who took delivery of them after making payment on behalf of the
second defendant, or fix date for deleting the names of the plaintiffs from the
books of the company and substituting the names of the purchasers in respect of
these shares.
As per the
agreement under Exhibit P. 1, the first plaintiff tendered his resignation as
director, chairman and managing director of the appellant bank on 4th May,
1945, itself. The fourth defendant later on bought 500 shares out of the 3,118
shares agreed to be purchased by the second defendant. He paid the plaintiff
Rs. 1,28,617-8-0 on behalf of the second defendant, as agreed to under Exhibit
P.1 ; and wrote a letter, Exhibit P. 3, on 8th May, 1945, to the second
defendant at Bombay, informing him about the payment to the plaintiffs on
behalf of the second defendant, and requesting his to send a cheque to him
payable at Madras for Rs. 1,07,992-8-0, the money paid by him to the
plaintiffs, less Rs. 20,625, the value of 500 shares bought by him out of the
3,118 shares. Exhibit P. 3 also conveyed to defendant No. 2 information of a
tea party given to the Deputy Governor, Reserve Bank of India, at the appellant
bank premises, and added that the bank matter was going in order. On 9th May,
1945, the first plaintiff passed a stamped receipt for Rs. 1,03,455, the value
of 2,508 shares of his own sold by him to the second defendant, on whose behalf
the fourth defendant had paid the money. A similar receipt was granted with
regard to Rs. 24,162-8-0 due to the second plaintiff for the 600 shares sold by
it to defendant No. 2.
But troubles
began very soon. On 16th May, 1945, the fourth defendant wrote a letter,
Exhibit P. 5, to the second defendant at Bombay enclosing a copy of the
previous letter, Exhibit P. 3, written 8 days before, and complaining of non-
receipt of the cheque for Rs. 1,07,992-8-0 requested therein, and asking for the
immediate despatch of a draft for that amount together with interest at 4 1/2
per cent. per annum up to the date of the payment. The second defendant, of
course, had not paid defendant No. 4 a pie by then, probably because he was
unable to find the money though he had become the managing director of the
appellant bank in the place of the first plaintiff who had been ousted under
Exhibit P. 1. He, however, managed to sell 950 more shares, out of the 3,118
shares purchased from the plaintiff, to the third defendant, N. P. Patel,
another director of the bank, who was carrying on business in Princess Street,
Bombay. The blank transfer forms given to defendant No. 4 by the plaintiffs, on
defendant No. 2’s behalf, in respect of the 500 shares bought by the fourth
defendant were signed by the purchaser, the fourth defendant, as the
transferor, the plaintiff having already signed before. The transfer forms thus
signed by the transferor and transferee were presented to the bank duly
stamped, and these shares were transferred by the directors of the bank to the
name of the fourth defendant on the 8th of June, 1945, the plaintiff’s name
being deleted in respect of these shares. Similarly, the blank transfer forms
in respect of the 950 shares bought by the third defendant were signed by the
third defendant (the transferor, the plaintiff, had already signed ) and the
transfer forms, thus completed by the transferor and the transferee, were
presented to the bank, duly stamped, and were duly transferred by the directors
to the name of the third defendant, the plaintiff’s name being deleted in
respect of those shares. But the blank transfer forms with regard to the
remaining 1,668 shares (1,608 shares standing in the name of the first
plaintiff, and 60 shares standing in the name of the second plaintiff in the
books of the bank) were not filled up by any transferee, till the suit and the
petition were filed, and no completed transfer forms presented to the bank,
apparently because the second defendant could not find purchasers for them and
get such purchasers to sign in them as transferees. So the 1,608 shares and 60
shares continued in the books of the company registered in the names of the
plaintiffs.
The scrips in
respect of the 1,668 shares, and the blank transfer forms relating to them,
were handed over by the second defendant to the third defendant as security for
large sums advanced by him to the second defendant, probably to pay off the
fourth defendant. The third defendant wrote a letter, Exhibit P. 6, to the
secretary of the appellant bank on 19th May, 1945, claiming dividend in respect
of those shares as mortgagee, producing those shares before the secretary and
executing an indemnity bond (Exhibit p. 11), in favour of the bank against any
claims in respect of the dividend for those shares, and giving in detail the
numbers of the shares. The bank paid him the dividend on those shares on the
authority of the letter, statements therein, production of the scrips, and the
indemnity bond, for the year ending 31st December, 1944, and for two more
years. After this, the amount due to the third defendant from the second
defendant was said to have been entirely paid and discharged. The third
defendant then delivered back the blank transfer forms and the scraps to the
second defendant’s nominee, the National Studios Ltd., Bombay, and he ceased to
have any more interest in the 1,668 shares. Exhibit P. 13 dated 5th April,
1947, is the third defendant’s letter to the National Studios Ltd. regarding
these and other shares, and Exhibit P. 14 is a letter of his to the National
Studios Ltd. requesting for payment. Exhibit P. 15, dated 18th April, 1947, is
a letter from the National Studios Ltd. acknowledging the receipt of the scrops
and the blank transfers. Exhibits 16 and 16-A relate to the payment of the
price of those shares by the National Studios Ltd. in discharge of the amount
due by defendant No. 2 to defendant No. 3. In Exhibit P. 15-B, a letter written
by the director of the National Studios Ltd. to the third defendant, it is stated
that the remittance of Rs. 68,272- 14-7 was in full settlement of the purchase
of the shares by the National Studios Ltd. So, finally, defendant No. 2
discharged his dues to defendants Nos. 4 and 3.
The plaintiffs
did not worry at all about the transfers of the 3,118 shares sold by them under
Exhibit P. 1, or enquire from the company whether their names were removed from
the register in respect of those shares and the names of the second defendant
or other purchasers substituted in respect thereof. They took it for granted
that the second defendant would have sold the shares to whomsoever he liked and
got the purchaser’s names, or his own name, registered in the bank’s books.
When the second defendant wanted time for payment of the money due under Exhibit
P. the first defendant had firmly refused to give even a few days, and then the
second defendant had made the fourth defendant pay on his behalf, and the first
plaintiff gave the scrips and the blank transfer forms to the fourth defendant
after receiving full payment. He had at first refused to give the scrips and
the blank transfer forms to the fourth defendant, probably because he had no
privity of contract with him. Then the second defendant had said that it was
impossible to conclude the contract under Exhibit P. 1 unless he agreed to give
the scrips and the blank transfer forms to the fourth defendant, as they
(defendants Nos. 2 and 4) had to place the shares internally. According to the
first plaintiff’s evidence as P. W. 1, the second defendant added.
“It is our
look-out to see that the transfers are effected in the registers. It is our
business and interest. We will do it.”
As the second
defendant was the managing director of the bank, and the fourth defendant was
the chairman, and the third defendant was also a director, the first plaintiff
did not worry about the transfers, and took it for granted that they would be
made in due course after the second defendant had distributed the 3,118 shares
he had bought to the purchasers from him, or that the second defendant would
get himself registered in respect of the unsold shares. According to him,
though technically the purchaser of the 3,118 shares under Exhibit P. 1 was the
second defendant, Saraf, he treated him as the mouth-piece and nominee of the
other directors and as acting on behalf of the other directors, and considered
all the three directors, defendants Nos. 2 to 4, to be acting in concert and to
be jointly purchasing the shares under Exhibit P. 1 though the third defendant
was absent at the transaction, and only defendants Nos. 2 and 4 were present,
and defendant No. 4 purported to pay the price only on behalf of the second
defendant, and there was no privity of contract between him and the plaintiffs
regarding the purchase of any of the shares under Exhibit P. 1. The first
plaintiff added, as P. W. 1, that, after he had sold all the shares and
resigned his chairmanship, managing directorship, and directorship, he phoned
to the bank and told the secretary or the assistant secretary or some other
officer of the bank (he was not sure who received the phone call) that he had
sold away all his interest in the bank to the directors, and that he phoned
like that at the request of defendants Nos. 2 and 4. He added that he did not
write any letter to the secretary of the bank about it, or have any other
correspondence with the bank. He had also omitted to mention this phone call in
his plaint. According to him, his belief that the names of the plaintiffs had
been removed from the books of the bank, and the names of the plaintiffs had
been removed from the books of the bank, and the names of the purchasers
substituted, was reinforced by the fact that no notice of meetings and no
dividend notice or dividend warrants were sent to him by the bank after Exhibit
P. 1.
While the
plaintiffs were thus pursuing a policy of masterly inactivity, the affairs of
the bank were going from bad to worse, and the bank was steadily rushing
towards bankruptcy. In October, 1947, the plaintiffs were surprised to receive
from the appellant bank a notice, calling on them to pay up a sum of Rs. 15,012
representing a further call of Rs. 9 per share in respect of 1,668 share said
to stand registered in the names of the plaintiffs, 1,608 shares in the name of
the first plaintiff and 60 shares in the name of the second plaintiff. The
plaintiffs were taken aback on receiving this notice, and made enquiries and
learnt, to their surprise, that out of the 3,118 shares sold by them to
defendant No. 2, under Exhibit P. 1, only 950 had been got transferred by him
to the name of the third defendant, and only 500 to the name of the fourth
defendant, and that the balance of the 1,668 shares stood still registered in
their names in the books of the company. They were also surprised at the names
in the books of the company. They were also surprised at the bank’s landing on
the rocks, and rushing towards bankruptcy, under directorship of defendants
Nos. 2 to 4. The first plaintiff swore, as P. W. 1, that so confident was he of
the bank’s continuing to prosper even after he resigned, that he invested the
entire sum of Rs. 1,28,617-8-0 received by him under Exhibit P. 1, in the
appellant bank itself, adding it on to the plaintiff’s existing deposit of Rs.
1,20,000.
The first
plaintiff wrote Exhibit P. 18 on 2nd September, 1947, immediately, after
receiving the call for Rs. 9 per share, to the second defendant, pointing to
them on 4th May, 1945, and that the second defendant had also drawn the
dividends on those shares, when he himself was the managing director, but had
omitted to register the shares in his name, and added that the plaintiffs had
no liability in respect of the shares, and that the second defendant should, in
honesty and fairness, see that the shares were actually registered in the bank’s
books in his name at once, if he had not already done so, and requested reply.
The second defendant was too cunning to be taken in by such tactics. He did not
reply to that letter. The first plaintiff wrote frantically another letter to
him on 31st October, 1947, possibly by registered post. The second defendant,
then by registered post, sent a reply, Exhibit P. 19, dated 10th November,
1947, stating that he did not appear to have received the letter dated 2nd
September, 1947, and requisting for a copy thereof to be sent to him. He added
that he was not in any way liable to pay any call in respect of the 1,668
shares standing registered in the plaintiff’s name in the books of the bank, as
he had acted merely as a nominee or mediator in the transaction evidenced by
Exhibit P. 1. It was only thereafter that the first plaintiff wrote a letter,
Exhibit O. 20, on 2nd December, 1947, to the bank itself, addressing it to the
secretary of the bank, the previous letters being addressed only to the second
defendant personally, by name, to his Bombay address. In Exhibit P. 20, the
first plaintiff alleged that the second defendant, who was till recently the
managing director of the bank, and defendants Nos. 3 and 4, the other
directors, had purchased the 3,118 shares from the plaintiffs under Exhibit P.
1, and that the shares were duly transferred to him, and that the bank and the
then secretary, Mr. Raghavendra Rao, knew all about this, and that the bank
deliberately and designedly kept in abeyance the transfer of those shares in
the name of the second defendant, who had promised to get the shares
transferred in the second defendant, who had promised to get the shares
transferred in the books of the bank to his name or to the name of the other
directors, defendants Nos. 3 and 4, and that defendant No.2, or his nominee,
defendant No. 3, had drawn out the dividends for two years, as the owner of
shares, executing an indemnity bond. He added that the two other directors,
defendants, Nos. 3 and 4, also were fully aware of all the facts, and that,
therefore, the call on the plaintiffs at Rs. 9 per share, in respect of the
1,668 shares was unsustainable, and the liability of the plaintiffs regarding
that call, or any other call respecting these shares, plaintiffs regarding that
call, or any other call respecting these shares, was repudiated and disowned,
as well as any right or title of the plaintiffs in those shares. He enclosed
along with Exhibit P. 20 a copy of the letter, Exhibit P. 1.
On 26th
December, 1947, on not receiving any satisfactory reply from the bank, the
first plaintiff sent another letter, Exhibit P. 21, to the secretary of the
bank, once again repudiating the liability of the plaintiffs for the call of
Rs. 9 made by the directors, and asking the bank to hold the second defendant
responsible for the payment of all call moneys and to take criminal action
against him for the way in which he had treated the bank in drawing the
dividends in his name or in the name of his nominee, the third defendant, and
asking for copies of the indemnity bonds executed by defendants Nos. 2 and 3
for receiving the dividends, and asking for a reply acknowledging the receipt
of his letter. All these letters and protestations proved to be of no avail.
The first
plaintiff happened to become again the managing director and chairman of the
appellant bank after the second defendant had cleared out. At a meeting of the
directors of the bank, presided over by him, the 1,668 shares, concerned in
this suit and the petition, were transferred to the name of the third
defendant, who had received the dividends in respect thereof for two years, and
the plaintiff’s name was deleted from the company’s books. But the third
defendant at once took out Application No. 1238 of 1948 in this court for rectification
of the company’s register of shareholders, making only the appellant bank a
party, and not the plaintiffs also. BELL J. by his order dated 20th April 1948,
ordered rectification of the company’s register of shareholders, removed the
name of the third defendant on the ground that the director’s meeting,
approving the transfer in his name, was an invalid one, and put back the
plaintiffs’ names once more in the register of shareholders.
In August,
1948, a petition for winding up the appellant- bank was filed in this court, as
its affairs were said to be in bankrupt condition. The winding up order was
passed in April, 1950, and the official liquidators were appointed.
Soon after the
winding up petition was filed, the plaintiffs filed, under section 39 of the
Indian Companies Act, C. S. No. 525 of 1948, and Application No. 1229 of 1951
in this court, on 7th September, 1948, for a declaration that the plaintiffs
were entitled to have their names cancelled, struck out and omitted in the
bank’s register of shareholders, and to have the name of the second defendant,
or his nominees or transferees, entered in their place, and for a declaration
that the plaintiffs had ceased to own or hold the aforesaid 1,668 shares, and
to restrain the first defendant or its liquidators by an interim temporary and
permanent injunction from making any call or taking any other proceedings
against the plaintiffs in respect of the 1,668 shares, and to make the first or
second or third or fourth defendant, as the court thought fit, pay the
plaintiffs’ costs. The plaintiffs also relied on estoppel on the part of the
bank, preventing them from contending that the plaintiffs’ names should remain
in the register of shareholders regarding these 1,668 shares. The cause of
action, according to the plaintiffs, arose on the 4th May, 1945, when the
plaintiffs sold the 1,668 shares (as part of the 3,118 shares) to the
defendants, on the 10th October, 1947, when the call on the shares was made on
the plaintiffs by the first defendant, on the 11th February, 1948, when the
plaintiffs applied to the first defendant for transfer of the 1,668 shares and
on the 20th April, 1948, when their names were put back again in the register
of shareholders of the bank by the order of BELL J.
The suit and
the applications were hotly contested by all the defendants. The bank, the
first defendant, contended that there were no completed transfer forms
regarding these 1,668 shares signed by the transferor and transferee, and that
such completed transfer forms, duly stamped were not presented to the bank,
praying for registration of the shares in the name of the transferee and that,
even if these blank transfer forms had been presented (which were not), the
bank could not have transferred those shares, as the mandatory provisions of
section 34 of the Companies Act and article 35 of the articles of association
regarding applications for transfer were not complied with, and that the
company had an absolute right without giving any reasons, to refuse the
transfer under article 36 of the articles of association and section 34(7) of
the Companies Act, and that this right was specially relevant when these were
partly paid up shares and the plaintiffs were solvent persons and defendant No.
2, the purchaser, was not at all in a sound financial position and able to
discharge the further calls of Rs. 60 per share. Several other defences were
also raised by the bank, namely, that the power of the court to rectify the
register under section 38 would not extend to a case like this, where the
default lay only with the plaintiffs and defendant No. 2, and the alleged fraud
only with defendant No. 2, and there was no default or unnecessary delay or
fraud on the part of the bank, and the names of the plaintiffs were continued
in the register of shareholders for excellent reasons, and not “without
sufficient cause” as contemplated under section 38. The defence was also raised
that the moment the winding up petition was filed and resulted in a winding up
order, the winding up petition was filed and resulted in a winding up order,
the winding up order thus passed would, under the insolvency law, take effect
from the date of the filing of the winding up petition, and take away the
powers of the court to rectify the register of shareholders as and from the
date of the winding up petition, since the effect of a winding up order would
be to make the company case to exist, and to give rights to innocent third
parties, like the creditors of the erstwhile company, against the shareholders.
The first defendant said that the 950 shares out of the 3,118 shares, covered
by Exhibit P. 1, were transferred to the name of the third defendant, and
another 500 shares out of the 3,118 shares, covered by Exhibit P. 1, were
transferred to the name of the fourth defendant, as properly stamped transfer
forms signed by the transferor and transferee were presented to the bank and
the directors had allowed the transfers and deleted the names of the plaintiffs
regarding those shares and substituted the names of defendants Nos. 3 and 4.
Since no such transfer forms were presented regarding the remaining 1,668
shares, there was no occasion to the bank’s directors to consider any transfer
applications except when the first plaintiff, after becoming the managing
director once more, had at an invalid meeting of the directors, got the 1,668
shares transferred to the third defendant, without any proper transfer forms
and without producing the shares and so that act was challenged by the third
defendant, who filed a rectification petition allowed by the order of BELL J.
bringing back the names of the plaintiffs to the register once more in respect
of these 1,668 shares. Defendants Nos. 3 and 4 not only adopted the above
contentions of defendant No. 1, but urged that there was no privity of contract
between them and the plaintiffs regarding the sale of the shares under Exhibit
P. 1.
Defendant No.
3 added that he had received the dividends regarding the 1,668 shares only as a
mortgagee from defendant No. 2, in respect of those shares and on his behalf,
and had ceased to have any interest in those shares from April, 1947, when his
mortgage amount was discharged. He said that his purchase of the 950 shares out
of the 3,118 shares from the second defendant was irrelevant to this suit and
petition. It was urged before us by his learned counsel, Mr. V. C.
Gopalaratnam, that the third defendant had settled with the Liquidators his
liability for the calls concerning the 950 shares bought by him.
The fourth defendant
stated that he had only acted as a financier for the second defendant who had
purchased the 3,118 shares from the plaintiffs under Exhibit P. 1, and had no
ready cash. Defendants, Nos. 3 and 4 denied that they had conspired with
defendant No.2 regarding these shares purchased under Exhibit P. 1, or that
those shares were purchased by defendant No. 1, on their behalf also. It was
represented by the learned counsel for defendant No. 4 that the fourth
defendant had settled with the liquidators his liability regarding the calls
concerning the 500 shares bought by him from the second defendant, out of the
3,118 shares purchased by the second defendant under Exhibit P. 1.
The second
defendant has filed a written statement, contending that he had never agreed to
purchase from the plaintiffs the 3,118 shares, under Exhibit P. 1, as urged by
the plaintiffs, but was only acting as an intermediary in respect of these
shares, in other words, that he had only promised to find purchasers for those
shares, if possible, and that he was not liable for getting the names of the
plaintiffs deleted and those of the purchasers substituted in respect of these
1,668 shares, as no purchasers had bought them, and it was the duty of the
plaintiffs to have applied to the first defendant bank by filing properly
stamped transfer from duly signed by the transferor and transferee after he had
ascertained the names of the purchasers. He also denied any collusion or
concert or conspiracy between him and defendants Nos. 3 and 4 or his having
purchased the shares on behalf of defendants Nos. 3 and 4 also, and said that
defendants Nos. 3 and 4 did not acquire any rights to any shares under Exhibit
P. 1. So all the defendants prayed that the suit and petition should be
dismissed with their costs.
RAMASWAMI
GOUNDER J. held that, though no properly stamped instrument of transferor and
transferee had been delivered to the bank along with the share certificates, in
respect of these 1,668 shares, and the necessary formalities required by section
34 of the Companies Act and under article 35 of the bank’s articles of
association had not been complied with and there was no fraud or default or
negligence by the bank in not effecting transfers, as there was no application
for transfer regarding these 1,668 shares either by the transferor or
transferee, as required by section 34, and by both under article 35, still the
terms of section 38 were wide enough to give him power to rectify the register
in the circumstances of this case, as the fraud of the second defendant on the
plaintiffs was enough to sustain the claim of the plaintiffs for rectification,
and if the second defendant had acted honestly, as per his representation made
to the first plaintiff, the plaintiff’s names would not have continued in the
register of shareholders of the bank regarding these 1,668 shares, and so the
court had the right, and indeed the duty, to remove the plaintiff’s names
regarding these shares in the bank’s register of shareholders and substitute
the second defendant’s name, especially as the second defendant had the full
benefit of the shares and had raised money on their security from the third
defendant, and had made the third defendant send those scrips and blank
transfer forms to the National Studios Ltd., Bombay, of which he was the
chairman of the board of directors, selling the shares to the Studios and
paying the sale proceeds to the third defendant towards the mortgage amount. He
also held that the bank was estopped from contending that the plaintiff’s names
were properly continued in the register, as it had not sent the plaintiffs any
notices of meetings or dividend warrants after Exhibit P. 1, leading them by
such conduct of theirs, to believe that the shares had been transferred from
the plaintiffs’ names. He observed that mere knowledge of the sale of the
shares by the plaintiffs, on the part of the officers of the bank, because of
the telephone conversation referred to by P. W. 1, would not be enough to
satisfy the requirements of section 34 of the Companies Act Article 35 of the
article of association, though it might be taken into account regarding the
plea of estoppel raised by the plaintiffs. He rejected the contention of the
plaintiffs regarding concert and conspiracy by defendants Nos. 3 and 4 with defendant
No. 2 regarding the purchase of the shares under Exhibit P. 1 by defendant No.
2. He also rejected the plaintiffs’ contention that the purchase of the shares
under Exhibit P. 1 was for the benefit of all the directors, namely, of
defendants Nos. 2 to 4 and not merely for the benefit of defendant No. 2. He
said that the purchase of all the 3,118 shares under Exhibit P. 1 was only by
defendant No. 2 and would bind him only defendant No. 4 having acted only as
his immediate financier, and defendant No. 3, as his subsequent lender under a
mortgage of the 1,668 shares, the liabilities of defendants Nos. 3 and 4 being
therefore restricted to the 950 shares and 500 shares, out of the 3,118 shares,
purchased by them from defendant No. 2, they having no privity of contract with
the plaintiffs, and no liability whatever regarding the 1,668 shares concerned
in the suit. In the end, therefore, he gave the plaintiffs a decree granting
them the declarations and injunction, a prayed for, regarding the 1,668 shares,
and directing the bank to rectify its register of shareholders regarding these
1,668 shares, by deleting the names of the plaintiffs as holders or owners
thereof, and substituting the name of the second defendant as the purchaser of
those shares, overruling the contention that the bank had an absolute
discretion, under section 34(7) and article 36, to decline to transfer the
shares. he directed the second defendant, who remained absent after filing his
written statement, though keeping his advocate, Mr. P. C. Subramanian, to watch
the case, to pay the costs of the plaintiffs, with subsequent interest thereon
at six per cent, per annum from the date of taxation till date of payment, and
directed all the defendants to bear their own costs in the suit, but allowed
the official liquidators of the first defendant bank to recover their costs,
including an advocate’s fee of Rs. 1,000, from the assets of the bank. He did
not pass any separate order in Application No.1229 of 1951, as the decree in
the suit covered everything. The first defendant bank has left aggrieved and
has field this appeal.
We have
pursued the entire records, and heard the learned counsel on all sides. Mr.
Ranganatha Sastri, learned counsel for the appellant, and Mr. K. Rajah Aiyar,
learned counsel for the plaintiffs-respondents, argued in detail every aspect
of the case, and took us through the entire evidence, oral and documentary. Mr.
Ranganatha Sastri urged various grounds for holding the judgment and decree of
RAMASWAMI GOUNDER J. to be unsound and unsustainable.
Of course, he
admitted that under section 38 of the Companies Act, though a petition is the
normal way for moving the court for rectification of the register, a suit also
can be filed under that section, either alternatively or in addition, as in
this case. A ruling of a Bench of this court in Mohideen Pichai v. Tinnevelly
Mills Co. shows this clearly.
Mr. Ranganatha
Sastri’s first contention was that no petition under section 38 of the
Companies Act will lie after a petition for winding up, resulting eventually in
a winding up order, has been filed, as in this case, since, under the
insolvency law, an order of winding up like an adjudication, will take effect
from the filing of the petition itself, and the company must be deemed to have
ceased to exist from the date of the petition as the rights of the innocent
third parties would have intervened, on the winding up order. He was not able
to convince us on this point, or cite any clinching ruling. Obviously, the
theory adumbrated by him will have startling results, and will lead to much
avoidable hardship and injustice. In Tennent v. City of Glasgow Bank ; a
resolution for winding up the company had already been passed before the
application for rectification was made. So the House of Lords rejected the
petition for rectification as the rights of innocent parties had intervened.
The following observations in the judgment of the House of Lords, at page 621,
are relevant :
“The
assumption is that, while the company is a going concern, no creditor has any
specific right to retain the individual liability of any particular
shareholder. It is on the same or on a similar principle that, so long as the
company is a going concern, a shareholder who has been induced to take up
shares by the fraud of the company has a right to throw back his shares upon
the company without reference to any claims of creditors. He would have a right
to transfer his shares without reference to creditors. The company, as a going
concern, is assumed to be solvent, and able to meet its engagements, and to
have a surplus, and the company being solvent, its duty to pay the repudiating
shareholder what is due to him, and to take the shares off his hands, is an
affair of the company, and not of its creditors. But if the company has become
insolvent, and has stopped payment, then, even irrespective of winding up, a
wholly different state of things appears to me to arise. The assumption of new
liabilities under such circumstances is an affair not of the company but of its
creditors.”
The same
principle cannot, without under extension, be applied to a case where a
petition for rectification is filed after the winding up petition but before
the winding up order, as the company is still a going concern carrying on its
business. In In re Hull and County Bank, it was held that after the winding up
of a company a shareholder, who was induced to apply for shares by fraudulent
misrepresentations contained in the promoter’s prospectus, was not entitled to
rectification as innocent third parties’ interests (creditors’ interests) had
intervened. In In re London Hamburgh and Continental Exchange Bank, a suit for
specific performance and rectification of register, filed four days before the
petition for winding up was presented, was rejected, as the company was in a
state of bankruptcy and as the jurisdiction given to a court in such cases for
rectifying a register, though not limited to cases in which there had been
error, mistake or default on the part of the company and was a wide jurisdiction,
such jurisdiction ought to be confined to cases where the register is incorrect
through the default of the company when it was rushing towards bankruptcy, and
as in the present case there had been no delay, or default on the part of the
company, the court should not use its discretion and rectify the register. In
Oakes v. Turquand and Harding, it was held that a petition for rectification of
the company’s register of shareholders for removing the petitioner’s name from
the list of contributories on the ground that he had purchased shares on
misrepresentations made to him by the directors should be dismissed if it was
filed after the winding up order. As his voluntary ignorance upon the subject
until the winding up order, he was rightly placed on the list of
contributories, and the petition was dismissed. Several learned Law Lords
delivered that judgment. They did not say that a petition would not have lain
after the winding up petition but before the winding up order was passed, thus
going against Mr. Ranganatha Sastri’s contention. In Indian Specie Bank Ltd. v.
Patvardhan, a Bench of the Bombay High Court held that after a company had gone
into liquidation, the transfer of shares or rectification of the registers,
could only be made on proof of the company’s default or delay, in dealing with
the application for transfer (made before the winding up order) but that it
could be done, if such default or delay on the part of the company in dealing
with the application was proved. In that case, the petition for rectification
of the register was taken out before the winding up order. As held in hansraj
Gupta b. Asthana, on the winding up order, the liability of a person on the
register of shareholders of the company became absolute, and followed from the
fact of his being of the register in respect of those shares, and that though
the original contract may supply the reason for his name having been placed on
the register in respect of the shares, it cannot affect his liability in
respect of those shares after the winding up. In In re Land etc. Company of
South Africa : exparte Boyle, it was held that an application for rectification
would not lie after the winding up order was passed, and the rights of innocent
third parties, the creditors, arose. The ruling in Ward’s case, shows that the
court is not bound by the company’s register of shareholders in settling the
list of contributories and has authority to rectify the register and will
determine the question as to who is in equity the real owner of the shares,
provided that the winding up order has not been passed, thus showing that the
petition for rectification will lie after the winding up petition but before he
winding up order is passed.
As against
this formidable array of authorities, Mr. Ranganatha Sastri relied on the
ruling of a Bench of the Allahabad High Court consisting of MUSTAX AHMED and
DESAI JJ. in Shiromani Sugar Mills Ltd. v. Debi Prasad, where DESAI J., who
delivered the judgment of the court, has observed in paragraph 20 : “In
addition to the laches, the winding up of the company raises another bar in the
way of the opposite parties to repudiate their shares. The law is that a
shareholder cannot be relieved from his shares after a winding up application.”
He relied on the ruling in Kent b. Freehold Land and Brick Making Co. (and some
other similar rulings). In Kent’s case, LORD CAIRNS L. C. held that a
petitioner cannot be relieved from his liability for shares in a company upon
the ground of misinterpresentation in the prospectus on a bill filed after the
presentation of a petition for winding up the company, on which an order for
winding up was subsequently passed, though the petitioner might have his remedy
against any of the defendants except the company. The company in question had
already become bankrupt and unable to pay its debts by the time the petition
was filed, though the winding up order was passed subsequently. This was a
decision rendered in 1868. In view of the numerous decisions to the contrary
referred to above, and especially of several Law Lords in Oakes v. Turquand and
Harding and Hansraj Gupta b. Asthana, and the special facts in Kent v. Freehold
Land and Brick Making Co., and similar rulings, which will not apply to the
facts of this case, we are unable to follow the view of DESAI J. or accept the
correctness of the ruling in Shiromani Sugar Mills Ltd. b. Debi Prasad, and
hold that a petition for rectification will lie normally after the filing of a
winding up petition and before the winding up order is passed, provided the
court will normally reject that petition if the company is already in a
notorious state of bankruptcy by the time the petition for rectification is
filed, as in Kent v. Freehold Land and Brick Making Co., and that it is for the
court, in its discretion, to say whether such a petition should be allowed or
not, it having undoubted jurisdiction to entertain it.
The next
contention of Mr. Ranganatha Sastri was that RAMASWAMI GOUNDER J. went wrong in
holding that no default, or delay, or fraud of the company was required in a
petition under section 38 against it for rectification. We cannot agree. It is
only under section 38(b) that default, or unnecessary delay, on the part of the
company comes into play. Under section 38(a) a petition for rectification will
lie if the name of any person is fraudulently or without sufficient cause
entered in or omitted from the register of members of a company. Thus, it is
obvious that even without any mistake, default, or fraud of the company, a
man’s name may be entered in the register of shareholders in substitution of an
existing shareholder’s name by the directors, approving of a transfer of the
shares in the name of the transferee either on the transferee’s cleverly
forging the transfer deed, in order to make an unlawful gain, or on the
transferor’s forging it in order to pass on his liability, and cause unlawful
loss to another, and yet a court can and ought to, rectify the register, if a
petition is filed before the winding up and the fraud or forgery is proved.
There are several English rulings rectifying the register in such cases. So
too, supposing rioters (as in the Moplah rebellion or the Devakotta riots) or
the enemy (like the Japs in the late war) burn down a court house or other
buildings containing a valid transfer deed signed by the transferor and
transferee, before it can be presented to the company for registration of the
transfer and the reconstruction of such documents (as is usually ordered by the
Government in such cases) takes a very long time, the court can, on a petition
for rectification of the register, do the needful, though the company is not
responsible for the delay, provided the petition for rectification is filed
before the winding up order and the company has no objection to the transfer.
Such instances may be multiplied indeed, even the company will have a right to
apply under section 38(a), to rectify the register of shareholders regarding
the name of any person entered in it fraudulently or without sufficient cause
or omitted from the register of members, and of course, no default or fraud of
the company can, or need be, proved in such cases.
In Ward and
Henry’s case, Lord Justice TURNER has held at page 436 :
“The question
is, whether the jurisdiction given by it is general, applicable to all cases, or
limited to cases in which there has been error, mistake, or default on the part
of the company. Upon the best consideration I have been able to give to the
subject, I am inclined to think that the jurisdiction is general, and not
limited as suggested. The intention of the section, as I understand it, is to
provide a summary means of dealing with cases which the court, in its
discretion, should think might be so dealt with. A large and wide discretion,
ought, I think, to be exercised by the court in determining whether it will
exercise the power given to it by the section, and it is, I think, too narrow a
construction to hold that the section applies only where there is error,
mistake, or default, on the part of the company.”
In other
words, there is jurisdiction in the court to rectify the register even in the
absence of error, or mistake, or default, on the part of the company, though
the court will not, usually, exercise its discretion and rectify the register,
when there is no mistake, or error, or default, on the part of the company. It
is a matter entirely for the court to decide, subject to the articles of
association and Companies Act. In that case, the court refused to exercise its
jurisdiction, and order rectification, on the ground that there was no mistake
or delay or default on the part of the company.
In Ex parte
Shaw, the Court of Appeal held that it was not necessary to give jurisdiction
to a court, for rectifying a register of shareholders in a company, that there
should be mistake or delay or default on the part of the company, but that it
is a matter of discretion whether the court will exercise that jurisdiction,
and that in a complicated or doubtful case the jurisdiction ought not to be
exercised, but that in a clear it ought to be exercised, and rectification
made. In In re Imperial Chemical Industries Ltd. it was held that the
jurisdiction of the court to rectify the register is not limited to cases where
a name has been entered improperly in it, but extends to cases where a name
stands on the register without sufficient cause (this phrase is specifically
found in section 38(a) of the Companies Act) and that where a petitioner’s name
is entered in the register without sufficient cause, though forgery, etc., was
not proved, his application for rectification should be granted and his name
removed, from the register. So it is all a question for the court to allow or
dismiss the petition at its discretion, the jurisdiction being there despite
there being no mistake, default or delay on the part of the company.
The last and
strongest ground urged by Mr. Ranganatha Sastri was that, in the absence of the
presentation of a duly stamped transfer deed, signed by the transferor and
transferee, to the bank, along with the scrips, in respect of these 1,668
shares, and the admitted fact that the transfer forms in respect of these
shares are still blank, without any transferees singing therein, the bank had
no authority to transfer the shares to the name of the second or third or
fourth defendant as prayed for by the plaintiffs, and that the bank was
certainly not bound to do so, in view of section 34 of the Companies Act and
article 35 of the articles of association, and that RAMASWAMI GOUNDER J. went
grievously wrong in directing the second defendant’s name to be substituted for
the name of the plaintiffs, overriding the absolute discretion of the bank,
given under section 34(7) of the Companies Act and article 36 of the articles
of association, to refuse to register any transfer without giving any reason
whatever. We agree. Mr. Rajah Iyer could not cite a single ruling, English,
Indian, or American, or of any other country where it has been held, that a
company is bound to register a transfer without the transferee signing in the
transfer deed. Section 34(1) of the Companies Act says that an application for
the registration of the transfer of shares in a company may be made either by
the transferor or the transferee, provided that where such application is made
by the transferor no registration shall in the case of partly paid up shares
(like these 1,668 shares) be effected unless the company gives notice of the
application to the transferee, and that the company gives notice of the
application to the transferee, and that the company can, unless objection is
taken by the transferee within two weeks from the date of receipt of the
notice, enter in is register the name of the transferee in the place of the
transferor. Section 34(7) says :
“Nothing in
this section shall prejudice any power of the company under its articles to
refuse to register the transfer of any shares.”
Innumerable
rulings, English and India, were relied on by Mr. Ranganatha Sastri to show
that a court cannot override either the provisions of the Companies Act or the
article in the articles of association. In Ward’s case, In re Imperial Chemical
Industries Ltd. , Ward and Henry’s case, In re Imperial Mercantile Credit
Association . Ward and Garget’s case and Musgrave and Hart’s case it has been
held that where the articles of association of a company require the transfer
of shares to be executed by both parties, the court has no power to rectify the
register by removing the name of the transferor, unless the transfer deed has
been executed by the transferee also. The principle of it is simple. A court is
bound to carry out the contract between the parties, and cannot make a new
contract for them. Each company has its own articles of association which have
been settled by it, and accepted by the shareholders as the terms governing the
condition on which the shares have been issued to them and the manner in which
the transfers of the shares have to be effected after they have been registered
in the company’s books. It will be contrary to justice equity and good
conscience, and indeed, sense and commonsense alike, for the court to override
these terms, agreed to by the parties in all somenity, and no court is given
power to do so. It is also obvious that unless the transferee has signed in the
transfer deed, and unless such a transfer deed executed by the transferor and
the transferee is presented to the company, the company cannot know in whose
name the shares are to be transferred and cannot issue the mandatory notice to
the transfer required by section 34(1) of the Companies Act before the transfer
can be made in the transferee’s name. A blank transfer deed may pass property
in the shares as between the purchaser and the seller, and transfer the shares
in that sense, but before that transfer can be registered with the company
under section 34, the transferee’s name must be clearly known to the company
either by his signing in the transfer deed, in token of the transfer to him, or
by a court passing a decree for specific performance recognising the transfer
of the shares to the transferee. Such a procedure will show clearly who the
transferee is. Even then, the transfer deed signed by the transferor and the
transferee (wherever possible) or by court for one of the parties and duly
stamped must be presented to the company with an application for the registration
of the transfer, and it will be within the discretion of the company to allow
or refuse the registration of the transfer under section 34(7) of the Companies
Act and article 36 of the articles of association, in this case. Of course, the
prescribed stamp is required for the transfer deed under the Stamp Act, whose
provisions the company must observe on paid of its being subjected to pecuniary
penalties, or even prosecution if it is justified. No doubt, in the case of a
decree for specific performance enforcing the transfer of the shares, if the
transferor or transferee does not sign the transfer deed, the court might sign
it on his behalf, as in any other decree for specific performance, and the
other side can then sign in it, stamp it and present it to the company for
registering the transfer, but the company has still the usual discretion to
register it or not.
In
Nagabhushanam v. Ramachandra Rao a Bench of this court, consisting of
KUMARASWAMI SASTRI and DEVEADOSS JJ. held that where a transfer of shares in a
limited company, like this company, is required by law, or by the articles of
association, to be made only by a deed executed both by the transferor and the
transferee in the prescribed form, a deed of transfer executed by the
transferor alone would not pass to the transferee the title to the shares, and
an auction- purchaser under a subsequent attachment and sale of the shares was
entitled to the shares and to apply for registration, as the owner, in
preference to the private purchaser. I t was observed there at page 541 :
“It is argued
by Mr. Krishnaswami Aiyar that when there is a court sale and a purchase under
it, there is no discretion left for the directors and that they are bound to
transfer the shares. It is argued by Mr. Narayanamurti, for the other side,
that there is nothing in the Companies Act or the articles of association to
make any difference between private sales and sales i n execution of decrees,
the necessity for the sanction of the directors being to prevent undesirable
persons or debtors of the company from getting transfers of shares. The reason
applies with equal force to private or court purchasers. We agree with the view
taken in Manilal Brijlal v. Gordhan Spinning and Manufacturing Co., that thee
is still a discretion in the directors to recognise or not purchasers in
execution of decrees.”
The view of
this Bench regarding the discretion of the directors to allow or refuse to
register the transfer represents, in our opinion, the correct state of the law,
as it is based on several English rulings, like Ward’s case, and several cases
of Indian High Courts like Manilal Brijlal v. Gordhan Spinning and
Manufacturing Co., referred to above. In our opinion, a ruling of a Bench of
this court, consisting of SRINIVASA AYYANGAR and ANANTHAKRISHNA AYYAR JJ. in
Mohideen Pichai v. Tinnevelly Mills Co. Ltd. holding that a company has no
discretion to refuse to register the shares whose transfer is ordered by the
court, relied on by Mr. K. Rajah Aiyar, is with great respect, wrong law, and
is due to the failure to observe the vital distinction between a valid transfer
of shares, in the sense of the passing of ownership, and the registration of
the transfer by the company in its register of shareholders. The learned Judges
drew a distinction between the transfer of shares by the voluntary act of the
parties and what they termed transmission of shares by order of court, and
considered the observations in Nagabhushanam v. Ramachandra Rao, that the
directors of a company have a discretion in the matter of registering a
transfer ordered by court, to be mere obiter. Both the views, are in our
opinion, unsustainable. The observations in Nagabhushanam v. Ramachandra Rao
were not obiter, and amounted to direct decision on a point which arose in the
case, and could not be overruled by a Bench of co-equal authority, like that in
Mohideen Pichai v. Tinnevelly Mills Co. Again, the distinction between the
transfer and transmission drawn by the Bench in Mohideen Pichai v. Tinnevelly
Mills Co., is in our opinion, irrelevant for the purpose of registering the
shares. Section 34(7) of the Companies Act and article 36 of the articles of
association are concerned with the Company’s registering the transfer of the
shares, and not with their accepting or rejecting the validity of the transfer
and the ownership in the shares in the transferee. While the court can declare
in a suit for specific performance that the owner of the shares is the
transferee, there being a valid transfer, and can direct the transferor to
execute a proper transfer deed in the name of the transferee, it cannot affect
the discretion of the company to allow or reject an application to register the
transfer, whether before or after the winding up. ANANTHAKRISHNA AYYAR J.’s
observations in Mohideen Pichai v. Tinnevelly Mills Co., “the company was not a
party to the litigation and the observation of the learned Judge that there was
a discretion in the directors to recognise or not purchasers in execution of
decrees was only obiter,” will have no relevancy regarding this matter. The
learned Judge gave another ground, which was perhaps the real reason for the
decision in that particular case, namely : “further it does not appear what
exactly were the rules of that company about the transfer and transmission of
shares.”
We do not
think it necessary to refer the apparent conflict between the two Bench rulings
of this court in Nagabhushanam v. Ramachandra Rao and Mohideen Pichai v.
Tinnevelly Mills Co. to a Full Bench as in this case, a duly stamped transfer
deed signed by the transferor and transferee alike, in respect of these 1,668
shares, was not presented before the company, and registration of the transfer
applied for after which even alone the question of discretion of the company to
order or refuse the registration of the transfer would arise. Both the Bench
rulings, of course, recognise, as indeed all other rulings on this point,
English, Indian and American, that unless a duly stamped transfer deed, signed
by the transfer applied for, the company had no authority or power to consider
the registration of the transfer except of course in the extraordinary case or
rioters, fraudulent persons and the occupying army of the enemy destroying such
transfer deeds signed by both the transferor and the transferee, which is not
the case here.
In Madhava
Ramachandra Kamath v. Canara Banking Corporation Ltd. GENTLE J. held that in
the absence of an instrument of transfer signed by the transferor and
transferee and duly stamped, and presented to the company for registration of
the transfer, when so required by articles of association, there was no power
in the company to register the transfer, and the registration was set aside as
ultra vires of section 34 of the Companies Act, just as BELL J. in Application
No. 1238 of 1948, set aside the registration of these very 1,668 shares in the
third defendant’s name by this bank, after the first plaintiff became again its
managing director and chairman, by his order dated 20th April, 1948, for the
same reason among others.
A Bench of the
Bombay High Court, consisting of STONE C.J. and KANIA J. has held in New
Citizen Bank b. Asian Assurance Co. that before a shareholder claims his name
should be entered on the register of the company as a shareholder, he has to
submit the share scrip and a properly executed and duly stamped transfer deed
signed by the transferor and transferee, and that where an instrument of
transfer properly stamped has not been given, it cannot be said that the
transferee’s name was omitted without any sufficient cause. In Mohammed Akbar
v. Official Liquidator, a Bench of the Bombay High Court, consisting of CHAGLA
C. J. and BHAGWATI J. (now in the Supreme Court) have held the same view and
have added that a contributory cannot say : “I am not liable because I have
sold my shares to a purchaser who has not got his name registered in the
register of shareholders of the company” as in this case.
Regarding
these 1,668 shares, the transfer forms have remained in blank till today and
have not been signed by the transferee, and, indeed, the plaintiffs alleged
that all the directors, and not merely defendant No. 2, had purchased the
shares under Exhibit P. 1, and prayed that their name should be omitted from
the register in respect of these 1,668 shares, and the name of either the
second defendant, or the third defendant or the fourth defendant, entered in
their place not even adding how many of the shares wee to be entered in the
names of each of these three or whether they were to be entered in the names of
the three jointly and in what proportion and leaving it to the court to decide
about the exact transferee and his number of shares in each case, a ridiculous
thing to ask a court to do so as the parties have to do it. Now were the 1,668
shares presented to the bank along with the duly stamped and completed transfer
deeds.
Mr. Rajah
Aiyar urged that the absolute discretion given to the company to accept or
reject an application for registration of a transfer, under an article in the
articles of association, recognised by the rulings cited above and by section
34(7) of the Companies Act, cannot be held to be valid, as it is arbitrary and
unreasonable, and affects the citizens’ rights of property. We cannot agree. As
already stated, the company is given the discretion only in the matter of
registering the transfers, and is not empowered to decide whether the transfers
are valid or not ; nor does it affect the plaintiffs’ right to sue defendant
No. 2, or defendant No. 3, or defendant No. 4, for specific performance, if so
advised. Of course, even after getting a decree for specific performance
against them or any one of them, directing them to get the transfer deeds
executed in their favour (the court executing the transfers in the place of the
unwilling parties in suitable cases of decrees for specific performance), the
transfer deeds will have to be presented by the transferors or transferees to
the company, under section 34(1) , praying for the registration of the
transfers, and the company will have an absolute discretion (possibly subject
to good faith) to refuse to register the transfer under section 34(7). The only
possible exception is that when the company refuses to register a transfer out
of spite, or from corrupt and improper motives, a writ may possibly lie by the
aggrieved person to enforce the registration, though we give no ruling on the
point, as it is not necessary in the facts of this case. The discretion given
to the company under the articles of association is, in our opinion, perfectly
justifiable, as that is necessary for the well being of companies and was the
basis of the contract between the company and the shareholders. It is intended
to prevent the company from being ruined by infiltrating fifth columnists,
parading as transferees, or by transfers in the names of impecunious persons by
solvent people in order to get rid of their liability regarding unpaid calls,
and also to prevent the cornering of all shares b y wealthy people to the
prejudice of the ordinary shareholders. Thus, people interested in a rival
company, carrying on the same trade, might want to become transferees, in
respect of the bulk of a company’s shares, and to get their names registered,
in order to obstruct the work of the company and to facilitate the business of
their own company. So too, on seeing a company rushing towards bankruptcy, rich
shareholders, desirous of getting rid of their liability for unpaid calls, may
transfer their shares in the names of impecunious persons. All the three
reasons will apply to partly paid up shares, and the first two reasons to fully
paid up shares, and justify in the interests of the public the discretion given
to the company under the articles of association and under section 34(7) to
refuse to register the transfers in the names of the undesirable persons. We
may add that the plaintiffs are admitted to be rich and solvent persons, while
defendant No. 2 is said to be a man of no worth at all, and the 1,668 shares in
question are only paid up to the extent of Rs. 40 each, and there are unpaid
calls to the turn of Rs. 50 each. So, in the interests of the company, and of
the innocent creditors, the company was rightly given the discretion to refuse
to register the transfer in the name of defendant No. 2, even if a duly stamped
and completed transfer deed signed by the transferor and transferee had been
presented to the company and registration of the transfer asked for.
Mr. Rajah
Aiyar stressed that the plaintiffs had acted honestly and in good faith
throughout. But that is not relevant for this purpose. Many an honest man will
have to suffer for his laches in not presenting a properly completed and
transfer deed to the company for registration of the transfer, just as he will
have to suffer if he does not sue within the period of limitation. Honesty, by
itself, will not prevent the operation of law. Again, Mr. Rajah Aiyar forgets
that the honest creditors of the bank deserve more consideration than the
honest plaintiffs who were at least guilty of laches.
The last
contention of Mr. Rajah Aiyar was that the bank was estopped from contending
that the names of the plaintiffs should remain in the register of shareholders
against these 1,668 shares, because they knew about the transfers by the first
plaintiff’s phone call intimating it, and impliedly accepting the transfer of
the shares by not sending any notices of meetings or dividend notices or
dividend warrants to the plaintiffs in respect of these shares after exhibit P.
1. We cannot agree. There was no estoppel, in law, by such conduct. The first
plaintiff’s phone call does not deserve any weight to be attached to it, as he
could not say whether the secretary, or the assistant secretary, or other
officer of the bank received the call, and could not even say to whom the
shares were transferred, or to all the three combined. To give such a phone
call any value would be unthinkable. The first plaintiff did not follow up the
phone call by any letter to the bank giving details. Even that would not have
been of any avail, in the absence of presenting a duly completed and stamped
transfer deed to the company with an application for registration of the
transfer. The fact that the plaintiffs were not sent any notices of the
meetings or dividend notices or warrants by the company after Exhibit P. 1 would
only be sufficient to deprive the first defendant bank of its costs in the
lower court and here for such laches, when dismissing the suit and application.
It will not amount to representation by conduct to the plaintiffs, by the bank,
that the shares had been transferred. How could the bank have ever transferred
the shares when the transferee’s name was not known to it, or even settled by
the plaintiffs, and when no duly completed and stamped transfer deeds were
presented to the company with an application for registration as required by
the mandatory provisions of section 34(1) of the Companies Act and article 35 ?
It is not even as if the plaintiffs wrote to the bank stating that they
presumed that notices of meetings and dividends, and dividend warrants, were
not sent to them in respect of these shares, as they had been transferred and
as the names of the transferees had been registered by the bank in their place,
and the bank had replied that it was so, or had filed to reply for an
unreasonably long time, and become bankrupt meanwhile. It is obvious that many
other reasons might have existed for the failure to send the plaintiffs notices
of the meetings and dividends and the dividend warrants after Exhibit P. 1.
Negligence of clerks, especially in a fast sinking bank, resulting in confusion
and disorganisation and carelessness, is one of those possible causes. When the
conduct of the company cannot be attributed with certainty to be due to any
open cause, it will be absurd to rely on it as operating as estoppel,
especially when the bank itself had no power to transfer the shares from the
names of the plaintiffs in the absence of duly completed and stamped transfer
deeds presented to it with an application for transfer. It must be remembered
that even when the bank illegally ordered the transfer of these shares in the
name of the third defendant (not second defendant) , after the first plaintiff
again became the managing director and chairman for a short spell, there were
no duly completed stamped transfer deeds and an application for registering the
transfer before the bank. The plaintiffs never wrote to the bank directly for
months after the call for Rs. 9 per share was received by them, and
corresponded only personally with the fraudulent second defendant. The first
letter of the plaintiffs to the bank was only Exhibit P. 20, on 2nd December,
1947, three months after the call was received. The fact that the dividend on
the 1,668 shares was given by the bank to the third defendant, the mortgagee,
on behalf of the second defendant, who had purchased the shares under Exhibit
P. and mortgaged them to defendant No. 3, will not amount to any conduct on the
part of the bank operating as estoppel, as it is clear that banks in such
circumstances, usually give dividends as it is clear that banks in such
circumstances, usually give dividends to such mortgagees after taking indemnity
bonds from them.
The rights of
the plaintiffs, if any, against defendants Nos. 2,3 and 4 may remain intact, subject
to limitation, but that will not be relevant to this petition for
rectification. In the end, therefore, we set aside the judgment and decree of
RAMASWAMI GOUNDER J. in C.S. No. 525 of 1948 and Application No. 1229 of 1951,
and direct the name of the second defendant to be removed from the list of
shareholders, in the register of shareholders kept by the bank, in respect of
these 1,668 shares, and direct the names of the plaintiffs to be put back in
the register as shareholders (now contributories). In the peculiar
circumstances, we direct all the parties to bear their own costs in both the
suit and petition before the lower court and in this appeal, the official
liquidators of the company being allowed to draw out their costs, including an
advocate’s fee of Rs. 1,000 in the lower court, and Rs. 1,500 here, from the
assets of the bank.
Appeal
allowed.
[1953] 23 Comp Cas 536 (TRAV-COCH)
v.
Vanchinad Rubber
& Produce Co. Ltd.
Sankaran and Gangadhara
Menon, JJ.
A.S. No. 706 of 1122 M.E.
April 1, 1952
M.
Abraham and N.K. Narayana Pillai for the Appellant.
N.K. Job and K.N.
Narayanan Nair for the Respondent.
judgement
Sankaran J. — The plaintiff whose suit was dismissed by the lower court has preferred this appeal. Defendant No. 5 was the holder of 121 shares in the first defendant company and he had pledged these shares with the plaintiff and had also entrusted to him the share certificate which has been marked as Exhibit C. Since defendant No. 5 failed to redeem the pledge, plaintiff instituted a suit as O.S. No. 63 of 1108 in the Trivandrum District Court against defendant No. 5 for recovery of the amount due as per the pledge already mentioned. Since the amount was sought to be recovered by the sale of the shares held by defendant No. 6 the first defendant company was also made a party to the suit. In execution of the decree obtained by the plaintiff in that suit he sold these shares in court auction and himself purchased the same on 15-3-1112. Exhibit A is the copy of the sale certificate granted to him. Subsequent to such purchase he had some correspondence with the defendant company to have these shares transferred to his name on the strength of the court sale. The company informed the plaintiff that defendant No. 5 had already transferred 40 shares in favour of defendant No. 2, 25 shares each in favour of defendants Nos. 3 and 4 and that these transfers had already been recognised by the company and the necessary entries made in share register. The plaintiff was also informed that defendants Nos. 2 to 4 as transferees of these shares were being paid the dividends due in respect of such shares and that for certain amounts due to the company from defendants Nos. 3 and 5 the company had a lien over the 25 shares standing in the name of defendant No. 3 and over the 31 shares still standing in the name of defendant No. 5. According to the plaintiff the transfer of shares in favour of defendants Nos. 2 to 4 has been fraudulently effected as a result of collusion between them and defendant No. 5 and that such transfer does not affect the rights acquired by the plaintiff as per sale certificate Exhibit A. On these allegations Company Petition No. 15 of 1115 was filed by the plaintiff in the Kottayam District Court under Section 41, Travancore Companies Act, corresponding to Section 38, Indian Companies Act, for getting a rectification of the share register of the defendant company by substituting his name in the place of defendants Nos. 2 to 5 as the owner of the 121 shares covered by the share certificate Exhibit C. In view of the conflicting claims put forward by the plaintiff and defendants Nos. 2 to 5 that court directed the plaintiff to institute a regular suit to get his rights declared. The order to that effect was passed on 6-11-1117. The present suit was accordingly instituted by the plaintiff on 24-11-1117 praying for a rectification of the share register of defendant No. 1 company by entering in it the name of the plaintiff as the owner of the 121 shares covered by the share certificate Exhibit C and also for a decree for recovery from the company of the dividends due on these shares for the period from 15-3-1112, the date of the sale certificate (Exhibit A), together with 6% interest on such amount and also for costs of the suit. The suit was resisted by the defendants. The defendant company contended that when the transfer of shares in favour of defendants Nos. 2 to 4 was recognised by the company and the names of such transferees entered in the share register the company was not aware that defendant No. 5 had pledged these shares with the plaintiff and that such transfer which had already come into effect could not be affected by the subsequent suit instituted by the plaintiff on the basis of the pledge in his favour or by the decree and the court sale which followed it. It was also contended that defendants Nos. 2 to 4 had also paid the call at the rate of Rs. 5 for each share and that they were regularly getting the dividend due in respect of those shares. Defendant No. 4 also raised similar contentions and stated that defendants Nos. 2 to 4 purchased the shares from defendant No. 5 in good faith and for valuable consideration and without any knowledge of the pledge with the plaintiff. Defendant No. 5 also supported the contentions of defendants Nos. 2 to 4. He further contended that the plaintiff's suit is not maintainable and that it is barred by limitation. Still another contention raised by defendant No. 5 was that since the court sale evidenced by Exhibit A was not followed by the delivery as contemplated in Rules 76 and 77, of Order XXI, Travancore Civil Procedure Code, the plaintiff had acquired no valid title to the shares in question. The lower court overruled the plea of limitation raised by the defendants but upheld the other contentions raised by them and accordingly dismissed the suit. Hence this appeal by the plaintiff. Defendants Nos. 1, 4 and 5 have filed objection memorandum challenging the correctness of the lower court's finding that the suit is not barred by limitation and also reiterating the contentions that the non-compliance with the procedure prescribed in Order XXI, Rules 76 and 77, Civil Procedure Code, is fatal to the rights claimed by the plaintiff.
Of the several grounds raised by the defendants against the maintainability of the plaintiff's suit one ground alone is seen to have been considered by the lower court. That ground is to the effect that plaintiff should have pursued his remedies by way of proceedings in execution of the decree in O.S. No. 63 of 1108 and that a fresh suit like the present one is barred by Section 47, Civil Procedure Code. The lower court upheld this contention and ruled that the present suit for the enforcement of the plaintiff's right under the sale certificate Exhibit A granted in O.S. No. 63 of 1108 is not maintainable. This view is obviously erroneous. Plaintiff' s claim in O.S. No. 63 of 1108 was for recovery of a debt due to him from the present defendant 5. That suit was decreed in favour of the plaintiff and in execution of the decree the right, title and interest which the present defendant 5 who was the judgment debtor in that case had over the 121 shares covered by the share certificate (Exhibit C) were sold in court auction and was purchased by the plaintiff himself. The sale was duly confirmed in his name and the sale certificate (Exhibit A) was issued in his favour. It was a sale of movable property and the mode in which the delivery of that property covered by that sale is to be effected is the one prescribed by Order XXI, clause (3) or Rule 76, Travancore Civil Procedure Code, (corresponding to clause (3) of Rule 79 of Order XXI of the Indian Code). The provision is to the effect that delivery of the shares sold shall be made by a written order of the court prohibiting the creditors from receiving the debt or any interest thereon and the debtor from any payment thereof to any person except the purchaser or prohibiting the person in whose name the share may be standing from making any transfer of the share to any person except the purchaser or receiving payment of any dividend or interest thereon and the manager, secretary or other proper officer of the corporation from permitting any such transfer or making any payment to any person except the purchaser. Beyond this nothing further could be done by way of proceedings in execution on the strength of the sale certificate (Exhibit A). It follows therefore that none of the reliefs claimed in the present suit could be obtained by the plaintiff by way of execution proceedings in O.S. No. 63 of 1108. The main relief claimed in the present suit is to get a rectification of the share register of the defendant I company by registering the name of the plaintiff as the holder of the 121 shares of which he has become the purchaser under Exhibit A. The other reliefs claimed are only consequential ones following the main relief. Since the reliefs claimed in the present suit were entirely beyond the scope of the prior suit O.S. No. 63 of 1108 there is no force or substance in the contention that the plaintiff should have applied for these reliefs in the court executing the decree in O.S. No. 63 of 1108. Such reliefs could be obtained by the plaintiff only by way of other independent proceedings and hence it cannot be said that Section 47, Civil Procedure Code, operates as a bar to the present suit.
The next point urged on behalf of the respondent is that the non-compliance with the procedure prescribed by Rules 79 and 80 of Order XXI, Civil Procedure Code (corresponding to Rules 76 and 77 of the Travancore Code) makes the present suit based on Exhibit A unsustainable. It is contended that the delivery as contemplated in clause (3) of Rule 79 is essential to complete the title of the auction purchaser, under the sale certificate Exhibit A, to the shares covered by that certificate. The rule only prescribes the different modes in which delivery is to be effected in the case of sales of movable properties. When such property consists of shares in a corporation it is stated that the delivery may be effected by prohibiting the parties concerned from transferring the shares or any interest thereon to any person other than the purchaser. But there is nothing in the rule to indicate that the title of the auction purchaser to the shares purchased by him will be perfected only after delivery is made by the issue of the prohibitory order as prescribed by clause (3) of Rule 79. On the other hand the conditions necessary for perfecting the auction-purchaser's title are prescribed by clause (2) of Rule 77 of Order XXI (Rule 74 of the Travancore Code). Clause 2 of this rule lays down that "on payment of purchase money the officer or other person holding the sale shall grant a receipt for the same and the sale shall become absolute. "So far as the sale evidenced by Exhibit A is concerned, these conditions were duly complied with and satisfied. It is also clear from a reading of clauses (2) and (3) of Rule 79 that the modes of delivery prescribed therein are intended to govern cases where the movable property sold happens to be in the possession of some person other than the judgment-debtor. In such cases the interests of the auction purchaser are sought to be safeguarded by the issue of notices to the third parties in possession of the property sold intimating them about the fact of the sale and of the consequences following such sale. The compliance with such a procedure was not necessary in the case of the sale evidenced by Exhibit A. The share certificate relating to the 121 shares sold under Exhibit A has already been delivered over to the plaintiff decree holder auction purchaser even at the time when defendant 5 had pledged these shares with him. At the time of the auction sale and even subsequently possession of the share certificate has been with the auction purchaser himself and it was he who produced it in this case and got it marked as Exhibit C. There is the further fact that the defendant company had been made a party defendant in O.S. No. 63 of 1108. Thus the auction sale of the shares in question was conducted after notice to the company as well. Since the auction sale of the shares was conducted in such a situation it cannot be said that it was essential that the issue of a delivery order as contemplated by clause (3) of Rule 79 was essential for the completion of the proceedings in execution in that case. There was in substance and in effect such a delivery order and the company as a party defendant in that case had the necessary notice that subsequent to the court sale the auction purchaser alone could be treated as the owner of the shares in question. The absence of a formal delivery order as contemplated by clause (3) of Rule 79 cannot therefore in any way prejudice the plaintiff's rights under Exhibit A.
Coming to the procedure prescribed by Rule 80 it is clear from a reading of the rule itself that the procedure is not obligatory. Clause (1) of the rule runs as follows:
"Where
the execution of a document or the endorsement of the party in whose name a
registered instrument or a share in a corporation is standing is required to
transfer such negotiable instrument or share the Judge or such officer as he
may appoint in this behalf may execute such a document or make such an
endorsement as may be necessary and such execution or endorsement shall have
the same effect as an execution or endorsement by the party."
This provision is to govern cases where the execution of a document or the endorsement by the party in whose name the negotiable instrument or the share in a corporation is standing, is necessary for effecting a transfer of such negotiable instrument or share. It is a rule which prescribes the procedure when what is required or when what is decreed or ordered is the transfer of the share. In such cases the court by complying with the procedure prescribed by this rule will be doing what the party in whose name the share stands was bound to do in order to effect a transfer of the share. But where it is not a transfer of the share in the real and strict sense of the term the execution of a document or the endorsement by the party may not be required. The question of the court executing such a document or making such an endorsement as contemplated by Rule 80 will not also arise. The rights of a shareholder may pass to another either by way of transfer or by way of transmission. There is a clear distinction between transfer and transmission of shares. Transfer is by voluntary act of parties whereas transmission is by operation of law. Sale of shares in court auction comes under the category of transmission by operation of law. This distinction between transfer and transmission of shares has been clearly explained in Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. and also in In re Wahid Bus & Mails Transport Co. Ltd., Multan. In the Madras case it was pointed out that in the case of court sale of shares the purchaser will acquire a complete title to the shares when delivery thereof is effected by passing a written order of prohibition by the court as contemplated by clause (3) of Rule 79 and that the compliance with the procedure prescribed by Rule 80 is not obligatory. The same view was taken in Nagabhushanam v. S. Ramachandra Rao. It was held in that case that where a court sale in respect of the shares is confirmed and an order contemplated by clause (3) of Rule 79 is issued no further steps need be taken for completing the transmission of the shares in favour of the purchaser. It is seen from the articles of association of the defendant company that separate provisions have been made to govern transfer of shares as distinct from the transmission of shares. These articles are contained in Exhibit XXII. Articles 14 to 17 deal with transfer of shares while articles 18 to 21 deal with transmission of shares. In the case of transfer of shares same has to be effected by the execution of a document in the manner prescribed by article 15. The execution of such a document is not insisted upon in the case of transmission of shares. On the other hand, such transmission will be recognised and implemented by the company on production of the evidence in proof of such transmission. The plaintiff in whose favour the shares covered by the share certificate (Exhibit C) had been transmitted by the sale in O.S. No. 63 of 1108 has produced the sale certificate (Exhibit A) in support of his claim to the shares and it is sufficient to substantiate his claim to have his name entered in the share register of the company, as the holder of these shares. For the reasons stated above we hold that the objection that the plaintiff's suit based on Exhibit A is unsustainable for the reason of noncompliance of the procedure prescribed by Rules 79 and 80 of Order XXI, Civil Procedure Code, cannot prevail.
Still another objection urged on behalf of the defendants is that the plaintiff's remedy is by way of an application under Section 38, Companies Act, and not by way of a fresh suit like the present one. No doubt that section provides for an application for rectification of the share register of the company and for consequential, reliefs being granted to the applicant. Even though such a summary procedure is prescribed by the Companies Act is cannot be said that the provision takes away the right of the party to seek the necessary reliefs by way of a regular suit. The provisions of the Companies Act do not by express words or by necessary implication take away the party's right of suit in respect of matters coming within the scope of Section 38. Hence it has to be taken that the right of suit available to the party under common law subsists in spite of the provision made in Section 38 of the Companies Act. It will be open to the party to resort to the summary procedure prescribed by that section or to seek reliefs by instituting a regular suit. In Ramesh Chandra Mitter v. Jogini Mohan Chatterji it was held that in a simple case where an immediate rectification is essential, it may be desirable to apply under Section 38, but if the case is at all complicated, an action should be brought. This decision was followed in Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. where also it was held that a regular suit for rectification of the share register and for consequential reliefs is maintainable and that the remedy in that direction is not confined to an application under Section 38 of the Companies Act. In the present case the plaintiff had as a matter of fact filed an application to the District Court under Section 38 of the Companies Act. That court found that the questions raised by the parties were of a complicated nature which could only be properly dealt with in a regular suit and accordingly directed the applicant to institute a fresh suit to get the reliefs claimed by him. Exhibit D is the copy of the order striking off his application with a direction to institute a regular suit. The present suit was accordingly instituted by the plaintiff. Considered in the light of all these aspects we hold that the present suit is maintainable.
The position taken up by the defendant is that the plaintiff's suit is governed by the three years' period of limitation prescribed by Article 48 or 49 of the Limitation Act. Article 48 governs suits for specific movable property lost or acquired by theft, or dishonest misappropriation or conversion, or for compensation for wrongfully taking or detaining the same. Article 48-A applies to suits to recover movable property conveyed or bequeathed in trust, deposited or passed and afterwards bought from the trustee, depositary or pawnee for a valuable consideration. Article 48-B relates to suits to set aside sale of movable property comprised in a Hindu, Muhammadan or Buddhist religious or charitable endowment, made by a manager thereof for a valuable consideration. Article 49 applies to suits for other specific movable property, or for compensation for wrongfully taking or injuring or wrongfully detaining the same. The reliefs claimed in the present suit do not come under the category of any of the reliefs specified in Articles 48 and 49. There is no other particular article applicable to suits of this nature. In the absence of any other specific article governing the present suit it has necessarily to be taken that the present suit is governed by the residuary article, i. e., Article 120, Limitation Act. That this is the article applicable to suits for rectification of the share register of a company and for other incidental reliefs is also the view taken in Jawahar Mills Ltd., Salem v. Official Receiver, Sha Mulchand and Co. Ltd.
The next point for decision is whether by virtue of the court sale evidenced by Exhibit A the plaintiff has acquired the ownership in respect of all the 121 shares covered by the share certificate (Exhibit C). The court sale of these shares was only on 15-3-1112. Long prior to that date defendant No. 5 had transferred 60 of these shares in favour of defendants Nos. 2 to 4. Exhibits XXIV, XXV and XXVI are the assignment deeds under which such a transfer was effected by defendant No. 5. All these assignment deeds were executed on 3-11-1101. Exhibit XXXV shows that 40 shares were transferred in favour of defendant No. 2, Exhibit XXV shows that 25 shares were transferred in favour of defendant No. 3 and Exhibit XXVI shows that 25 shares were transferred in favour of defendant No. 4. The board of directors of the company at the meeting held on 30-12-1101 recognised these transfers as proper and valid and accordingly resolved to register the names of the transferees as the holders of their respective shares in the books of the company. This is evident from Exhibit V the minutes of the directors' meeting held on 30-12-1101 and Exhibits II to IV and VI to XXX which are the accounts and other registers maintained by the defendant company show that from 30-12-1101 onwards defendants Nos. 2 to 5 were treated as the holders of the 40 shares, 25 shares and 31 shares, respectively. It is contended on behalf of the plaintiff that the transfer of shares as per the assignment deeds, Exhibits XXIV and XXV, in favour of defendants Nos. 2 and 4 were effected fraudulently and as a result of collusion between these defendants and defendant No. 5 with notice that all the 121 shares covered by Exhibit C had already been pledged with the plaintiff.
According to the plaintiff defendant No. 5 had pledged these shares with him on 5-8-1101. The document evidencing the pledge has not been produced in the case and therefore it is not possible to know the nature, the terms and the conditions of the pledge. From the pledge itself no notice can be attributed to the company or to defendants Nos. 2 to 4. Admittedly the plaintiff did not issue any notice to the defendants and the company intimating them of the pledge of these shares in his favour by the defendant No. 5. Plaintiff's suit (O.S. No. 63) for the enforcement of the pledge was instituted only in the year 1108. Present defendants Nos. 2 to 4 were not made parties to O.S. No. 63 of 1108 and hence it cannot be said that they had any notice of the proceedings in that case which terminated with the issue of the sale certificate (Exhibit A) to the plaintiff. The defendant company was a party to that suit and thus it can be taken that in the year 1108 the company had notice of the pledge in favour of the plaintiff of the shares in question. But nearly seven years prior to that date defendants Nos. 2 to 4 had become the transferees in respect of 90 of these shares and they had been duly recognised as the holders of those shares from the position occupied by defendants Nos. 2 to 5 in relation to the defendant company the plaintiff wants the court to draw the inference that all these defendants had notice of the pledge in his favour of the shares in question. Defendant No. 5 has all along been the president of the first defendant company. It is stated that defendant No. 4 was the managing director of the company and defendants No. 2 and 3 are his brothers. Defendant No. 4 as D. W. 2 has stated that he become the managing director of the company only in the year 1105. The transfer of the shares in favour of defendants Nos. 2 to 4 by defendant No. 5 was in the year 1101. There is the evidence of defendant No. 4 as D. W. 2 that defendants Nos. 2 to 4 obtained the assignment of these shares as per Exhibits XXIV, XXV and XXVI in all good faith and for valuable consideration and without any knowledge of the pledge of these shares in favour of the plaintiff. Defendant No. 5 has been examined as D. W. 3 and he has also supported the evidence given by D. W. 2. Defendant No. 5 has not stated that either before or subsequent to the execution of the assignment deeds Exhibits XXIV to XXVI he has mentioned to the transferees anything of the pledge in favour of the plaintiff. He has further stated that at the time of the assignment the security in favour of the plaintiff was more than sufficient and that he bona fide believing that there was nothing wrong in executing assignment deeds Exhibits XXIV to XXVI. The trial court has believed the version given by D. W. 2 and 3. As against such evidence adduced on behalf of the defendants there is practically no counter evidence on the plaintiff's side to make out his allegation that the aforesaid assignments were unsupported by consideration and brought into existence fraudulently and in collusion. The plaintiff alone has been examined on his side and he has not deposed to any such fraud and collusion. The mere fact that, defendant No. 5 who effected the transfers of these shares in favour of defendants Nos. 2 to 4 after the same had been pledged with the plaintiff happened to be the president of the defendant company, cannot by itself be taken to mean that the company had knowledge of the pledge even before such transfers were recognised as proper and valid as per the proceedings evidenced by Exhibit V.
Under the constitution of the company the president has no duties cast upon him to disclose all his personal dealings to the company. As a matter of fact there is no evidence to show that there was such a disclosure in respect of the pledge of the 121 shares covered by Exhibit C to the directors when they had passed the proceedings under Exhibit V. Under such circumstances the knowledge of defendant No. 5 regarding the pledge cannot be deemed to be the knowledge of the directors of the company. There is also nothing to show that the pledge in favour of the plaintiff was under a registered document. At best it could only be taken to have been effected under an equitable mortgage by deposit of the share certificate (Exhibit C). At the same time it was not accompanied by any transfer either in full or in blank executed by the mortgagor. As already stated the deposit of the share certificate by defendant No. 5 with the plaintiff by way of security for the loan was not intimated to the company. In the absence of any such intimation there was nothing wrong in the company having recognised the transfer of the shares in favour of defendants Nos. 2 to 4 under Exhibits XXIV to XXVI as proper and valid and in giving effect to such a transfer.
On behalf of the plaintiff it is urged that without the production of the share certificate (Exhibit C) the company should not have recognised the transfer of these shares under Exhibits XXIV to XXVI. The note at the foot of Exhibit C is relied on in support of this contention. That foot-note is as follows :
"No
transfer of any portion of the shares comprised in this certificate can be
registered unless accompanied by this certificate. Payment of calls will be
endorsed on the back hereof."
At the outset it has to be stated that this foot-note cannot have the force of a provision in the articles of association of the company contained in Exhibit XXII. Exhibit XXII contains no provision insisting on the production of the share certificate along with the deed of transfer. The requirements of a valid transfer are provided for in article 15 and if such requirements are satisfied by the execution of a deed of transfer as contemplated by that article, it will be perfectly open to the company to recognise such transfer if the company is satisfied that the transfer was effected bona fide and for valuable consideration. The note at the foot of the share certificate is obviously intended as a caution to the holder of the share certificate and it gives an option to the company to call for the production of the share certificate also in respect of the transfer of any particular share. All the same the non-exercise of that option cannot by itself invalidate the act of the company in recognising a transfer otherwise valid and proper. A similar question arose for consideration in Rainford v. James Keith & Blackmail Company Ltd. There also the share certificate contained a foot-note stating that "without the production of this certificate no transfer of shares mentioned therein can be registered." C, the holder of such a share certificate, had pledged the same with R as a security for a loan. Subsequently C sold the same to Y. The directors of the company acting in good faith accepted the transfer in favour of Y and registered the shares in his name and issued a fresh certificate in his favour, even though the share certificate held by C was not produced along with the deed of transfer. It was held that R was not entitled to enforce the pledge in his favour against the company and that the foot-note in the share certificate did not amount to a representation to or contract with the holder of the certificate that the shares would not be transferred without the production of the certificate, but was only a warning to the owners of the shares to take care of the certificate because he could not compel the company to register a transfer without its production. Applying these principles to the facts of the present case it is clear that there was nothing wrong or illegal in the defendant company having recognised the transfer of the shares in favour of defendants Nos. 2 to 4 as proper and valid and entering their names as holders of the respective shares in the share register of the company. The result is that when the plaintiff became the auction purchaser under Exhibit A there were only 31 shares standing in the name of the judgment-debtor who is the present defendant No. 5. The title to these 31 shares alone passed to the plaintiff under that court sale. It follows therefore that on the strength of the sale certificate (Exhibit A) plaintiff is not entitled to enforce any claims in respect of the remaining 90 shares which had already been registered in the names of defendants Nos. 2 to 4. So far as these defendants and the shares registered in their names are concerned the suit has to fail and the plaintiff can get a decree in this case only in respect of the 31 shares standing in the name of defendant No. 5.
In the result this appeal is allowed only in respect of the 31 shares-covered by Exhibit C still standing in the name of the defendant No 5. Plaintiff is given a decree for the several reliefs claimed in the plaint only in respect of these 31 shares subject to the lien in favour of the defendant company for whatever amount that may be due to the company from defendant No. 5 up to 15-3-1112 the date of court sale under Exhibit A. Plaintiff will get proportionate costs throughout from defendant No. 6. In other respects the appeal is dismissed with proportionate costs to respondents Nos. 1 to 4. The objection memoranda filed on behalf of respondents Nos. 1, 4 and 5 are dismissed.
[1983] 54 COMP. CAS. 254 (Punj. & Har.)
Hoshirarpur Azad Transporters P.
Ltd.
v.
Hoshiarpur Express Transport Co.
G.C. MITTAL J.
CIVIL REGULAR SECOND APPEAL NO. 1549 OF 1969
JULY 16, 1981
J.N. Kaushal and Maluk Singh for the Appellant.
D.N. Awasthy for the Respondent.
Gokal Chand Mittal J.—The Hoshiarpur Azad
Transporters (P.) Ltd., Hoshiarpur, and several other persons filed a suit for a
declaration, claiming that plaintiffs Nos. 2 to 8 and defendant No. 9 are the
directors of the aforesaid company and that plaintiffs Nos. 2 to 36 and
defendants Nos. 9 to 31 are the shareholders of the said company, with a
consequential relief of permanent injunction restraining defendants Nos. 1 to 8
from interfering with the management of the said company. The suit was
contested by defendants Nos. 1 to 8 and it was pleaded that all the plaintiffs
and the defendants, who were supporting the plaintiffs, had sold their shares
in the said company to them and as such they had nothing to do with the said
company and it was defendants Nos. 1 to 8 alone, who were the shareholders,
some of whom were the directors of the company and were managing the same. On
the contest of the parties, a large number of issues were framed by the trial
court and after evidence was led, the trial court came to the conclusion that
all the plaintiffs and defendants supporting the plaintiffs had sold their
shares in the company to defendants Nos. 1 to 8 and as such ceased to be
shareholders and directors of the company and that the shares and the
management rested with defendants Nos. 1 to 8. The plaintiffs went up in
appeal, which was dismissed by the learned Additional District Judge,
Hoshiarpur, by a +judgment and decree dated 24th May, 1969. Still feeling
dissatisfied, the plaintiffs have come to this court in second appeal.
Mr. J. N. Kaushal, senior advocate, appearing for the
plaintiffs, has confined his arguments, for claiming declaration that
plaintiffs Nos. 2 to 36 were the shareholders of the company and the transfer
made by them in favour of defendants Nos. 1 to 8 had to be ignored, because of
the following facts :
(i) That the original share
certificates/scrips were still with the plaintiffs;
(ii) That
the deed of transfer of shares was signed merely by the transferors and not by
the transferees ;
(iii) That the entire purchase price of the
shares sold has not been paid to the plaintiffs ; and
(iv) That the provisions of s. 108 of the
Companies Act, 1956, were not duly complied with.
After hearing the learned counsel for the parties on
the aforesaid matter, I find that there is no substance in the contentions
raised by Mr. Kaushal. Exhibit P-1 is the deed dated 6th March, 1960, by which
the plaintiffs sold their shares to defendants Nos. 1 to 8. After the aforesaid
sale, a meeting of the company was called, in which a very detailed resolution
was passed on 20th April, 1960, a copy of which has been placed on the record
as Ex. P-15. It was clearly stated therein that all the shares of the company
have been transferred to defendants Nos. 1 to 8 and that the earlier
shareholders of the company have ceased to be shareholders and directors and
now the management was transferred to defendants Nos. 1 to 8. The aforesaid
resolution was followed by a letter dated 24th December, 1960 (Ex. DW-I/1)
written by the transferors (the plaintiffs) to the Registrar of Companies,
intimating that all the shares had been transferred in favour of defendants
Nos. 1 to 8. The sequence of the aforesaid facts clearly goes to show that
first there was a transfer of shares by the plaintiffs, which was followed by a
resolution of the company and the intimation of the transfer was duly given by
all the plaintiffs and other transferors to the Registrar of Companies. The
company has accepted the transfer of shares in favour of defendants Nos. 1 to 8
and since March, 1960, till the filing of the suit in April, 1964, i.e., for
about four years, it was defendants Nos. 1 to 8 who were managing the affairs
of the company, some of whom were the directors thereof.
Keeping in view the aforesaid admitted facts on the
record, the four points raised by Mr. Kaushal may now be examined. In order to
examine the first three points raised by him, it will be useful to notice the
fourth point first, which is with regard to the applicability of s. 108 of the
Companies Act. A reading of s. 108 shows that a company may not register
tranfer of shares if it was not satisfied about the transfer and some of the
possible grounds could be that the instrument of transfer was not stamped, that
it was not executed by the transferor and the transferee and that the
instrument of transfer is not accompanied with the certificate relating to the
shares. This section does not say that if the share certificates still continue
with the transferor, the sale would be deemed to be void or if the transferee
does not sign the instrument of transfer, the transfer would be deemed to be
void. On the other hand, a right has been given to the company under this
provision to refuse to record the transfer in their register. It is not
disputed on facts that in the present case the company accepted the transfer
and registered the names of the transferees in their books. Once it is held
that the sale of shares would not become void for not attaching the share
certificates along with the transfer deed or if it is not signed by the
transferee, then the only inference is that so far as the contract between the
transferor and the transferee is concerned, the same would be binding between
the parties and none of the parties would be entitled to back out of the
contract. As a matter of fact, it is admitted by Mr. Kaushal that all the
transferors did sign the deed, Ex. P-1, also signed the proceedings of the
meeting dated 20th April, 1960, a copy of which is Ex. P-15, and the letter was
written to the Registrar of Companies intimating about the transfer of the
shares, a copy of which has been placed on the record as Ex. DW-1/1. Therefore,
so far as the plaintiffs, who are the transferors, are concerned, they cannot
back out of the transfer of shares by them. Admittedly, the transfer was made
in favour of defendants Nos. 1 to 8. Defendants Nos. 1 to 8 also accept the
transfer as good. On these facts, even if the original share certificates
remained with the plaintiffs or the deed of transfer of shares was not signed
by the transferees, it was of no significance because, in spite of that, the
contract of transfer of shares would be valid in the eye of law. Accordingly,
there is no merit in the first two contentions raised by Mr. Kaushal.
As regards the payment of price of the shares, a
reading of Ex. P-l itself shows that a sum of over Rs. 44,000 was paid down in
cash and the balance was agreed to be paid in the manner stated in the
agreement. It cannot be disputed that transfer of shares, and even immovable
property, would be complete after the instrument of transfer is executed,
whether the price is paid at that time or is paid in part and part agreed to be
paid later or the whole consideration is agreed to be paid later. In the second
and third contingencies, the only course open to the transferors would be to
claim the balance sale price or the entire sale price, as the case may be, but
it cannot be held that the transfer would be void or non-existent. Accordingly,
I do not find any merit in the third contention either. The fourth point has
already been discussed. Under the fourth point, the court below took the view
that s. 108 of the Companies Act, 1956, was directory and that there was
substantial compliance of the same. While agreeing with that view, I have given
the additional reason in the foregoing paragraph.
The net result is that the plaintiffs and the
defendants supporting the plaintiffs have ceased to be shareholders with effect
from 6th March, 1960, when the transfer deed was executed by them in favour of
defendants Nos. 1 to 8 and, therefore, no relief can be granted to them in the
suit.
For the reasons recorded above, I do not find any
merit in this appeal and dismiss the same but without any order as to costs.
[1977] 47 COMP. CAS. 644 (ALL)
Hanuman Mills Private Ltd., In re.
SATISH CHANDRA J.
COMPANY PETITION NO. 9 OF 1972.
APRIL 25, 1975
Kameshwar for
the Petitioner.
J.D.
Prabhakar, O.P. Agarwal, R.R. Gupta and S.K. Dhugra for the Respondents.
JUDGMENT
Satish
Chandra J.—On 11th May,
1972, Sri N.K. Agarwal, the petitioner, filed an application under section 155
of the Companies Act, 1956, for the rectification of the register of members of
Messrs. Hanuman Mills Private Ltd., Fatehpur, by entering the name of the
petitioner as a shareholder in respect of 342 shares mentioned in paragraph 2
of the petition. Soon after, on 19th May, 1972, this court passed an order of
winding up of Messrs. Hanuman Mills Private Ltd., Fatehpur. Thereafter, on 15th
July 1972, the applicant, moved another application praying that after the
winding-up order this court has jurisdiction under section 467 of the Companies
Act to settle the list of contributories and in that regard to direct the
rectification of the register of members of the company under winding up. He
prayed that his earlier application moved on 11th May, 1972, be treated as one
under section 467 of the Companies Act.
The
petitioner's case is that he held a decree in Suit No. 4 of 1959 dated 14th
December, 1959, for Rs. 10,901.35 against one, Damodar Das Agarwal. He was the
younger brother of Sri Shyam Sundar Agarwal, the managing director of the company.
The decree was put into execution (Case No. 12 of 1960). Three hundred and
forty-two shares held by the judgment-debtor, namely, Damodar Das Agarwal, were
put up for auction on 18th July, 1963. They were purchased by the
petitioner-decree-holder with the permission of the court for Rs. 4,000 in the
partial satisfaction of the decree. The sale was confirmed by the execution
court on 30th January, 1965, and became final.
On 9th
February, 1965, the execution court intimated the company of the transmission of
the aforesaid 342 shares to the petitioner. The execution court issued a sale
certificate to the petitioner on 31st July, 1965, certifying that he was the
owner of the aforesaid shares, and directing the name of the petitioner to be
substituted in place of Damodar Das Agarwal. But, in spjte of it, the managing
director of the company did not comply with the direction of the court.
Consequently, the applicant has prayed that his name be entered as a
shareholder of the 342 shares in place of Sri Darnodar Das Agarwal in the
register of members of the company.
In the
application the petitioner states that he became the owner of the following
shares :
|
(1) |
Two shares
of Rs. 100 each standing in the name of Damodar Das Agarwal. |
||
|
(2) |
100 shares in
the name of Baldeo Prasad. |
||
|
(3) |
20 shares
in the name of Balaram Krishna. |
||
|
(4) |
55 shares
in the name of Bimal Kumar Agarwal. |
||
|
(5) |
65 shares
in the name of Prakash Chandra. |
||
|
Total |
|
342 shares |
|
Sri Shyam Sundar
Agarwal, the erstwhile managing director of the company, has filed a
counter-affidavit. He does not admit that the petitioner is the owner of the
shares. He challenges the jurisdiction of the execution court to effect
transmission of the aforesaid shares to the petitioner. It was pleaded that the
petition was not maintainable and that it was barred by time. Sri Shyam Sundar
Agarwal filed another affidavit stating that Damodar Das Agarwal was indebted
to the extent of Rs. 10,000 to Sri Deoki Nandan Agarwal and his son's firm,
Amrit Dal Mills. He also stated that Messrs, Salik Ram Lalta Prasad of Sitapur
was a grain dealing concern of a cousin of the petitioner, Sri N.K. Agarwal.
Messrs. Salik Ram Lalta Prasad was also indebted to the extent of Rs. 8,000 to
Amrit Dal Mills, and when the latter pressed for its moneys due from Damodar
Das and Messrs. Salik Ram Lalta Prasad, the alleged shares were given to Amrit
Dal Mills. On the filing of this affidavit the petitioner impleaded Messrs.
Amrit Dal Mills through Sri Deoki Nandan Agarwal and Sri Purshottam Das
Agarwal, proprietors, as respondent No. 3, and Sri Damodar Das Agarwal as
respondent No. 4 to the petition. Notices of the petition were issued to them.
Sri Deoki
Nandan Agarwal has filed an affidavit stating that he was not the proprietor of
Amrit Dal Mills, which exclusively belonged to Sri Purshottam Das Agarwal, He
further stated that Sri Damodar Das Agarwal borrowed Rs. 10,000 from Purshottam
Das at 12 per cent, per annum interest oh 15th June, 1958. He gave a pronote as
collateral security for the loan. He goes on to state in his affidavit that in
spite of demands when Damodar Das Agarwal could not pay the sum of Rs. 10,000
and interest, he pledged the alleged 342 shares in question to Sri Purshottam
Das Agarwal on 15th July, 1960, and the saidscripsare in the possession of Sri
Purshottam Das Agarwal. He also stated that Damodar Das Agarwal was owner and
beuamidar of these shares of Hanuman Mills Ltd. and he was entitled to pledge
the shares. He claimed that the petition is time-barred.
On the
pleadings the court framed the following issues in the case:
(1) Whether the petition is not
maintainable as alleged in paragraphs 5 and 23 of the counter-affidavit ?
(2) Whether
the petition is barred by limitation?
(3) Whether the petitioner is not
entitled for registration of his name in the register of members of the company
for the reasons alleged in para graphs 3, 4, 19, 24 and 25 of the
counter-affidavit?
(4) Whether the petitioner Is the owner
of 342 shares and is entitled to get his name substituted in the register of
members of the company as alleged in paragraphs 1, 5, 19 and 20 of the
petition?
(5) To
what relief, if any, is the petitioner entitled ?
By the order
dated 11th September, 1972, on which date the issues were framed, the court
fixed 30th October, 1972, for final hearing and gave liberty to the parties to
take steps to summon such witnesses as they liked to produce in the case, It
may be stated that none of the parties has adduced any oral evidence.
Issue No. 1,
relating to the maintainability of the petition, was taken up as a preliminary
issue and was disposed of by the learned company judge on 13th December, 1972.
It was held that the application was maintainable. The learned judge held that
a person who has become the owner of the shares and has, on that account,
become a member of the company, but his name has not been brought on the
register of members can apply under section 155. It was held that section 155
is not dependent on section 111 of the Companies Act. Section 155 is the
controlling section and gives the court an overriding power notwithstanding any
previous order of the Central Government. It was held that the fact that a
person has not followed up the procedure mentioned in section 108 and thus
leading up to the appeal to the Central Government under section 111 of the
Companies Act does not deprive him of his right to move the court under section
155. The learned judge further held that the prohibition contained in section
108(1), namely, that a company shall not register a transfer of shares unless a
proper instrument of transfer, duly stamped and executed by or on behalf of the
transferor and the transferee has been delivered to the company along with the
certificate relating to the shares, is not applicable to the case of
transmission of shares as a result of an order of a court of law. When a person
has become the owner of shares as a result of a court auction, he is entitled
to be recorded as a member of the company, and if the company, without any
sufficient cause, refuses to record him as a member he can maintain an
application under section 155. As such the application cannot be thrown out on
the ground that the applicant has failed to avail of the procedure provided under
sections 108 to 111 to the Act.
Issue No. 2.—The question raised by this issue is
whether the petition is barred by limitation. In this case the order of winding
up of the company was passed on 19th May, 1972. Thereafter, on 15th July, 1972,
the petitioner made an application that the court has to settle the list of
contributories under section 467, and his application dated 11th May, 1972, may
be treated as one under section 467 of the Companies Act. This application,
having been moved within two months of the date of the winding-up order, cannot
be said to be barred by limitation. Under section 467 the court has to settle
the list of contributories, and in that connection has the power to rectify the
register of members.
In Shankara v. Haridhan Singh [l966] 36 Comp Cas 209
(Punj) it has been held that an application for rectification of register was
not "an application made" within meaning of section 3 of the
Limitation Act, and so does not attract article 181 of the Limitation Act,
which is only applicable to applications under the Code of Civil Procedure. The
Punjab High Court followed the 'decision of the Supreme Court in Sha Mulchand
& Co. v. Jawahar Mills Ltd. [1953] 23 Comp Cas 1 (SC). Article 137 of the
Limitation Act, 1963, is equivalent to article 181 of the Limitation Act, 1908.
This authority will, therefore, equally apply to article 137. Learned counsel
for the managing director had placed reliance on article 137 of the Limitation
Act in support of this issue. In my opinion the decision of the Punjab High
Court is applicable, and it cannot hence be said that the application was
barred by time because of article 137 of the Limitation Act.
In the same
case the Punjab High Court further held that the application for rectification
of register is not a suit instituted as defined by section 2(1) read with
section 3 of the Limitation Act. Hence, article 120 of the Limitation Act was
not applicable. I am also in agreement with this view.
The application
in the present case, which, in substance, is for rectification of the register
of members so as to entitle the petitioner to be placed on the list of
contributories, cannot be said to be barred by time.
This issue is
decided in the negative, against the defendants and in favour of the
petitioner.
Issues Nos. 3
and 4.—These issues are inter-related and can be disposed of together.
The principal
question is whether the petitioner is the owner of the 342 shares in question.
Beyond pleading ignorance, the managing director, who is the only contesting
respondent, does not seriously question the proceedings taken by the execution
court in regard to the auction sale of the shares in question. The petitioner
has filed certified copies of the various orders of auction and confirmation of
sale. He has filed the sale certificate issued to him. He has filed a copy of
the order issued by the court intimating the company of the sale of the
aforesaid shares to the petitioner. He has also filed copies of the applications
made by the benamidars, namely, Baldeo Prasad, Balaram Krishna, Bimal Kumar
Agarwal and Prakash Chandra, in the course of the execution proceedings,
stating that they have no interest in these shares, they were mere benamidars
and the real owner of the shares was Damodar Das Agarwal. The statement of
these benamidars to the same effect has been filed by the petitioner along with
his rejoinder-affidavit. It cannot hence be doubted that in execution
proceedings the petitioner became the auction purchaser of 342 shares, the
details of which were given in paragraph 2 of the petition. These shares
belonged to Sri Damodar Das Agarwal and were held by him in different names as
indicated in paragraph 2 of the petition. The various persons in whose names the
shares are actually registered in the register of members of the company were
benamidars, the real owner being Damodar Das Agarwal, the judgment-debtor of
the petitioner. I am satisfied that the petitioner has established that he
became the auction purchaser of the 342 shares, which were the property of
Damodar Das Agarwal, the judgment-debtor.
Learned
counsel for the managing director relied upon Order 21, rules 79 and 80 of the
Code of Civil Procedure, and urged that since the share scrips were not in the
possession of the court and since the court had not endorsed them in favour of
the petitioner, the petitioner did not become the owner thereof.
In reply,
learned counsel for the petitioner invited my attention to Philipose v.
Vanchinad Rubber & Produce Co, Ltd. [1953] 23 Comp Cas 536 (Trav-Coch). In
this case it was held that non-compliance with the procedure prescribed by
rules 79 and 80 of Order 21, Civil Procedure Code, did not make the suit based
on sale certificate unsustainable. There is nothing in these rules to indicate
that the title of the auction purchaser to the shares purchased by him will be
perfected only after delivery is made by the issue of the prohibitory order as
prescribed by clause (3) of rule 79. On the other hand, the conditions necessary
for perfecting the auction purchaser's title are prescribed by clause (2) of
rule 77 of Order 21. So far as the sale evidenced by the sale certificate was
concerned, these conditions were duly complied with and satisfied. In the
present case also the execution court issued the requisite sale certificate to
the petitioner. That was proof of the satisfaction of the various conditions
prescribed by rule 77 for perfecting the auction purchaser's title to the
subject-matter of the auction, namely, the shares. In my opinion, the
proceedings in the execution court culminated in the vesting of the ownership
and title to the shares in the decree-holder-petitioner.
The managing
director has put forward the theory that Sri Damodar Das Agarwal was indebted
to the extent of Rs. 10,000 to Sri Deoki Nandan Agarwal and his son's firm,
Amrit Dal Mills, and that he gave these shares to Amrit Dal Mills when he was
pressed for the money. No documentary or other evidence has been adduced by him
to sustain these allegations. The affidavit filed by Sri Deoki Nandan Agarwal
contradicts the affidavit of the managing director. Sri Deoki Nandan Agarwal
dissociates himself completely from the proprietorship of Amrit Dal Mills or
from the loan of Rs. 10,000 alleged to have been taken by Damodar Das Agarwal.
According to him the loan was given by Purshottam Das Agarwal, who was the sole
owner of Amrit Dal Mills. According to him, Damodar Das Agarwal pledged the
alleged 342 shares to Sri Purshottam Das Agarwal in relation to the loan of Rs.
10,000 taken by him earlier. It is significant that Sri Purshottam Das Agarwal
has not come forward to establish this alleged claim. Sri Deoki Nandan Agarwal
has filed no document to prove the alleged pledge. The Amrit Dal Mills, which
is alleged to be the sole proprietary concern of Sri Purshottam Das Agarwal,
has also not put in appearance in spite of the service of notice of the
petition. Even the affidavit of Sri Deoki Nandan Agarwal does not establish the
passing of any interest in the 342 shares to Sri Purshottam Das Agarwal. At the
most it makes out a case of pledge. It has not been stated as to what happened
to the alleged pledge. In my opinion the whole story seems to be an
after-thought, brought out only to defeat the claim of the petitioner. It is
significant that even Sri Deoki Nandan Agarwal admits in his affidavit that
Damodar Das Agarwal was owner and benamidar of these shares.
It was urged
on behalf of the managing director that under the proviso to sub-section (5) of
section 111 of the Companies Act the Central Government was entitled to sell
the shares to an existing member on payment of appropriate compensation. By
bypassing the provisions of sections 108 to 111 the petitioner has deprived the
existing shareholders of their right to acquire the shares in dispute. It has
already been held that the procedure prescribed by sections 108 to 111 is not a
condition precedent to the maintainability of an application for rectification
under section 155 of the Companies Act. The provisions of sections 108 to 111
have not been incorporated or made applicable to the power of the court to
settle the list of contributories under section 467 of the Companies Act.
Assuming, however, that that procedure was by some stretch of reasoning
available in the present proceedings, none of the shareholders has come forward
to purchase the 342 shares in question. So the question of applying the proviso
aforesaid does not at all arise.
My finding is
that the petitioner is the owner of 342 shares and is entitled to get his name
substituted in the register of members of the company.
Issue No. 4
is accordingly decided in the affirmative, in favour of the petitioner and
against the respondents.
The various
points raised in issue No. 3 have already been answered in the findings
recorded in the other issues. This issue is accordingly decided in the
negative, against the respondent and in favour of the petitioner.
In the result
the petition succeeds and is allowed. The register of members of the Hanuman
Mills Private Ltd., Fatehpur, shall be rectified. The petitioner, Sri N.K.
Agarwal, shall be entered as a member as against the 342 shares mentioned in
paragraph 2 of the petition in place of Damodar Das Agarwal and his other
benamidars mentioned in paragraph 2 aforesaid. The petitioner would be entitled
to costs.
[1985] 58 COMP. CAS. 97 (ALL.)
v.
Naini Oxygen Acetylene and Gas
Ltd.
S.D. AGARWALA, J.
Company Petitions Nos. 3 and 4 of 1981
FEBRUARY 3, 1983
Bharatji Agarwal
and R.K. Agarwal for the Petitioner.
B.C. Dey,
R.K. Sharma and V.K. Barman for the Respondents.
Agarwala,
J.—These are two connected
petitions filed under s. 155 of the Companies Act, 1956, hereinafter referred
to as "the Act". Company Petition No. 3 of 1981 has been filed by
M/s. Kumar Exporters Private Ltd., petitioner No. 1, and Ashok Agarwal,
petitioner No. 2, against Naini Oxygen Acetylene and Gas Ltd., having its
registered office at 79, Darbhanga Colony,
The company has
an authorised capital of Rs. 30 lakhs divided into 2,50,000 equity shares of
Rs. 10 each and 5,000 redeemable shares of Rs. 100 each. The issued and paid-up
capital is Rs. 22 lakhs comprising of 2,20,000 equity shares of Rs. 10 each.
Bansal held 13,400 equity shares of Rs. 10 each in the company. The company had
allotted one single share certificate No. 11 to Bansal. The distinctive numbers
of the shares as shown in the share certificate are 40,901 to 54,300, both
inclusive. The shares issued in favour of Bansal were only partly paid up.
The case of
the petitioner in the Company Petition No. 3 of 1981 was that Bansal
transferred 2,500 shares out of said certificate to the petitioners. The case
of the petitioners in Company Petition No. 4 of 1981 is that Bansal transferred
2,793 shares in favour of the petitioners out of share certificate
issued to Bansal. The total number of shares transferred in favour of the
petitioners, therefore, was 5,293. Since the share was valued at Rs. 10 each,
it was agreed between the parties that a sum of Rs. 52,930 would be paid as
consideration for the said shares. On April, 28, 1978, Ashok Agarwal wrote a
letter to the company that a sum of Rs. 44,850 be transferred from his account
to the account of R.K. Bansal. On the same day, another letter was issued by
D.P. Agarwal, who is the father of Ashok Agarwal as well as Ajoy Agarwal, the
petitioners in both the cases, that a sum of Rs. 8,081.60 from his account be
transferred and credited to the account of Bansal. The total consideration
which was paid to Bansal was Rs. 52,931.60. This amount was credited in the
account of Bansal and it is not disputed by the counsel for the company that in
view of payment of this amount to Bansal, all the shares were made fully paid
up.
On December 4, 1978, Bansal executed transfer deeds
in favour of the petitioners in respect of the shares which were agreed to be
transferred by him. These transfer deeds along with share certificate No. 11
was received by the company on December 7, 1978. On October 27, 1979, a
reminder was sent to the company to effect the transfer of shares in favour of
the petitioners. This letter was received by the company on November 17, 1979.
A second reminder was sent on December 15, 1979, but in spite of this reminder
also, a the shares were not transferred in favour of the petitioners. In view
of the fact that the shares were not transferred in favour of the petitioners,
the petitioners filed the present petitions in this court.
At the outset, it may be stated that it is admitted
by Bansal in the counter-affidavit filed in this court that the signatures on
the transfer deed dated December 4, 1978, were those of Bansal. It has been
further admitted by Shri B. C. Dey, counsel appearing for the company, that the
shares held by Bansal had become fully paid up but this could only be possible
after the amount was credited in favour of Bansal by virtue of the letters
issued to the company on April 28, 1978. In the circumstances, it is not
necessary to go into the question as to whether the consideration in respect of
the shares has passed to Bansal or not because if once it is admitted that the
entire block of shares, namely, 13,400 shares, have been made fully paid up,
that itself prima facie evidences the fact that the amount was transferred from
the account of the petitioners to the account of Bansal.
Learned counsel for the petitioners has urged that
the petitioners having submitted the transfer deed along with the share
certificate to the company, the company without any justifiable reason has
refused to register the shares in favour of the petitioners and, as such, they
were entitled to approach this court for rectification of the register of
members under s. 155 of the Companies Act.
Sri B.C. Dey, learned counsel for the respondent
company, has, however, urged, firstly, that the application for transfer of
shares being not in accordance with s. 108 of the Companies Act was not an
application in accordance with law and since the provisions of s. 108 of the
Act are mandatory, the company was justified in refusing to register the shares
in favour of the petitioners. Secondly, it has been urged that unless the
certificate was split up, the company could not register the shares in favour
of the petitioners. Thirdly, it has been urged that the original share
applications are with the police department and, as such, the signatures on the
transfer deed cannot be verified by the company and, therefore, the shares in
any case could not be recorded in the name of the petitioners and, lastly, a
submission has been further raised that since in the application form there is
no signature of a witness showing that Shri Bansal signed the document of
transfer, the transfer was justifiably not recorded by the company.
In order to examine the first contention raised by
the learned counsel for the respondent company, it is necessary to state a few
facts. In para. 6 of the affidavit filed in support of Petition No. 3 of 1981,
it has been categorically stated that the petitioner submitted the share transfer
forms duly executed by Sri Bansal on September 4, 1978, along with the share
certificate forms to the company for registration. This was received by the
company on December 7, 1978. This transfer form related to 2,500 equity shares.
Simultaneously, the petitioner in Petition No. 4 of 198 L also submitted a
share transfer form duty executed by Bansal in respect of 2,793 equity shares.
This has been stated in para. 6 of the affidavit filed in support of Petition
No. 4 of 1981. It is, therefore, clear that on December 4, 1978, two transfer
forms duly signed by Bansal in respect of 2,500 equity shares and 2,793 equity
shares were submitted to the company along with the share certificate No. 11,
which was in respect of 13,400 equity shares in favour of Bansal. This averment
has not been denied in the counter-affidavits of Anil Saran filed in both the
petitions. The only case set up is that the application was not maintainable,
as there was no request for sub-division of the certificate. The factual
position, therefore, which emerges is that in respect of the same certificate,
two transfers were effected by Bansal, for 2,500 equity shares and 2,793 equity
shares, and both these transfer forms along with the share certificate in
favour of Bansal were placed before the company, which were received by the
company on December 7, 1978.
The argument of the learned counsel for the company,
consequently, is that since only one share certificate was submitted, which had
not been sub-divided, the application for transfer was not maintainable in law.
Sub-clause (1) of s. 108 of the Companies Act excluding the proviso, which is
relevant for decision of the case, is quoted below :
"108.
Transfer not to be registered except on production of instrument of
transfer.—(1) A company shall not register a transfer of shares in, or
debentures of, the company, unless a proper instrument of transfer duly stamped
and executed by or on behalf of the transferor and by or on behalf of the
transferee and specifying the name, address and occupation, if any, of the
transferee, has been delivered to the company along with the certificate
relating to the shares or debentures, or if no such certificate is in
existence, along with the letter of allotment of the shares or
debentures."
The above clause, therefore, provides that a company
shall not register a transfer of shares unless a proper instrument of transfer
duly stamped and executed by or on behalf of the transferor has been delivered
to the company along with the certificate relating to the shares so sought to
be transferred. In the instant case, it is not disputed that the instrument of
transfer duly stamped and executed by Bansal had been delivered to the company
along with the composite share certificate. The mere fact that the share
certificate contained more number of shares than what were transferred in
favour of the petitioner by virtue of the transfer deed, cannot take away the
effect of the production of the share certificate. If, therefore, once the
company had before it the share transfer forms duly executed and stamped along
with the share certificate, though the share certificate may be for a larger
number of shares, it cannot be said that there is non-compliance of s. 108 of
the Companies Act.
Learned counsel for the company has relied upon a
decision of the Hon'ble Supreme Court in Manna Lai Khetan v. Kedar Nath Khetan
[1977] 47 Comp Cas 185. In that case, the Supreme Court opined that since
negative words have been used in s. 108 of the Companies Act they are
indicative of the legislative intent that the statute is mandatory. In my
opinion, the intention of holding s. 108 of the Companies Act to be mandatory
is only to the extent that the company must have before it the share transfer
form duly executed and stamped along with the share transfer certificate, but
it cannot be interpreted to mean that even when a share certificate is there,
though for a larger amount, there is non-compliance of s. 108 of the Companies
Act. The larger share certificate includes the shares sought to be transferred
and, as such, there would be full compliance of s. 108 of the Companies Act if
an application for transfer of a smaller number of shares is accompanied by a
share certificate relating to a larger number of shares. In the circumstances
of the present case, therefore, in my opinion, the application forms were
accompanied with a certificate relating to the shares sought to be transferred.
In this view of the matter, I do not find any force in the first contention
raised by the learned counsel for the company.
In regard to the second contention raised by the
learned counsel for the company, in my opinion, this contention also is not
substantiated. Section 112 of the Companies Act lays down the procedure for
certification of transfers. Certification, in effect, means a statement by the
company that certain documents have been delivered to the company for the
purpose of transfer of shares. It is a kind of receipt. It is a representation
by the company to any person acting on the faith of such certificate that
documents show a prima facie title to the shares in the transferor's name in
the instrument of transfer. This provision has been made to facilitate the sale
of smaller number of shares in case the share certificate is for a larger
number of shares. If Parliament contemplated that no transfer could be made
unless the share certificate was split up, it was not necessary to make any
such provision as has been made in s. 112 of the Companies Act.
In Palmer's Company Law, Volume I, 22nd edition, page
404, it has been observed as under :
"If the certificate includes other shares which
are not transferred by the instrument of transfer or if the certificate is in
respect of shares sold to more than one transferee, the transferor lodges his
certificate with the company, and the company's secretary, at the request of
the transferor or his broker, certificates the transfer with a statement to the
effect that a certificate in respect of the shares in the transfer has been
lodged with the company. This process is known as 'certification'."
Similarly, in Ramaiya's Guide to the Companies Act,
9th edition, page 288, it has been observed as under :
"Where the certificate is lodged with a view to
the transfer of part only of the shares comprised therein, the company in due
course issues to the transferor a fresh certificate for the balance ; or,
according to the practice of some companies, indorses on the deposited
certificate particulars of the shares transferred, and then returns the
certificate to the depositor. Sometimes on the deposit and before the issue of
a fresh certificate, the depositor is given a balance ticket."
I fully agree with the observation made by Ramaiya in
the above-mentioned commentary. I do not find any prohibition laid down in any
section of the Companies Act that a party cannot apply for transfer along with
a certificate for larger shares unless sub-division is made earlier. In the
circumstances, the mere fact that the certificate was not sub-divided earlier,
did not take away the power of the company to record the transfers sought by
the petitioner.
The above view which I have taken is further
fortified by a perusal of the Companies (Issue of Share Certificates) Rules,
1960, published by a notification of the Government of India in the Ministry of
Commerce and Industry, Department of Company Law Administration, dated June 30,
1959. On a reading of rr. 4 and 7 of the said Rules, it is clear that when a
composite certificate is. sought to be sub-divided or when a certain number of
shares are sought to be transferred from a composite certificate, the said fact
has to be recorded in a manner prescribed under r. 7 in the register of members
or in the register of renewed and duplicate certificates. In view of the above,
I am of the opinion that merely because the share certificates bad not been
sub-divided earlier, there was no justification for the company to refuse
registration of shares in favour of the petitioner when there was an
application along with a share certificate presented to the company.
So far as the third and fourth contentions of the
learned counsel for the company are concerned, these questions do not arise in
the instant case, as in para. 4 of the counter affidavit of Ramesh Kumar
Bansal, in both the petitions, it has been categorically admitted by him that
he had signed the share transfer forms. In the circumstances, the mere fact
that some papers are with the police or that a witness had not signed
testifying to the signature of Bansal, it cannot be said that the transfer
forms were, in any manner, invalid in law or that the company could not
register the transfer in favour of the petitioner.
Section 155 of the Companies Act provides that if
default is made by the company in entering on the register the fact of any
person having become a member of the company, it is open to him to apply to the
court for rectification of the register. In the instant case, I am satisfied
that the company did not rectify the register within time without any
justification in law. In the circumstances, the petitions are liable to
succeed.
In the
result, Petition No. 3 of 1981 is allowed and respondent No. 1 is directed to
register the name of petitioner No. 1 in place of Ramesh Kumar Bansal in
respect of 2,500 equity shares. Petition No. 4 of 1981 is also allowed and
respondent No. 1 is directed to rectify the register and record the name of the
petitioner in place of Ramesh Kumar Bansal in respect of 2,793 equity shares.
The petitioners shall be entitled to their costs in both the petitions from
respondent No. 1.
[1958] 28 COMP. CAS. 137 (NAG.)
V.
Gandhi Sewa Samaj Ltd
KOTVAL J.
SEPTEMBER 7, 1957
KOTVAL J. - These are petitions at the instance of two
persons, Sadashiv Shankar Dandige and Chintaman Jagannath Kathikar, praying for
a summary order directing the opponent company to register the transfer of
shares of the company in their favour under section 155 of the Companies Act,
1956 (1 of 1956).
The Gandhi
Sewa Samaj Ltd. is a public limited company. They have an authorised capital of
10,000 shares of Rs. 10 each of which 1,304 shares have been subscribed. By two
deeds of transfer, two shareholders of the company, namely, Mr. M. P. Jog and
Mr. K. B. Tandaiyya, transferred their hundred shares each respectively to the
petitioner S.S. Dandige on May 24, 1956, and to the petitioner C. J. Kathikar
on June 13, 1956. Both the transfers were refused by the company who, in the
first instance, merely informed the petitioners that they declined to register
the transfer of the shares in their names. No reasons were assigned.
Both the
petitioners then moved the Central Government in appeal under section 111 of
the Companies Act and by an order passed on November 13,1956, the Central
Government ordered the respondent company to effect registration in their book
of the hundred shares transferred to each of the petitioners. Nevertheless it
appears the shares were not transferred, and ultimately the petitioners have
had to move this court under section 155 of the Companies Act.
The
petitioners have also alleged that after the order of the Central Government
dated November 13, 1956, they forwarded the share scrips with the transfer
deeds and the transfer fees to the opponent company by registered post, but
acceptance of the registered cover was refused. Both the petitioners also
alleged that subsequently they went personally to the office of the company and
requested the company to transfer the shares in their names.
The opponent
company did not deny that the registered letter reached their office, but the position
they have taken up is that they were unable to accept delivery of a sealed
envelope and asked that they should be given open delivery which the postal
authorities refused to do and therefore they were unable to accept the
registered letter. They denied that the petitioners or any of them had come to
the office of the company subsequently to ask for registration of the transfers
in their names.
As regards the
two petitioners, the company in their reply to the petition disclosed the
reasons why they did not wish to register the transfer of shares in the name of
either petitioner. They alleged against the petitioner S. S. Dandige that “he
was a known litigious and quarrelsome (sic) and would discredit and obstruct
the management and create friction amongst the shareholders and act against the
interests of the company.” In paragraph 6 they alleged that the board of
directors were convinced that the entry of the petitioner will not be in the
interest of the company as his relations were absolutely strained and he was
likely to work against the interests of the company. Similar allegations were
made against the petitioner C. J. Kathikar in paragraphs 6 and 7 of the
company’s reply.
Before 1 deal
with the various allegations of fact it is necessary to consider two points
raised on behalf of the petitioners. The first point raised is that in view of
the order of the Central Government under section 111 of the Companies Act, the
company had no right to dispute the right to transfer and that they were bound by
the order passed under section 111. Mr. Bode on behalf of the petitioners urged
that section 155(1)(b) refers to a case where a default is made or unnecessary
delay takes place in entering on the register the fact of a person having
become or ceased to become a member, and he urged that this must be read in
conjunction with section 111 which prescribes the forum where the question
could be decided ; and therefore, if once the proper forum, that is to say, the
Central Government, to whom an appeal lies, has come to a decision that the
petitioners were entitled to be registered as members default or occasioning
unnecessary delay in entering on the register the fact of their having become
members within the meaning of section 155(1)(b). That sub-section, therefore,
indicates that no fresh inquiry need be made and the order under section 111 is
final and binding.
In my opinion,
this contention overlooks the powers of the court under section 155,
sub-section (3), which are of the widest amplitude, particularly clause (b) of
sub-section (3) which gives the court the power in the following words ;
“generally may decide any question which it is necessary or expedient in
connection with the application for rectification.” I am unable to hold that
section 155 is dependent upon section 111. On the contrary it appears to me
that section 155 is the controlling section and gives the court an overriding
power notwithstanding any previous order of the Central Government. It would be
meaningless to give the court a general power to decide any question including
any question relating to the title of a person as is given by section 155(3)
and then indirectly cut off that power by giving the Central Government the
same power to decide the same question in appeal first. The contention, in my
opinion, fails.
The second
contention, however, is more important. It was urged that the company having
regard to their powers under the Act as also under their articles of
association, could not refuse to register the transfer of the shares in favour
of the petitioners.
Under section
82 of the Companies Act the share or other interest of any member in a company
shall be movable property transferable in the manner provided by the articles
of the company. The section therefore clearly provides that shares in a company
shall be capable of being transferred in the manner provided by the articles of
the company, and it is well settled that unless the articles otherwise provide,
a shareholder has a free right to transfer his shares to whom he chooses. See
in this respect Palmer’s Company Law, 19th edition, page 108. It is not
necessary to seek in the articles for a power to transfer for the Act gives
that. It is only necessary to look to the articles to ascertain the mode of
transfer and the restrictions upon it. Thus a member has a right to transfer
his shares to another member unless this right is clearly taken away by the
articles ; and Palmer goes on to stress that “so absolute, prima facie, is that
right that a transfer by a shareholder, if out-and- out, is valid though made
to a pauper and with an avowed object of escaping liability.”
I then turn to
the articles to see if any such power justifying restriction of the right of
transfer exists. On behalf of the company, reference was made to article 9 from
which it was sought to derive the company’s power to refuse to transfer.
Article 9 runs as follows :
“The shares
shall be under the control of the directors who may allot or otherwise dispose
of the same to such persons, on such terms and conditions and at such times as
they think fit and full power to give to any person, the right to call for the
allotment of any shares either at par or at a premium, for such time and for
such consideration as the directors may see fit.”
Now, in the
first place, the article appears under a chapter or under a heading entitled
“capital”. By its very terms it seems to me that it applies to the first
allotment or disposal of the shares after the company was formed, and though it
speaks of the shares being under the control of the directors, the subsequent
portions of the article clearly indicate that it is the right of allotment or
disposal of the shares at the inception of the company that was alone dealt
with by article 9 and not the transmission or transfer of shares. Otherwise,
the words “and full power to give to any person the right to call for the
allotment of any shares either at par or at a premium, for such time and for
such considerations as the directors may see fit” would be inapplicable. In
fact, these words can only be used in the context of a new issue of capital and
not in the context of transfer of capital already issued.
But the
company has dealt with the subject of transfer and transmission of shares in
articles 38 to 43 as the heading of the part containing those articles would
show, and one would expect that if a power to refuse registration of shares was
reserved by the company, such power would find place among those articles, but
none of these articles were referred to at the Bar or deal with the subject.
In the absence
of any express provision in the articles themselves, no doubt regulation 21 of
Table A would apply by virtue of section 28, but regulation 21 merely refers to
the transfer of shares not being fully paid up shares and to no other shares
and it is admitted here that the shares in the present case were fully paid up
shares and therefore regulation 21 would be out of place.
In fact,
article 40 of the company’s articles gives an almost identical power as is
contained in regulation 21. But article 40 also refers merely to shares which
are not fully paid up and therefore will not apply in the present case.
Curiously
enough, therefore, it does appear that the articles of this company reserved no
power to the company or their directors to refuse the registration of shares
except in the case of shares which are not fully paid up.
If then there
was no power in the company to refuse to register the shares, I do not see how
the company can urge grounds in justification of their refusal. I hold
therefore that the company not having the power to refuse registration of the
shares in respect of which the petitioners had applied to be registered as
members, the company cannot now urge any grounds in justification of their
refusal.
But then it
was urged by Mr. Dhabe on behalf of the company that the company in the present
case had never accepted the position that there was a transfer of shares at all
and that at least the petitioners were bound to show that a valid transfer had
taken place before the question of the power of the company to refuse transfer
can arise.
The two
transfer deeds have been filed by the respective petitioners and they are duly
attested ; and on the face of those transfer deeds there appears nothing to
indicate that they were either bogus or not genuine or were obtained by fraud.
The company never disputed the fact of transfer except for the first time in
their written statement in answer to the present petitions. Even before the
Central Government they were asked to appear and substantiate their allegations
that the transfer deeds were invalid and not bona fide transactions, but they
failed to appear before that Tribunal. In view of all this, I accept the petitioners’
affidavits that the transfers were effected in their favour.
Apart from
this it seems to me that if the bare denial by the company of a transfer, which
on the face of it is proper, were to be held sufficient to oust the
jurisdiction of this court to make an order under section 155, that provisions
of law could in most cases be rendered nugatory and its exercise made dependent
upon the caprice of the company. The jurisdiction is of a summary nature and
therefore obviously a detailed investigation cannot be entered into. Now if in
such circumstances, if the fact of transfer is denied by the company the courts
will have to investigate the matter and the objection will be raised that that
cannot be done in a summary proceeding. Thus the provisions will be rendered
otiose in most cases. This could not be the intention of the Legislature.
In the present
case, moreover, the company’s pleadings do not clearly deny the fact of
execution of the transfer deeds. The relevant pleading of the company in this behalf
is contained in paragraphs 5 and 6 of their replies in each case. No doubt,
there is the general denial that the allegations in paragraph 5 of the
petitions are denied. In paragraph 5 the petitioners recited that they had
taken the transfer for cash consideration. But there is no more specific plea
than that. The only specific plea was that it was denied that “any cash
consideration was passed for the same and that too to the extent of rupees one
thousand. In fact the value of the shares way very much low at that time and
there was no real buyer for these shares in the market.” The company further
pleaded that the managing agency (opponent No. 2 in the petition) being
strained, “N.A.No.2(managing partner of the managing agency) became suspicious
of the whole transaction and was convinced that the transaction was bogus and
the applicant wanted to make an entry into the company only to create trouble
and hinder the smooth working of the company. The N.A.No. 2 therefore made
enquiries and learned that the applicant had in fact paid no cash of one
thousand as alleged.” In paragraph 6 there is the general allegation that the
transfer itself is not bona fide. No particulars as to why the opponent company
considers it not bona fide have been stated.
Now, it was
argued that the company having denied paragraph 5 of the petition and the fact
of transfer, the basic facts upon which a petition under section 155 alone can
be founded are in dispute. It was urged that unless in the fist place a valid
transfer was admitted or proved beyond doubt the question of the power of the
company cannot arise ; and that since the facts were in dispute this court in
the exercise of its summary jurisdiction ought not to pass any order but
relegate the parties to their remedy in a civil court.
I have already
said that prima facie there is nothing on the face of the transfer deeds to
show that they were not genuine or bogus or not bona fide. It was urged that
even the signature of the transferor is not proved. The company had in their possession
the signatures of the transferors M. P. Jog and K. B. Tandaiyya to whom the
shares were originally allotted, but they did not allege that the signatures of
the transferors did not tally with the signatures in their possession, nor did
they allege that the transferors’ signatures upon the transfer deeds were
forgeries. There is no specific denial of the execution of the transfer deeds.
On behalf of
the company Mr. Dhabe relied upon a number of cases. They were Mohd. Azam Gori
v. Mohd. Salahuddin, Devarkumar v. Rupak Ltd. and Smt. Savitadevi Jhunjhunwala
v. Harinagar Sugar Mills Ltd., a case decided by Mr. Justice COYAJEE. The
Hyderabad case referred to above was a case where the company had from the
inception disputed as a forgery the signature of the transferor upon the
transfer deed presented to it, and the court held in these circumstances that
they were not concerned to enquire whether it was a genuine signature or not.
This, as I have already emphasized, is the very circumstances which was not
pleaded by the company in the present case. Only the consideration was
disputed. In Devarkumar v. Rupak Ltd. the dispute which was before the court
was whether certain resolutions of the company were valid and intra vires and
whether there could be a valid transfer of shares in pursuance of such
resolutions, and the court held that such issues arising between the parties
could not be properly decided in a summary proceeding. In Smt. Savitadevi
Jhunjhunwala v. Harinagar Sugar Mills Ltd. though the reported decision was not
placed before me there appears to have been a controversy under several heads
raised before the court and the court remarked that a regular investigation
would have to be held and, therefore, it directed the parties to proceed in a
regular manner by way of a suit. In my opinion, these were cases where the
controversy raised regarding the transfers was of a type which involved
detailed investigation whereas in the present case, except the plea regarding
want of consideration and the plea that the transfer took place at a date 8
days earlier than the date shown upon the face of the document, there was
substantially no other plea properly raised on behalf of the company which
needs investigation.
Regarding the
want of consideration, I am unable to see how that is a concern of the company,
because even assuming that the shares were transferred without consideration,
e.g., as a gift, they would still be validly transferred. As to the other
objection that the transfers took place on or about May 17, 1956, whereas the
transfer documents show that they were executed on May 24, 1956, and June 13,
1956, the plea, even if true, cannot result in vitiating the transfers, nor can
it justify the refusal on the part of the company to register the transfers, because
it is well known that transactions do take place earlier and then the formal
documents of transfer are executed at a later date. Nothing turns upon this
point.
Another
objection raised by the company is on the basis of article 39 of the articles of
the company. The objection in substance is that the transfer deeds were not
lodged in compliance with article 39 and therefore the company was not bound to
transfer and so no question of their power to transfer can arise. Article 39
requires that “every instrument of transfer shall be deposited with the company
and no transfer shall be registered until such instrument shall be so
deposited, together with the certificate of the shares to be transferred, and
together with any other evidence the managing agents may require to prove the
title of the transferor, or his right to transfer the shares.” Now, the
objection seems to be that the petitioners did not deposit the instruments of
transfers with the company, but, on their own showing, sent them by registered
post. The objection, in the first place, even assuming that it is a valid
objection, appears to me to be far too technical in order to justify on that
ground the refusal by the company to register the transfers of the shares.
After all, these provisions are meant to ensure that the company receives the
shares safely so that they may be enabled to proceed with the transfer promptly
; and if it is shown that the shares were sent to them instead of being
directly deposited with the company, I think that that would be sufficient
compliance with the requirements of article 39.
But, quite
apart from this, section 51 of the Companies Act expressly provides that a
document may be served on a company or an officer thereof by sending it to the
company or officer at the registered office of the company by post under a
certificate of posting, or by registered post, or by leaving it at its
registered office. I n the face of this clear provision of the Act itself, I do
not see how article 39 which limits the mode of sending to only one of the
three modes prescribed in the section can be justified. In my opinion, the
petitioners were well within their rights to send the shares by registered post
as they admittedly did.
The plea of
the company that they suspected that there might be nothing in the envelopes
and that, therefore, they were justified in asking the postal authorities to
give them open delivery in the presence of the senders, is, in my opinion,
frivolous. There was no material before the company on which they could have
reasonably suspected that the envelopes contained nothing. This was nothing but
an objection raised for sake of raising an objection and is certainly not
indicative of bona fides on the part of the company, especially when one
considers the strained relationship between the petitioners and the principal
persons in charge of the management of the company.
The only other
objection which remains to be dealt with is that the transferors not being
parties to these proceedings, the proceedings must fail. There does not appear
to be any provision of law which makes it essential that the transferor should
be a party to a proceeding in which the transferee requires a company to accept
a transfer deed and register the shares in his name. In fact, the normal
procedure in this behalf is to give notice to the transferor, and if no reply
is received objecting to the transfer, to accept the transfer as genuine. But,
of course, in the present case that occasion never arose because of the
wrongful refusal of the company to accept the registered envelope sent by the
petitioners. In any event, I do not see how the transferors could have helped
to resolve the dispute between the parties in the present proceedings. I do not
think the transferors were necessary parties. There is no substance in this
objection.
But, as I have
shown, all these pleas raised by the company, even assuming that they had been
decided in favour of the company, cannot avail them for the principal reason
that they never had any power to refuse to register the transfer of the shares
in favour of the petitioners at any time. As I have said, unless such a power
can be spelt out from the articles, the right of a person to have registered,
the shares transferred to him, is statutorily given to him. That right does not
appear to have been taken away, nor has any restriction of that right been
conferred upon the company by the articles. Therefore, irrespective of the
pleas raised by the company, I am of opinion that they had no power to refuse
to register the transfer of the spares in the present case.
In the result,
therefore, I allow the two petitions and order the opponent company to effect
the registration in their books of the transfer of the hundred shares each in
the names of the petitioners in terms of the transfer deeds dated May 24, 1956,
and June 13, 1956, and to give notice to the Registrar under section 156 of the
Act. The company shall pay the costs of these proceedings to the petitioners.
Petitions
allowed.
reports
SEBI & CORPORATE LAWS - Volume 61 [2005] 61 SCL . . . (. . .)
[2005] 61 SCL 1 (Bom.)
High
Court of
Shree Shanti Textile Mills (P).
Ltd.
v.
Siddharth N.
Shah
S.U.
Kamdar, J.
Company
Appeal No. 11 of 2000
in CLB
Petition No. 30 of 1999
March 10,
2005
Section 108, read with section 610, of the
Companies Act, 1956 - Transfer of shares - Transfer not to be registered except
on production of instrument of transfer - Whether if there is any conflict
among documents, then it is open for CLB to come to a proper assessment by
considering material and documentary evidence both which are in custody of
company as well as documents filed by company with Registrar of Companies -
Held, yes - Appellant was a private limited closely held company - Mrs. ‘K’ was
holding 1380 shares in company - She asked company for copies of original share
certificates or in alternative duplicate certificates but no reply was given by
company - Meanwhile, she gifted 1290 shares in favour of respondent and
executed transfer deed in respect of same she expired - Thereafter, an
application was made by ‘R’ for deletion of name of Mrs. ‘K’ stating that they
(R & Mrs. K) were jointly holding shares and after death of Mrs. K, R
became sole shareholder of said shares - Appellant-company transferred shares
in name of R - It was further case of appellant that transfer deed lodged by
Mrs. K during her life time was invalid as stamps affixed thereon had not been
cancelled, and that document of gift not being accompanied by share
certificates, there was no valid gift - On petition filed by respondent under
section 111, CLB, on basis of return of allotment filed with Registrar of
Companies, held that Mrs. K was sole holder of shares in question and directed
company to rectify register of members by transferring shares in name of
respondent - Whether it was open for CLB to look into all necessary evidence
including register of members and return of allotment for purpose of coming to
conclusion that shares were in name of Mrs. K as single holder and not jointly
with ‘R’ - Held, yes - Whether in absence of company complying with various
provisions of Act, it was open for company to raise an hyper-technical
contention that stamps having not been cancelled on transfer document, there
was no valid application under section 108 - Held, no - Whether in view of fact
that share certificates were in custody of company itself, it was not open for
company to contend that transfer document did not accompany said share
certificates and/or deed of gift did not accompany share certificates and,
therefore, there could not have been a valid gift - Held, yes - Whether there
was a valid gift of shares in favour of respondent and, therefore, said shares
were required to be transferred by company in favour of respondent - Held, yes
The appellant was a private limited closely
held company. Mrs. K was holding 1380 shares in the appellant-company. On
15-2-1999, she addressed a registered A.D. letter to the company asking for
copies of the original share certificates which were not delivered to her by
the company. In the alternative, she demanded issuance of duplicate share
certificates. Said letter was duly received by the company on 18-2-1999 but
there was no reply to the said letter. On 18-2-1999 Mrs. ‘K’ gifted her 1,290
shares in favour of respondent and sent a registered AD letter alongwith
transfer deed with an affidavit and covering letter stating that she had gifted
said shares and also lodged the necessary transfer deed. The company received
the said letter but sent no reply. On 14-3-1999 Mrs. ‘K’ expired. It was the
case of the appellant company that the said transfer lodged by Mrs. ‘K’ during
her life time were rejected by the appellant-company due to defects therein and
such rejection was orally communicated by the company to the respondent who was
a director at that point of time. However, it was disputed by the respondent
that any such decision was taken by the company. An application was made by ‘R’
for deletion of name of Mrs. ‘K’ in respect of her holding of 1380 equity
shares on the ground that the said shares were held by Mrs. ‘K’ jointly with
‘R’, and on her expiry, ‘R’ had become the sole holder. The respondent filed
petition before the CLB under section 111, seeking rectification of register of
members and seeking that the name of the respondent should be brought as Mrs.
‘K’ had gifted 1,290 shares to him. It was the case of the appellant that on
28-7-1999, a meeting of the board of directors was held and a decision was
taken to delete the name of Mrs. ‘K’ from said 1380 equity shares which were
held by her jointly and on deletion of her name, ‘R’ became the sole holder of
the said shares and, therefore, he was entitled to the said shares. The CLB,
however, held that the company was bound and liable to transfer the said shares
as Mrs. K. was the sole holder of said 1,290 shares and not joint holder with
‘R’; that there was a valid gift in favour of the respondent from the deceased;
and that there had been valid application for transfer and the company was bound
to transfer the said shares in favour of respondent. Accordingly, the CLB
directed the company to rectify the register of members and declare that the
respondent was lawfully entitled to the said 1,290 shares.
On appeal, it was contended by the appellant
inter alia, that the document of gift, not being registered nor accompanied by
a delivery of the movable property in the shares, there was no valid gift; and
that the document of transfer was not duly stamped inasmuch as the said stamps
which were affixed on the transfer deed were not cancelled and, therefore,
there was a breach and infraction of section108 and, consequently, the question
of transfer of shares did not arise.
It was very clear from the conduct on the part
of the company that it was not carrying on its business and its activities in
accordance with the laid down procedural requirements of the Act. However, it
insisted on strict compliance of the provisions of the law insofar as the
respondent was concerned. One of the requirements of section 108 is that the
share certificates must accompany the transfer document. Admittedly, the
company was holding the said share certificates and was not issuing the same in
contravention of section 113. The question for consideration was whether in such
circumstances, it was permissible for the company to refuse to transfer the
said shares in favour of the respondent on the ground that the
non-accompaniment of the share certificate with the transfer documents
infracted the provisions of section 108 and, consequently, the company was not
bound to register such a transfer. Such an approach would in fact mean to
perpetrate injustice to the respondent for breach of law committed by the
appellant. In the light of the aforesaid circumstances, the appellant company
urged that the CLB ought to have only relied upon the register of members for
the purpose of determining whether there was a joint holding or a single
holding. This argument was not acceptable. Firstly, the record of the company
was highly unreliable. The share certificates produced were signed by the
director only on 6-8-1999. However, the said certificates were purported to
have been prepared on 12-3-1992 and the first director’s signature i.e., ‘R’
was shown as if it was put on 12-3-1992. The second signature of the director
was of his son which was of 6-8-1999. Obviously, the son could not sign the
document on 12-3-1992 because as on that date he was not the director of the
company. He became the director of the company in 1994. Thus, the signature was
shown subsequent to the point of time when he became the director. However,
closely scrutinising the said share certificate, the respondent pointed out
that certificate No. 27 contained the date 12-3-1999 in the place of 12-3-1992.
It had been surprising that the certificate Nos. 6 to 26 contained the date
12-3-1992. Certificate No. 27 contained the date 12-3-1999 and once again share
certificate Nos. 28 to 38 contained the date 12-3-1992. It obviously indicated
that there had been a slip while preparing the said certificates and the year
1999 had crept in certificate No. 27 which was the year in which the said
certificates were prepared for the first time. It was because in the year 1999
the disputes between brother ‘R’ and the respondent had started due to gift by
Mrs. ‘K’ to the respondent. This error could not be ignored for the fact that
the said share certificates were signed by father and son, kept in custody of
the company all throughout and obviously to defeat the right of the respondent
were prepared by adding the name of ‘R’ as a second holder along with Mrs. K.
It was obvious because shares were allotted to Mrs. K in 1972 and in 1978 the
company had filed return of allotment as required under section 75 and in such
return of allotment they had disclosed only the name of Mrs. K as the sole
holder of the shares and not disclosed the name of second holder ‘R’. The
respondent had produced before the CLB as well as before the Court, the
certified copy of the return of allotment which was signed and filed in the
contemporaneous period 1972 and 1978 which showed the name of Mrs. K as the
only holder of the said shares. There was no other contemporaneous evidence
produced by the company indicating otherwise save and except the register of
members. From the register of members, it was clear that almost the whole of
the register was prepared at one go. It was not produced before the CLB which
had adversely commented on the same in the order impugned. Even the inspection
of the said register as well was not furnished to the respondent and when the
inspection was sought, only three pages of the register were given by the
company. The entries in the register were in the same ink and same hand-writing
in substantial portion thereof. It was unbelievable that a person, who had
prepared the register from 1972-78, could be the same person even in 1992 and
even thereafter. It was equally surprising that all the pages of the register
were prepared by the same person and in the same handwriting and in the same
ink. Therefore, the CLB was right and justified in placing reliance on the
independent and unchallenged evidence in the form of return of allotment and
holding that Mrs. K. was the sole holder in respect of the said shares. [
As regards the contention that section 75 does
not provide for putting both the names of joint holders on the share
certificates, since this section provides for names and addresses of the
allottees of the shares by the company, once the shares are allotted even in
joint names, both the persons are allottees and are required to be mentioned in
the return under section 75. The document produced by the respondent was the
most authentic and contemporaneous document with time period of 1972 and 1978
when shares were allotted in favour of Mrs. K (since deceased). Therefore,
there was no justification for interfering with the final order of the CLB when
it held that the documents produced by way of return of allotment from the
Registrar of Companies was believable and reliable and, therefore, same should
be accepted. However, the company had thereafter urged that it was not open for
the CLB to reject the register of members because the register of members under
sections 151 and 152 is a primary document on which the reliance should be
placed by the CLB. In the facts and circumstances of the instant case,
particularly the conduct on the part of the company, the CLB was justified in
relying only upon the uncontroverted independent evidence which came from the
custody of the Registrar of Companies and not from the company itself where ‘R’
was the interested person and in possession and custody of all the records of
the company. The contention of the appellants could not be accepted that it was
not open for the CLB to look into the return of allotments and only the
register of members should have been looked into for the purpose of
determination of the issue whether Mrs. K. was holding the said shares solely
or jointly. It was open for CLB to look into all the necessary evidence
including the register of members and return of allotment for the purpose of
coming to the conclusion that shares were in the name of Mrs. K. as single
holder and not jointly with ‘R’. The issue was squarely before the CLB that
whether Mrs. K was the sole holder or joint holder as contended by the rival
parties. The CLB in its order had observed that no register of members was
produced in original by the company before the CLB. There was no error in such
a finding. Therefore, the CLB was right and justified in holding that the shares
were held by Mrs. K in her sole and exclusive name and not jointly with ‘R’.
Hence, the reliance placed by the CLB on section 610 was also well placed and
justified and the consequent findings arrived at on the basis of the said
reliance was also legal, valid and justified. The provisions of section 610 are
introduced basically for the reasons that the records can be produced from the
Registrar of Companies to establish any case by any third party. [
The contention that the transfer document should
have been accompanied by share certificates and non-accompaniment thereof had
made the application for transfer of shares invalid, was required to be simply
rejected because the share certificates were admittedly always in the custody
of the company itself and were never forwarded to the shareholders at all. It
was not open for the company to demand that the share certificates should
accompany the transfer documents when they were in the custody of company
itself. The contention of the appellant that it was open for Mrs. K to first
apply for delivery of share certificates and collect the same and thereafter
tender the same along with the transfer document, also could not be accepted as
she had asked for share certificates and/or duplicate thereof but the company
never issued the same. Therefore, it could not be contended that the
certificates should have accompanied the transfer application. [
The contention that the stamps were not
cancelled and, therefore, transfer document was void and illegal and, thus,
there was no valid application under section 108, was also required to be
rejected. In the absence of the company complying with the various provisions
of the Act, it was not open for the company to raise such an hyper-technical
and pediatric contention. Hence, the contention lacked bona fides and was
raised only with an intention to defeat the right of the respondent because the
company and ‘R’ the director thereof were well aware that in view of the death
of Mrs. ‘K’, the fresh transfer documents could not be executed. Therefore,
instant case was not a case where by virtue of the non-cancellation of the
stamp on the transfer document, right of the respondent should be defeated
and/or the proprietary rights of the respondent in the shares should be
deprivated. [
In any event, it was open for the company to
point out the defect that the stamps were not duly cancelled to the respondent
within the prescribed period of time limit of 60 days where the respondent
could have rectified the said defects. However, the respondent company had
failed to show that it had pointed out the defects in the share transfer form
to the respondent within a reasonable period of time. In view thereof, it was
not open for the respondent company to raise such contention at belated stage
and subsequent to the death of the said Mrs. ‘K’. Therefore, the said
contention was to be rejected. [
The contention of the appellant that there was
no valid gift of the shares in favour of the respondent by the deceased Mrs. ‘K’
as the same did not accompany share certificate was also required to be
rejected. The intention of the deceased was to give a gift of the shares to the
respondent. The mere fact that the same was not accompanied by share
certificate because the share certificates were in the custody of the
appellant, did not make the said gift invalid. In the absence of the possession
of the share certificate with Mrs. K and the same being in possession of the
appellant company, a mere fact of addressing a letter to the company that the
said shares were transferred by her as and by way of a gift to the respondent
would amount to deemed delivery of the certificates alongwith the instrument of
gift and would be a valid gift and would not be invalid under the provisions of
the Transfer of Property Act because the custody of the share certificates was
already in the possession of the appellant. It is not necessary that the
movable property must accompany in physical sense along with the instrument of
transfer particularly when such a movable property is not in the custody or in
the possession of the donor. Therefore, it was appropriate and open to the
deceased to execute the gift of the movable assets without the said document
being registered because under the Registration Act the same does not require
to be registered. The respondent had, rightly relied upon a judgment of the
In view of the above, there was a valid gift
in respect of the respondent and, therefore, the said shares were required to
be transferred by the company in favour of the respondent. In any view of the
matter, insofar as the company was concerned, it was separate legal entity and
for them it was only required to be seen whether the provisions of section 108
were complied with or not. [
In such circumstances, there was no merit in
the instant appeal. The contentions were raised merely with a view to defeat
the rights of the respondent and, therefore, the appeal was to be dismissed
with the following conclusions :
(i) It is open for the Registrar of Companies to look into the statutory
records and other records of the company and on overall assessment come to the
conclusion and if there is any conflict among the documents then it is open for
the CLB to come to a proper assessment by considering the material and
documentary evidence both which are in custody of the company as well as
documents filed by the company with the Registrar of Companies.
(ii)Insofar as gift was concerned,
in view of the fact that the share certificates were in the custody of the company
itself, it was not open for the company to contend that the transfer document
did not accompany the said share certificates and/or deed of gift did not
accompany the share certificates and, therefore, there could not have been a
valid gift deed merely because the same did not accompany the share
certificates. The aforesaid circumstances would not make the gift deed in
favour of the respondent invalid in law.
The finding of the CLB was to be upheld that
Mrs. ‘K’ was singly holding all the said shares and, therefore, the question of
law as framed that the first joint shareholder in the case of joint
shareholding could not transfer the said joint shares without consent and
concurrence of second joint holder did not arise and accordingly, the same was not
to be answered. [
Cases referred to
Howrah Trading Co. Ltd. v. CIT AIR 1959 SC 775
(para 14), Jagdish Mills Ltd., In re AIR 1955 Bom. 79 (para 15), Coronation Tea
Co. Ltd., In re AIR 1961
Shyam Divan for the Applicant. Ms. Rajani Iyer and Ms. Panchmotia for
the Respondent.
1. The
present appeal is filed under section 10F of the Companies Act, 1956
challenging the order and judgment passed by the Company Law Board. Though
various questions are framed in the appeal, the learned counsel for the
appellant has pressed the following three questions of law for my consideration
:—
(i) Whether in the event of there being a conflict between the statutory
records maintained by the Company and the returns filed before the Registrar of
Companies, the entries in the statutory registers maintained by the Company
would prevail over the conflicting returns filed with the Registrar of
Companies;
(ii)Whether there could not have
been a valid gift in the eyes of law of 1,290 equity shares or any other shares
by the owner thereof, merely by signing a transfer deed in respect thereof
without actually handing over the relevant share certificates in respect of the
gifted shares :
(iii)Whether the first joint
shareholder, in the case of joint shareholding, could not transfer the said
joint shares by gifting away the same without the consent or concurrence of the
second joint shareholder.
2. Some
of the brief facts which are relevant for the purpose of determination of the
issues raised in the present case can be summarised as under :—
3. The
appellant, namely, Shree Shanti Textile Mills Private Limited is a private
limited company and is closely held by the family members of one Nyalchand R.
Shah (since deceased). The company is incorporated and registered in the year
1959. Originally there were three shareholders of the company holding 25 shares
each. Sometime thereafter 450 further shares were issued to the said original
three shareholders in proportion of 150 shares each. On 8-6-1972, 10 shares
were transferred to Mrs. Kamla Shah, 10 shares were transferred to Mr. Ramesh
Shah and five shares were transferred to Mr. Siddharth Shah. This transfer of
25 shares was from the shares which were held originally by Nyalchand Shah. On
8-6-1972 Mrs. Kamla Shah and Mr. Ramesh Shah were appointed Directors of the
said company. On 10-6-1972, 175 shares were transferred to Mrs. Kamla Shah from
the share holding of one Mr. Pramod Shah. On 29-12-1972, 475 new shares were
allotted to Mrs. Kamla Shah and Return of Allotment was filed with the
Registrar of Companies. The said return has been duly signed by the then
Director Mr. Nyalchand Shah (since deceased). On 12-1-1973, Form No. 2 was
filed with the Registrar of Companies in respect of the 475 shares which were
transferred in favour of Mrs. Kamla Shah. On 7-7-1976, 150 shares were
transferred to Mr. Siddharth Shah from the account of his father Nyalchand
Shah, (since deceased). Further, 1000 new shares were allotted to Mrs. Kamla
Shah on 10-1-1978 and necessary return of allotment as required under the
provisions of the Companies Act, 1956 was filed with the Registrar of
Companies. The said return of allotment filed in 1978 has been duly signed by
Mr. Ramesh Shah. Some time in or about 1993 further 75 shares were sold by Mrs.
Kamla Shah to Ojas Shah, 25 shares to Manali Shah and further 25 shares to
Shradha Shah. On 12-4-1994, 155 shares were sold by Mrs. Kamla Shah to Mrs.
Priti Shah. On 6-8-1994, one Mr. Ojas Shah, son of Ramesh Shah, was appointed
director of the said company. From 1994 to 1998, various annual returns were filed
with the Registrar of Companies duly signed by Ramesh Shah, Siddharth Shah and
Ojas Shah. Thus, as in March 1999 the share holding in the appellant company
was as under :
Sr.
No. Name
|
No. of
shares |
|
1. Kamla Shah & Ramesh Shah |
1380 |
|
2. Ramesh Shah & Neela Shah |
135 |
|
3. Neela Shah & Ramesh Shah |
50 |
|
4. Ojas Shah & Manali Shah |
75 |
|
5. Manali Shah & Ojas Shah |
25 |
|
6. Shradha Shah & Ojas Shah |
25 |
|
7. Siddharth Shah |
155 |
|
8. Priti Shah & Siddharth Shah |
155 |
4. On
15-2-1999, Mrs. Kamla Shah (since deceased) addressed a Regd. A.D. letter to
the company asking for copies of the original share certificates which were yet
not delivered by the company to Mrs. Kamla Shah. In the alternative she
demanded the issuance of duplicate share certificates to her in respect of her
holding in the said appellant company. It is not in dispute that the said
letter was duly received by the company on 18-2-1999 and that the company gave
no reply to the said letter.
5. On
18-2-1999 Kamla Shah gifted her 1290 shares to Siddharth Shah. She executed the
necessary transfer deed which is witnessed by family doctor and attested by
Notary. On 24-2-1999 Kamla Shah signed a letter recording the gift of 1290
shares in favour of Siddharth Shah. On 3-3-1999, Kamla Shah sent a registered
A.D. letter along with transfer deed with an affidavit and covering letter
stating that she has gifted 1,290 shares in favour of Mr. Siddharth Shah. Along
with the said letter she also lodged the necessary transfer deed duly executed
with the company on 5-3-1999. The company received the said letter dated
3-3-1999 but sent no reply. On 14-3-1999, Kamla Shah expired. It is the case of
the appellant company that the said transfer lodged by Kamla Shah during her life
time were rejected by the appellant company due to defects therein and such
rejection was orally communicated by the company to the respondent No. 1 herein
who was a director at that point of time. However, it is disputed by the
respondent No. 1 that any such decision was taken by the company refusing to
transfer the said shares. On 5-7-1999, an application was made by Ramesh Shah
who is one of the directors of the appellant company for deletion of the name
of Kamla Shah in respect of her holding of 1380 equity shares since according
to him the said shares were held by Kamla Shah jointly with Ramesh Shah. Thus,
according to Mr. Ramesh Shah on expiry of Kamla Shah who was the first holder
of the shares. Ramesh Shah has become the sole holder in respect of the said
shares and was therefore entitled to apply for deletion of her name. On
12-7-1999, the respondent herein filed a petition before the Company Law Board
under section 111 of the Companies Act, 1956, inter alia, seeking rectification
of the Register of Members and seeking that the name of the respondent should
be brought as members in respect of the shares held by Kamla Shah being 1,290
shares which have been gifted by her to the respondent herein. It is the case
of the appellants that on 28-7-1999, a meeting of the Board of Directors was
held and a decision was taken to delete the name of Kamla Shah from said 1,380
equity shares which were held by Kamla Shah since she had expired. It is also
the case of the appellant that since the said shares were held jointly, on
deletion of the name of Kamla Shah, Ramesh Shah became the sole holder of the
said shares and therefore he is entitled to the said shares. It is the case of
the respondent on the other hand, that in respect of the said Board meeting no
notice was served on the respondent though admittedly he was a Director at that
point of time. It is an admitted position before me that the share certificates
were never issued to any of the shareholders of the appellant company all
throughout and even today the said share certificates are in the custody of the
company themselves. It is also admitted position before me that one of the
Directors has signed the said share certificates only on 6-8-1999 though it is
the purported case of the respondent that the share certificates were prepared
in 1992.
6. In the
aforesaid facts of the case, a proceeding was initiated under section 111 of
the Companies Act, 1956 on 12-7-1999 and the said proceedings were contested before
the Company Law Board by the parties. On 16-8-1999, the Company filed a reply
to the said petition preferred by the respondent herein and ultimately by an
order and judgment dated 16-6-2000, the Company Law Board has allowed the
appeal and directed the company to rectify the Register of Members and declare
that the respondent is lawfully entitled to the said 1,290 shares which were
executed in her favour and the company was bound and liable to transfer the
same in favour of the respondent herein.
7. The
Company Law Board by the impugned order has held that the company is bound and
liable to transfer the said shares as Kamla Shah was the sole holder of said
1,290 shares and not joint holder with Ramesh Shah. Secondly, it has been held
that there is a valid gift in favour of the respondent from the deceased Kamla
Shah and thirdly it has been held that there has been valid application for
transfer and the company was bound to transfer the said shares in favour of
respondent. Accordingly the Company Law Board has by impugned order directed
the company to rectify the Register of Members and transfer 1,290 shares
belonging to the deceased Mrs. Kamla Shah to the name of the respondent and
deliver the same within one month from the date of the said order.
8. It is
this order which is the subject-matter of appeal before me and the learned
counsel appearing for the appellant under section 10F of the Companies Act has
raised the aforesaid substantial questions of law which are set out
hereinabove.
9. In
support of the aforesaid questions of law, the learned counsel for the
appellant has raised the following contentions. Firstly, it has been contended
that Kamla Shah was never single holder of the said shares and, therefore, the
application for transfer by respondent No. 1 on the basis of the document of
transfer executed by Kamla Shah alone was not valid and legal. It has been
further contended that on the death of Kamla Shah, the shares and the
properties in the said shares stood vested in Ramesh Shah as a joint holder and
no third party is entitled to the said 1,290 shares. It has been contended in
support of the aforesaid contention that in view of the joint holding of the
shares, the gift in favour of the respondent herein is invalid and without any
merit. It has been further contended that in any event, the document of gift
not being registered nor accompanied by a delivery of the movable property in
the shares in the present case there is no valid gift in the eyes of law and,
therefore, the respondent is not entitled to the said 1,290 equity shares. It
has been further contended by the learned counsel for the appellant that the
document of transfer was not duly stamped inasmuch as the said stamps which
were affixed on the transfer deed were not cancelled and, therefore, there is a
breach and infraction of section 108 of the Companies Act, 1956 and
consequently the question of transfer of shares does not arise and, therefore,
the provisions of section 111 are not attracted. It has been contended that for
the purpose of attracting the provisions of section 111, valid document of
transfer is necessary for the purpose of the company to act thereupon and in
the absence of such valid document, the transfer is invalid in law and,
therefore, the company was not bound to register the shares. It has been also
contended by the learned counsel for the appellants that the Tribunal has
clearly erred in law while refusing to rely upon a primary document i.e.,
Register of Members for establishing whether Kamla Shah was a single holder or
a joint holder and the reliance placed by the Company Law Board on the return
of allotment is invalid in law and, therefore, the said order is without
jurisdiction and clearly erroneous in law and is liable to be quashed and set
aside.
10. On the other hand, the learned counsel for
the respondent has contended that the act on the part of the directors has been
totally mala fide. It has been contended that for the purpose of exercise of
power by the Company Law Board or for that matter to give direction to transfer
the shares, the Company Law Board is required to see whether the refusal of the
Board of Directors for transferring of the said shares is bona fide, in the
interest of the company or totally mala fide. It has been contended by the
learned counsel for the respondent company that the acts of the Board of
Directors and the conduct of the Board of Directors is totally mala fide and
thus requires no interference by this Court in the present appeal. It is
therefore, contended that in fact there was no Board of Directors meeting held
and no notice was served on the respondent herein in respect of a meeting where
the application of the respondent was declined and the transfer of the shares
in his favour was rejected. It has been further strenuously contended by the
learned counsel for the respondent and in my view with substantial merits
therein that the company in the present case has been acting in a total mala
fide manner and is relying upon the documents which by contemporaneous evidence
can be established to be not genuine and highly suspicious. It has also been
contended that the said documents are created with the sole intention of Ramesh
Shah to grab the said shares in his favour and deprive the respondent of his
rightful transfer of the shares by virtue of the gifting of the said shares by
the deceased Kamla Shah in his favour. It has been contended that the present
company being a private limited company and closely held company by the various
shareholders, there is no necessity that strict compliance of the provisions of
procedural law as now contended by the respondent should be insisted upon
particularly when admittedly company itself is not complying with the various
provisions of the Companies Act. Ultimately, it has been contended that the
Court is required to do substantial justice in the matter by taking into
consideration the overall view of the matter and cannot reject the evidence
which is in favour of the respondent by hyper-technical and paediatric
consideration of the technical objections which are sought to be raised.
11. Considering the rival submissions of the
matter firstly it is necessary for me to consider the objection raised by the
learned counsel for the appellant about the Company Law Board refusing to rely
upon the Register of Members and has on the other hand relied upon the return
of allotment which has been filed by the company during the period 1972—1978
indicating the allotment of shares in favour of Mrs. Kamla Shah as a sole
holder. A dispute which has been strongly urged before me is whether Kamla Shah
was a sole holder of 1,290 shares or was the joint holder with Ramesh Shah of
the said shares as contended by the appellant herein. To consider this issue,
it is necessary to point out that the transfer of the shares has been taking
place in the company from time-to-time as mentioned hereinabove right from
1972. The allotment in favour of Kamla Shah first time was as far back as on
8-6-1972 and thereafter transfers on 10-6-1972 and 29-12-1972 and thereafter
there was allotment on 10-1-1978. There are certain facts which are admitted
before me and are required to be mentioned before I consider this issue,
namely, (1) Admittedly share certificates are never issued to any of the
shareholders of the company and are always kept in the custody of the company.
The said share certificates are even today in the custody of the company. (2)
There is no transfer recorded either on the reverse of the said certificate or
by maintaining separate register of transfer of shares. (3) There is not even a
record of the minutes of the Board Meetings from time-to-time indicating the
transfer of the shares and/or allotment of shares from time-to-time in favour
of one party or the other. The learned counsel for the appellant has candidly
admitted that there are no records of board meetings and there are no minutes
for the contemporaneous period in which the shares allotment and/or transfer is
registered in the Register of Members. (4) There is admittedly a return of
allotment filed under section 75 of the Companies Act, 1956 at the relevant
period of time in 1972 and 1978 when Mrs. Kamla Shah was allotted shares and
the same is in the record of Register of Companies. (5) There is a Register of
Members produced before me prepared in 1972 and has been relied upon so as to
indicate that the transfer of the shares from time-to-time has been recorded in
such Register of Members.
12. Thus, it is very clear from the conduct on
the part of the company that the company is not carrying on its business and its
activities in accordance with the laid down procedural requirements of the
Companies Act, 1956. However it insists on strict compliance of the provisions
of the law insofar as the respondent company herein is concerned. In my view, I
am required to consider that when the company itself is not maintaining the
records of the company in accordance with the Companies Act, 1956, can such a
company insist upon others to comply with the provisions of law so as to
deprive his legitimate right in respect of the said shares. One of the
requirements under section 108 of the Companies Act is that the share
certificates must accompany the transfer document. Admittedly, the company is
holding the said share certificates and is not issuing the said share
certificates in contravention of section 113 of the Companies Act. In such
circumstances, whether it is permissible for the company to refuse to transfer
the said shares in favour of the respondent herein on the ground that the
non-accompaniment of the share certificate with the transfer documents infracts
the provisions of section 108 of the Companies Act, 1956 and consequently the
appellant company is not bound to register such a transfer. In my opinion such
an approach would in fact mean to perpetrate injustice to the respondents for
breach of law committed by the appellant. In the light of the aforesaid
circumstances, the learned counsel for the appellant urged before me that
Company Law Board ought to have only relied upon the Register of Members for
the purpose of determining whether there is a joint holding or a single
holding. I am not inclined to accept the said argument for more than one
reason. Firstly, I have looked into the records of the company. The record of
the Company is highly unreliable. As and by way of an example the company has
produced the entire book of share certificates before me. The share
certificates produced are from Nos. 6 to 38. Admittedly the said share
certificate has been signed by the second director only on 6-8-1999. However,
the said certificate is purported to have been prepared on 12-3-1992 and the
first director’s signature i.e., Ramesh Shah is shown as if it is put on
12-3-1992. The second signature of the director is of his son which is of
6-8-1999. Obviously, the son could not sign the document on 12-3-1992 because
as on that date he was not the director of the company. He became the director
of the company in 1994. Thus, his signature is shown subsequent to the point of
time when he became the director. However, closely scrutinising the said share
certificate, the learned counsel for the respondent pointed out that
certificate No. 27 contains the date ‘12-3-1999’ in place of ‘12-3-1992’. It
has been surprising that the certificate Nos. 6 to 26 contains the date
‘12-3-1992’. Certificate No. 27 contains the date ‘12-3-1999’ and once again
share certificate Nos. 28 to 38 contains the date ‘12-3-1992’. It obviously
indicates that there has been a slip while preparing the said certificate and
the year 1999 has crept in certificate No. 27 which is the year in which the
said certificates are prepared for the first time. It is because in the year
1999 the disputes between brothers Ramesh Shah and respondent had started due
to gift of the said by mother Mrs. Kamla Shah to the respondent herein. Of
course the learned counsel has made light of it saying that this is an error
and this error should be ignored. I would have accepted the same but for the
fact that the said share certificates are signed by father and son, kept in
custody of the company all throughout and obviously to defeat the right of the
respondent herein are prepared by adding the name of Ramesh Shah as a second
holder along with Kamla Shah. It is obvious because shares are allotted to her
in 1972 and 1978 the company has filed return of allotment as required under
section 75 of Companies Act, 1956 and in such return of allotment they have
disclosed only the name of Kamla Shah as the sole holder of the shares and not
disclosed the name of second holder Ramesh Shah. The respondent has produced
before the Company Law Board as well as before me the certified copy of the
return of allotment which was signed and filed by deceased Nyalchand Shah in
the contemporaneous period 1972 and 1978 which shows the name of Kamla Shah as
the only holder of the said shares. There is no other contemporaneous evidence
produced by the appellant indicating otherwise save and except the Register of
Members. Now turning to the Register of Members from the look itself it is
clear that almost the whole of the Register of Members is prepared at one go.
This Register was not produced before the Company Law Board. The Company Law
Board has adversely commented on the same in the order impugned herein. Even
the inspection of the said Register of Members as well was not furnished to the
respondent herein and when the inspection was sought only three pages of the
Register of Members were given by the appellant herein. The entries in the
Register of Members are in the same ink and same hand writing in substantial
portion thereof. It is unbelievable that a person who has prepared the register
from 1972-1978 can be the same person even in 1992 and even thereafter. It is
equally surprising that all the pages of the Register of Members are prepared
by the same person and in the same hand writing and in the same ink. I am
therefore of the opinion that the Company Law Board was right and justified in
placing reliance on the independent and unchallenged evidence in the form of
return of allotment and hold that Kamla Shah was the sole holder in respect of
the said shares.
13. The learned counsel for the appellant has,
however, contended before me that section 75 does not provide for names of both
the holders as allottees should be mentioned and the company has rightly
thought it fit that it required to put the name of only one holder who is the
first holder and has accordingly filed the said allotment. I do not accept the
contention of the learned counsel for the appellant in that behalf. Section 75
of the Companies Act, 1956 provides for names and addresses of the allottees of
the shares by the company. Once the shares are allotted even in joint names,
both the persons are allottees and are required to be mentioned in the return
under section 75. The document produced by the respondent is the most
authenticate and contemporaneous document with time period of 1972 and 1978
when shares were allotted in favour of Kamla Shah (since deceased). In view
thereof I do not find any justification for interfering with the final order of
the Company Law Board when it held that the documents produced by way of return
of allotment from the Registrar of Companies is believable and reliable and,
therefore, and same should be accepted. However, the learned counsel for the
appellant has thereafter urged that it is not open for the Company Law Board to
reject the Register of Members because the Register of Members under sections
151 and 152 of the Companies Act, 1956 is a primary document on which the
reliance should be placed by the Company Law Board. I am of the opinion that in
the facts and circumstances of the present case, particularly the conduct on
the part of the appellant company in the present case, the Company Law Board
was justified in relying only upon the uncontroverted independent evidence which
came from the custody of the Registrar of Companies and not from the company
itself where Ramesh Shah is the interested person and in possession and custody
of all the records of the company. I do not also accept the contention of the
learned counsel for the appellants that it was not open for the Company Law
Board to look into the return of allotments and only the Register of Members
should have been looked into for the purpose of determination of the issue
whether Kamla Shah was holding the said shares solely or jointly. I find the
contention of the learned counsel for the appellant without any merit. It was
open for the Company Law Board to look into all the necessary evidence
including the Register of Members and return of allotment for the purpose of
coming to the conclusion that it was in the name of Kamla Shah as single holder
and not jointly with Ramesh Shah. The issue was squarely before the Company Law
Board that whether Kamla Shah was the sole holder or joint holder as contended
by the rival parties. Furthermore, the conduct on the part of the appellant
company not to produce the original Register of Members itself disentitles them
from contending that the return of allotment is the only document which has
been looked into by the Company Law Board. The Company Law Board in its order
has observed that no such Register of Members was produced in original by the
company before the Company Law Board. I do not find any error in such a
fidning. I am also not inclined to accept the proposition of law which has been
propounded by the learned counsel for the appellant that the Register of
Members being the primary evidence, the Company Law Board ought to have only
looked into it for the purpose of determination of the persons who are
allottees or the holders of the shares and consequently the members of the said
company. I am of the opinion, that the Company Law Board was right and
justified in holding that the shares were held by Kamla Shah in her sole and
exclusive name and not jointly with Ramesh Shah. I am further of the opinion
that the reliance placed by the Company Law Board on section 610 of the
Companies Act, 1956 is also well placed and justified. The provisions of
section 610 are introduced basically for the reasons that the records can be
produced from the Registrar of Companies to establish any case by any third
party. This reliance placed on section 610 is relevant, valid and justified and
the consequent finding arrived at on the basis of the said reliance is also
legal, valid and justified. I, therefore, reject the contention of the learned
counsel for the appellant that Kamla Shah was the joint holder with Ramesh Shah
and that the Register of Members being the primary evidence is the only
document which the Company Law Board should look into for the purpose of
ascertainment of the aforesaid fact.
14. The next contention raised by the learned
counsel for the appellant is that there has been no valid transfer in favour of
the appellant herein. In support of the aforesaid contention, the learned counsel
for the appellant has also relied upon a judgment of the Supreme Court in the
case of Howrah Trading Co. Ltd. v. CIT AIR 1959 SC 775 for contending that the
words “Member”, “shareholder” and “holder of share” are interchangeable words.
The words “holder of a share” are equal to the word “shareholder”. I do not see
any relevance of the said judgment to the facts of the present case. I,
therefore, reject the same.
15. This takes me to the next contention of the
learned counsel for the appellants namely, that there was no valid transfer in
the name of Kamla Shah as contained in section 108 of the Companies Act, 1956
and, therefore, consequently there was no valid application to effect transfer
under section 111 of the Companies Act, 1956. It is further contended that for
the purpose of exercising power under section 111, the company must have a duly
completed transfer application for the purpose of transferring the said shares
and it cannot be done unless there is a valid execution of a transfer document.
The learned counsel has contended that in the present case, there was no valid
application under section108 for two reasons; (i) that the stamp affixed on the
transfer document was not duly cancelled and (ii) that the application did not
accompany the original share certificate and, therefore, there was no valid
application under section 108. In support of the aforesaid contention, the
learned counsel has relied upon various judgments which are set out as under :—
(1) Jagdish Mills Ltd., In re AIR 1955
Bom. 79.
(2) Coronation Tea Co. Ltd., In re AIR
1961 Cal. 528
(3) Mathrubhumi Printing & Publishing Co. Ltd. v.
Vardhaman Publishers Ltd. [1992] 73 Comp. Cas. 80 (Ker.).
(4) Mannalal Khetan v. Kedar Nath Khetan
[1977] 47 Comp. Cas. 185 (SC).
(5) Muniyamma v. Araathi Cine
Enterprises (P.) Ltd. [1993] 77 Comp. Cas. 97 (Kar.).
(6) Nuddea Tea Co. Ltd. v. Asok Kumar
Saha [1988] 64 Comp. Cas. 775 (Cal.).
(7) Jayanthilal Purshottamdas Patel v. Gordhandas Desai (P.)
Ltd. [1968] 38 Comp. Cas. 405 (Bom.).
(8) Babul Choukhani v. Western India
Theatres Ltd. AIR 1957 Cal. 709.
By relying upon the aforesaid judgments it has
been contended by the learned counsel for the appellant that in view of
non-cancellation of stamp by the respondent on transfer document and because of
the non-accompaniment of the share certificate with the transfer of document,
there is no valid application as contemplated and provided under section 108 of
the Companies Act, 1956. It is, therefore, contended that in absence of a valid
application fulfilling the requirement of section 108 of the Companies Act, it
was not required and/or in any way bound to grant the said application. It has
been contended that non-cancellation of stamp makes the transfer document
invalid as being in non-conformity with the provisions of section 108 of the
Companies Act, 1956 and, therefore, there is no valid application and, thus,
the order passed by the Company Law Board is liable to be set aside. Dealing
with the second contention first that the transfer document should have been
accompanied by share certificate and non-accompaniment thereof has made the
application for transfer of shares invalid. I am of the opinion that the said
contention is required to be simply rejected because the share certificates were
admittedly always in the custody of the company itself and were never forwarded
to the shareholders at all. In view thereof, the contention that the share
certificates should have been accompanied with the transfer document is plainly
speaking unsustainable. It is not open for the company to demand that the share
certificate should accompany the transfer documents when they are in the
custody of company itself. The contention of the learned counsel for the
appellant that it was open for Kamla Shah to first apply for delivery of share
certificate and collected the same and thereafter tendered the same along with
the transfer document cannot be accepted. In the present case Kamla Shah did
ask for share certificates and/or duplicate thereof but the company never
issued the same. In my view therefore it is not open to contend by the
appellant that the certificates should have accompanied the transfer
application. In view thereof, the said contention is liable to be rejected.
16. Now,
turning to the first contention which has been raised that the stamps are not
cancelled and, therefore, transfer document is void and illegal and thus, there
was no valid application under section 108 of the Companies Act, 1956 is
concerned. I am of the opinion that the said contention is also required to be
rejected. It is undoubtedly true that the authorities cited by the learned
counsel for the appellant do suggest that the stamp should be cancelled and in
the absence of cancellation of the stamp the transfer documents are not valid
under section 108 of the Companies Act, 1956 and, therefore, there is no valid
application for transfer of the certificate. In my view, the aforesaid
proposition of law cannot be applied in the facts of the present case because
admittedly the company itself is not following the procedure in law. The
company itself has not complied with the provisions of the Companies Act, 1956.
In the absence of the company complying with the various provisions of the
Companies Act, 1956, it is not open for the company to raise such a
hyper-technical and pediatric contention that the stamps are not cancelled and,
therefore, there is no valid application. In my opinion, the contention which
has been raised lacks bona fides and is raised only with an intention to defeat
the right of the respondent herein because the company and Ramesh Shah, the
Director of the company are well aware that in view of the death of Mrs. Kamla
Shah the fresh transfer documents cannot be executed. In my opinion, this is
not a case where by virtue of the non-cancellation of the stamp on the transfer
document the right of the respondent should be defeated and/or the proprietary
rights of the respondent in the shares should be deprivated. I am of the
further opinion that such a defence is basically raised with the intention and
view to defeat the right of the respondent in the said shares.
17. In any
event, it was open for the company to point out the defect that the stamps are
not duly cancelled to the respondent herein within the prescribed period of
time limit of 60 days where the respondent could have rectified the said
defects. However, the respondent company has failed to show that in fact the
company has pointed out the defects in the share transfer form to the
respondent herein within a reasonable period of time. In view thereof, it is
not open in my opinion for the respondent company to raise such contention at a
belated stage and subsequent to the expiry of the said Mrs. Kamla Shah. I,
therefore, reject the said contention raised by the learned counsel for the
appellant pertaining to the non-compliance of section 108 by virtue of
non-cancellation of the stamps affixed on the said transfer forms.
18. On the
other hand, the learned counsel for the respondent has relied upon the judgment
of the Apex Court in the case of Hindustan Steel Ltd. v. Dilip Construction Co.
AIR 1969 SC 1238 holding that the Stamp Act being a fiscal measure enacted to
secure revenue for the State, it cannot be permitted to be used as a weapon of
technicality to defeat the sub-stantial rights of the parties in respect
thereof.
19. In my
opinion, in light of the judgment of the Apex Court in the case of Hindustan
Steel Ltd. (supra) the appellant herein cannot be allowed to use the
non-cancellation of the stamp as a weapon to defeat the substantial rights of
the respondent herein. I, therefore, reject the said contention of the
appellant herein.
20. The last contention raised by the appellant
is that there is no valid gift of the shares in favour of the respondent by the
deceased Kamla Shah as the same did not accompany share certificate. It has
been contended by the learned counsel for the appellant that under the
provisions of the Transfer of Property Act, the gift is valid if it is of a
movable property provided either it is accompanied by the delivery of the
movable property or if the gift or instrument of gift is duly registered. In my
opinion, the aforesaid contention is required to be straightaway rejected. In
my opinion, the intention of the deceased Kamla Shah was to give a gift of the
shares to the respondent herein. The mere fact that the same was not
accompanied by share certificate because the share certificates were in the
custody of the appellant does not make the said gift invalid. In my opinion, in
the absence of the possession of the share certificate with Kamla Shah and the
same being in possession of the appellant company, a mere fact of addressing a
letter to the company that the said shares are transferred by her as and by way
of a gift to the respondent therein would be a valid gift because the custody
of the share certificate was already in the possession of the appellant herein.
Thus, addressing a letter to the company expressing intention that the said
shares are given by way of gift in favour of the respondent herein when the
certificates are in the custody of the company itself would amount to deemed
delivery of the certificates along with the instrument of gift and thus it is
not invalid by virtue of the provisions of the Transfer of Property Act. In my
opinion, it is not necessary that the movable property must accompany in
physical sense along with the instrument of transfer particularly when such a
movable property is not in the custody or in the possession of the donor
herein. I also do not subscribe to the view which is propounded by the
appellant herein that merely because the share certificate could not accompany
the gift deed, the same should have been registered. In my opinion, it was
appropriate and open to the deceased to execute the gift of the movable assets
without the said document being registered because under the Registration Act
the same does not require to be registered. The learned counsel for the
respondent has, in my opinion, rightly relied upon a judgment of the Apex Court
in the case of Vasudev Ramchandra Shelat v. Pranlal Jayanand Thaker AIR 1974 SC
1728 which inter alia indicates that the gift does not become invalid for
non-compliance of the formalities prescribed under the Companies Act. In that
case in paragraph 10 it has been held as under:—
“10. In the case before us, the registered
document was signed by the donor as ‘the giver’ as well as by the donee, as
‘the acceptor’ of the gift and it is attested by six witnesses. In it, the
donor specified and gave particulars of the shares meant to be gifted and
undertook to get the name of the donee put on to the registers of the companies
concerned. The donor even said that she was, thenceforth, a trustee fork the
benefit of the donee with regard to the income she may get due to the fact that
her name was still entered in the registers of the companies concerned as a
shareholder. The donor delivered the registered gift deed together with the
share certificates to the donee. We think that, on these facts, the donation of
the right to get share certificates made out in the name of the donee became
irrevocable by registration as well as by delivery. The donation of such a
right as a form of property, was shown to be complete so that noting was left
to be done so far as the vesting of such a right in the donee is concerned. The
actual transfers in the registers of the companies concerned were to constitute
mere enforcements of this right. They were necessary to enable the donee to
exercise the rights of the shareholder. The mere fact that such transfers had
to be recorded in accordance with the company law did not detract from the
completeness of what was donated.” (p. 1733)
21. In my opinion, the contention of the learned
counsel for the appellant that the gift should have been accompanied by the
share certificate even though no share certificates were issued and the same
were in the custody and possession of the company is without any substance and
I, therefore, reject the same. I hold that there is a valid gift in respect of
the respondent herein and therefore the said shares are required to be
transferred by the company in favour of the respondent herein. In any view of
the matter, I am of the opinion, that insofar as the company is concerned, it
is separate legal entity and for them it is only required to be seen whether
the provisions of section 108 of the Companies Act, 1956 are complied with or
not. It cannot take up the issues which are in fact directly concerned or
related to Ramesh Shah. Ramesh Shah is not a party to the proceedings and,
therefore, it is not open for the company to challenge such a gift of the
shares by Mrs. Kamla Shah since deceased in favour of the respondent herein.
22. In the aforesaid circumstances, I do not find
any merit in the present appeal. I find that the contentions are raised merely
with a view to defeat the rights of the respondent herein and, therefore, I
dismiss the present appeal. I accordingly, answer the questions of law which
are framed, namely:—
(1) It is open for the Registrar of Companies to look into the
statutory records and other records of the company and on overall assessment
come to the conclusion and if there is any conflict among the documents then it
is open for the Company Law Board to come to a proper assessment by considering
the material and documents evidence both which are in custody of the company as
well as documents filed by the company with the Registrar of the Companies.
(2) Insofar as gift is concerned, I am of the opinion, that in
view of the fact that the share certificate was in the custody of the company
itself, it is not open for the company to contend that the transfer document
did not accompany the said share certificate and/or deed of gift did not
accompany the share certificate and, therefore, there could not have been a
valid gift deed merely because the same did not accompany the share
certificate. The aforesaid circumstances, would not make the gift deed in
favour of the respondent invalid in law.
(3) Insofar as the third question of law is concerned, I am
upholding the findings of the Company Law Board that Mrs. Kamla Shah was singly
holding all the said shares and, therefore, the question of law as framed that
the first joint shareholder in the case of joint shareholding could not
transfer the said joint shares does not arise and I accordingly decline to
answer the same.
23. The appeal is disposed of accordingly. No order as to costs.
[1962] 32 COMP. CAS. 145 (PUNJ.)
v.
KHOSLA
CJ. AND MAHAJAN J.
JULY
12, 1960
KHOSLA C.
J.--These are two cross
appeals (Letters Patent Appeals Nos. 56 and 58 of 1957) arising out of an order
made by Chopra J. on an application made by the Union of India for the
rectification of register of member of the Kulu vally Transport company. The
application was in respect of eight shares of which four were held by Ram Dial
(Nos. 39 to 42), two were held by Gurdial (Nos.14 and 43) and the remaining two
by Vidya vati, wife of Ram Dial (Nos.44 and 45). The four shares held by Ram
Dial had been previously pledged with Mrs. Parry. The Kulu Vally Transport
Company began to fare badly in 1952 and an offer for the sale of these shares
was made of the Union of India in the Railway Department. The offer was made by
means of three later, exhibits P.2,P.3and P.4 signed respectively by Ram Dial,
Gurdial and Vidya Vati. The letters were all in identical terms and text has
been reproduced in the judgment of the leaned single judge. The offer for sale
was unconditional, and the shareholders offered to receive whatever price was
considered just and proper by the Railway Department. No reply or a formal
acceptance to these letters was sent, but it seems to have been understood by
all parties that the shares were, in fact, transferred to the Railway
Department .The letter were accompanied by blank transfer deed and by the
scrips of six shares. The scrips of the share of Gurdial and Vidya Vati
accompanied their respective letters, but of the four shares of Ram Dial, the
scrips of only two were submitted. The scrips of the remaining two (Nos. 39 and
40) were with the pledgee, mrs. Parry. Nearly a year elapsed. and then Gurdial
and Vidya Vati began to make claims for the price of these shares. They claimed
that a sum of Rs. 8,000. was due to each of them on account of the price of the
four shares which had been transferred by both of them. It may be mentioned
here that the face value of each share of the Kulu Vally Transport Company was
Rs. 4,000. It may also be mentioned here that Ram Dial had previously offered
to receive 10 per cent. of the face value of his own shares and also of the
shares held by the members of his family.
The Union of
India treated these transactions as complete transfer of shares and made an
application for the rectification of the register of member of the company. The
learned judge allowed the application in so far as it related to the two shares
of Ram Dial of which he had sent sent scrips along with the transfer deeds but
dismissed the application in respect of the remaining six share . In coming to
this conclusion he held that there was no completed transaction of sale
effected by Gurdial and Vidya Vati. He also came to the conclusion that the
transfer deeds bore stamps which had not been canceled at the time of their
execution, and, therefore, the transfer deeds must be treated as unstamped, and
since as unstamped transfer deed could not be made the basis of a genuine
transfer, the transfers by Gurdial and Vidya Vati must be treated as
incomplete. With regard to the two share which were held by Mrs. Parry, the
learned judge took the view that since no share stripe were handed over also
with the transfer deeds the transfer could not be said to have been complete
within the meaning of the Indian Companies Act.
Against this
decision two cross appeals have been preferred under clause 10 of the letters
Patent. The appeal of Mrs. Parry in respect of the two shares held by here may
be disposed of in a few words. Ram Dial made an unconditional offer of transfer
on the 29th of December, 1952. He handed over the scrips of the two shares held
by him to the railway department and later agreed to accept 10 per cent. of the
face value of these shares. The fact that these share were pledged with Mrs.
Parry does not affect the transfer, because the pledge may well have been
redeemed, and since the scrips were in possession of Ram Dial and were handed
over along with the transfer certificates,the transfer must be held to have
been completed.
With regard to
the appeal by the Union of India, it has been urged before use that there was a
completed contract of sale inasmuch as Gurdial and Vidya Vati had made an
unconditional offer of sale. The fact that the price was not fixed, makes no
difference to the case. The learned judge has referred to section 5 of the Sale
of Goods Act, but it seems to me that the terms, in which Gurdial ad Vidya Vati
;made their offer, were of a unconditional offer, and the subsequent conduct of
the parties shows that this offer was accepted. The only thing that remained
undetermined was the price, and in accordance with the provisions of section 9
of the Sale of Goods Act, the vendor could claim a reasonable price since no
;steps had been taken to determine the figure. There is, however, another
objection to this transaction being considered a valid one, namely, the
non-cancellation of the stamps. The transfer certificates were stamped, but the
stamps were not canceled, the under the provisions of section 12 of the Indian
Stamp Act, the transfer deeds must be deemed to be unstamped. If a transfer
deed is unstamped, the company cannot be asked to give effect to the transfers.
Mrs. Salooja, who appears on behalf of the Union of Indian, drew out attention
to section 3 and section -29, item 62(a), Indian Stamp Act, and argued that
transfer deeds of shares had to be executed both by the transferor and the
transferee. The transferee in this case in the Government and, therefore, the
Government being the executant of the documents, the deeds were exempt from
stamp duty. The first proviso to section 3 is in the following terms:
“Provided that
no duty shall be chargeable in respect of--
(1)any
instrument executed by, or on behalf of, or in favour of, the Government in
cases where, but for this exemption, the Government would be liable to pay the
duty chargeable in respect of such instrument.
The liability
is dealt with ;under section 29,item 62(a), which relates to the transfer of
shares, etc. The duty is payable “by the person drawing, making, or executing
such instrument”. The argument of Mr. Salooja is that in this case Government
is the person drawing, making, or executing the instrument and, therefore, the
duty was ordinarily payable by Government, and that being so, the deeds will be
exempt from duty under the provision of the first proviso of which the terms
have been quoted above. Ordinarily, it is th transferor of shares who is liable
for stamp duty. This matter has bee considered in a number of cases, and it has
been held by; the Federal Court in Jainarain Ram Lundia v. Surajmull
Sagarmull,1 that, ordinarily ad as a matter of law, in case of transfer of
shares of a company it is the vendor who is liable for stamp duty. The matter
arose out of a contract to sell shares and the question for the consideration
of the learned judges of the federal Court was whether the contract was
complete or not. The party challenging the contract contended that no agreement
had been arrived at regarding the payment of the stamp duty on the transfer
deed and, therefore, the transfer could not be said to be complete. it was contended,
on the other hand, that the question of payment of stamp duty was not one of
the terms of the contract as ordinarily stamp duty was paid by the transferor.
This contention was accepted by the learned judges of the Federal Court, and
holding that in law it is the transferor who pays the stamp duty , the absence
of any agreement on this point could not invalidate the contract. In another
case which come up before the Bombay High Court --New Citizen Bank of India v
Asian Assurance Co. Ltd. , it was held that where an instrument of transfer
properly stamped has not been given, it cannot be said that the transferee’s
name was omitted with any sufficient cause . The same view was expressed by the
Nagpur High Court in Amraoti Electric Supply Co. Ltd. v. R.S. Chandak.
Taking the
view that the stamp duty is ordinarily payable by the transferor, it cannot be
said that the Government was liable for paying the stamp duty simply because an
instrument for transfer of shares is to be executed both by the transferor and
the transferee. That being so,the case does not fall within the exemption
referred to in the first proviso to section 3 of the Indian Stamp Act, and the
transfer deeds executed by Gurdial and Vidya Vati not being considered properly
stamped, the transfers cannot be said to have been complete. The view of the
learned single judge on this point also must be upheld.
With regard to
the remaining two shares of Ram Dial which were in possession of Mrs. Parry ,
since the scrips were not handed over along with the transfer deeds, this
transfer cannot be said to have been complete and the decision of the learned
judge on this point also must be upheld.
In the result
, I would uphold the decision of the learned judge in all respects and dismiss
both the appeals and make no order as costs.
D.K. MAHAJAN
J.-I agree.
Appeals
dismissed.
[1962] 32 COMP. CAS.
568 (CAL.)
Coronation Tea Co. Ltd. In re.
S.
P. MITRA, J.
APRIL
26, 1961
This is an
application for rectification of the share register of the company.
The first
objection of the company is that the transfer forms which haven been used are
not in arenas with the provisions of articles 48 of the articles of association
relating to transfer or transmission of shares. Under article 48(b) a form has
been set out. Upon comparing the form with the forms used by the petitioner I
find there has been substantial if not verbatim, complain with the requirement.
In any event, article 48(b) prescribes that the transfer may also be recorded “
in any usual or common form which the board shall have approved,” When the
petitioners applied to have her name registered, it was open to the board to
approve of the forms used by the petitioner and her transferors. I do not see
why approval could not be given to these forms. This contention of learned
advocate for the company, therefore, does not appear to me to be reasonable.
The next
contention is that unless a person is a member of a company, he cannot make a
an application under section 155 of the Companies Act, 1956. His remedies are under
section 111 and he may prefer an appeal to the Central Government as provided
by subsection (3) of that section. This arguments is obviously untenable as
section 155 clearly provides that if default is made or unnecessary delay takes
place in entering on the register, the fact of any person having become a
member, the person aggrieved may apply to the courts for rectification of the
register. In Sadashiv Shankar Dandige v. Gandhi Sewa Samaj Ltd., it is observed
that section 155 is the controlling section and gives the court an overriding
power notwithstanding any previous order of the Central Government. It would be
meaningless to give the court a general power to decide any question including
any question relating to the title of a person as is given by section 155(3)
and then indirectly cut off that power by giving the Central Government the
same power to decide the same question in appeal first.
With respect,
I agree with these observations. To my mind, in view of the provisions of
sections 9 and 111(1) of the Companies Act, sub-section (3) of section 111
merely pus a fetter on the powers of the directors and does not in any way
abridge the powers of the court.
Mr. Roy
appearing on behalf of the company has also urged that under section 108 a
company shall not register a transfer of shares unless , inter alia, a proper
instrument of transfer “duly stamped” has been delivered to the company. In the
present cases, there are instrument of transfer but they are to “duly stamped”
inasmuch as the stamps which have been affixed have not been canceled.
The expression
“duly stamped” has been defined in section 2(11) of the Indian Stamp Act. The
definition is as follows:
“ ‘Duly
tamped’ as applied to an instrument, means that the instrument bears an
adhesive or impressed stamps of not less than the proper amount that the such
stamp has been affixed or used in accordance with the law for the time being in
force in India except Part B States.”
Section 12 of
the Act runs thus:
“12.(I)(a) Whoever affixes any adhesive stamp to any instrument
chargeable with duty which has been executed by any person shall, when affixing
such stamp. cancel the same so that it cannot be used again and
(b) whoever executes any instrument on any paper bearing an adhesive
stamp shall, at the time of execution, unless such stamp has been already
canceled in manner aforesaid, cancel the same so that it cannot be used
against.
(2) Any instrument bearing an
adhesive stamp which has not been canceled so that it cannot be used against,
shall, so far as such stamp is concerned, be deemed to be unstamped.
(3) The person required by
subsection (I) to cancel an adhesive stamp may cancel it by writing on or
across the stamp his name or initials or the name or initials of his firm with the
true date of his so writing, or in any other effectual manner.”
Section 35 of
the Indian Stamp Act provides inter alia, that instruments which have not been
“duly stamped” are inadmissible in evidence. Section 63 lays down a any person
required by section 12 to cancel an adhesive stamp, in the manner prescribed by
that section, shall be punishable with fine which may extend to one hundred
rupees.
Mr. R.
Chaudhuri, learned counsel for the petitioner, has submitted that section 12,
35, or 63 of the Stamp Act has no relevance whatsoever in considering whether
an instrument has been “duly stamped” for purposes of section 108 of the
Companies Act, 1956. All that the court has to see is whether stamps of the
proper amount have been affixed to the instruments is not canceled in
accordance with the provisions of section 12 (1) (a) or (b) of the Stamp Act it
is deemed to be unstamped for the purpose of attracting the consequences
specified in sections 35 and 63 of that Act only.
Mr.Chaudhuri
has placed reliance on section 47 of the Act which is as follows:
“47. When any
bill of exchange or promissory note chargeable with the duty of one anna is
presented for payment unstamped, the person to whom it is so presented may
affix thereto the necessary adhesive stamp, and upon canceling the same in
manner hereinbefore provided, may pay the sum payable upon such bill r note,
and may charge the duty against the person who ought to have paid the same, or
deduct it from the sum payable as aforesaid, and such bill or note shall, so
far as respects the duty, be deemed good and valid:
Provided that
nothing herein contained shall relive any person from any penalty or
proceedings to which he may be liable in relation to such bill or note.
Mr. Choudhuri
contends that an unstamped instrument does not, therefore, lose its character.
Only for the special purposes of the Stamp Act it is deemed to be unstamped.
It is also to
be observed, according to learned counsel, that in section 2 (11) of the Act
the necessity for cancellation has not been mentioned. For giving the
instrument an unstamped character a legal fiction has bee introduced in section
12 in order that the provisions in secretions 35 and 63 may be made applicable.
I am unable to
accept these contentions of Mr. Chaudhuri. To my mind a company cannot register
a transfer of shares unless a proper instrument f transfer “duly stamped” has
been delivered to the company(section 108, companies Act, 1956). There is no
definition of the expression “duly stamped” in the Companies Act. But it has
been defined in section 2(11) of the Indian Stamp Act. “Duly Stamped”, as
applied to an instrument, means that the instrument bears, inter alia, an
adhesive stamp of not less than the proper amount and that such stamp has been
affixed in accordance with law it must be canceled either by the person who
affixes it or by the person who executes the instruments, if it bears an
adhesive stamp (section 12 of the Indian Stamp Act). In the instant case
adhesive stamps have been affixed o the instruments of transfer but they have
not been canceled. The company is right in contending, thereof that the
instruments are not “duly stamped.”
Mr. Chaudhuri
has also advanced another arguments. He says that the instruments of transfer
delivered to the company are not “instruments” in terms of section 2 (14 of the
Indian Stamp Act. This section provides that an “instrument” includes every
documents by which any right or liability is, or purports to be created,
transferred, limited extended, extinguished or recorded. Learned counsel has
drawn my attention to article 62 in Schedule I to the Stamp Act. this article
deals with transfer whether with or without consideration, inter alia, of
shares in an incorporated company or other body corporate. The duty payable on
such documents is one half of the duty payable on a conveyance (No.23) for a
consideration equal to the value of the share. According to Mr. Chaudhuri until
a resolution is passed by the board of directors of the company approving of
the transfer no right or liability is created or extinguished. It is only when
such a resolution is passed that the stamp is to be canceled. Under section
111(1) of the Companies Act, 1956, nothing in sections 108, 109 and 110 shall
prejudice any power of the company under its articles to refuse to register he
transfer of any share in the company. Under regulation 21 the board may subject
to the right of appeal conferred by section 111, decline to register (a) the
transfer of a share, not being a fully paid share, to a person of whom they do
not approve; or (b) any transfer of shares on which the company has a lien.
Under regulations 22 the board may also decline recognize any instrument of
transfer unless (a) a fee of Rs. 2 is paid to the company in respect thereof ;
(b) the instrument of transfer is accompanied by the certificate of the share
to which it relate, and such other evidence as the board may reasonably require
to show the right of the transferor to make the transfer; and (c) the
instrument of transfer is in respect of only one class of shares. These
provisions, learned counsel has urged, indicate that a transfer of shares means
a tripartite agreement between a buyer, his seller and the company. Until the
board of directors of the company gives its approval to the transfer, it cannot
be effective. The question of cancellation of stamps will arise only when the
approval of the board is given.
Strong
reliance was placed by Mr. Chaudhuri on the following notification published in
the Calcutta Gazette on July 24, 1941.
“Stamps.
Notification No. 6714 St.-- 18th July, 1941-- In exercise of the powers
conferred by section 75 of the Indian Stamp Act, 1899 (II of 1899) read with
the Government of India, Finance Department (Central Revenues) Notification
No.9 Stamps, dated 13th November, 1937, the governor is pleased to make the
following rule relating to he cancellation of ‘share Transfer’ stamps:
Mode of
canceling ‘share transfer’ stamps at the time of registration of the deed of
transfer,--’Share transfer’ stamps affixed to deeds of transfer of shares
shall, before effect is given to the transfer by the Joint Stock Company
concerned by the company by means f a punch which can perforate either the word
“cancld” or “Canceled” r the initials of the company, in sufficient prominence
to render the stamps permanently unfit for re-utilization evens though the
stamps were previously canceled in accordance with secretion 12 of the Indian
Stamp Act, 1899. In case a company fails to cancel the share transfer stamps as
provided in this rule the company shall be liable to the penalty prescribed by
section 63 of the Indian Stamp Act, 1899:
Provided that
for the purpose of canceling ‘share Transfer” Stamps, the provincial Government
may, on being satisfied by a certificate from the Collector or the
Superintendent of Stamps, permits any Joint Stock Company to adopt any other
method in lieu of perforation by means of a punch.
By
Order of the Governor,
B.R.SEN,
Secretary
to the Government of Bengal.”
Mr. Chaudhuri
seeks t draw support form the terms f this notification in favour of his
arguments that it is the duty of the company and not of the transferor or the
transfer to cancel stamps in the manner indicated in the notification at the
time of registration of the deed of trendier. Learned counsel relies on the
case of In re Copal Varnish Co. Ltd. for the proposition that an instrument of
transfer has no legal effect till the consent of the directors is obtained and
registration is effected.
On this point
also I am unable to agree with Mr. Chaudhuri. Sections 2(14) of the Indian
Stamp Act merely states that an instrument includes every documents by which
any right or liability is, purports to be crated, transferred, limited,
extended, extinguished or recorded. The definition is extensive and is not
restricted to the kinds of documents specifically referred to. An “instrument”
is a writing and generally imports a documents of a formal legal kid: vide
Stroud’s Judicial Dictionary, 3rd edition, Volume 2, page 1472. It cannot be
said, therefore, that an instrument of transfer of shares is not an
“instrument” within the meaning of section2(14) of the Indian Stamp Act. In any
event, it cannot be urged that this document is not a document by which any
right or liability s or purports to be created or recorded. In In re Copal
Varnish Co. Ltd. cited by Mr. Chaudhuri ,Eve J. has pointed out that by the
instrument of transfer, an equitable interests in the shares is passed to the
transferee. Lord Watson describing the rights of transferees holding blank transfer
deed in Colonial Bank v. John Cady observes that:
“It would ,
therefore, be more accurate to say that such delivery (meaning delivery of
blank transfer deeds) passes, not the property of the shares, but a title,.
legal and equitable, which will enable the holder to vest himself with the
shares without risks is of his right being defeated by any other person
deriving title from the registered owner.”
Secondly, the
requirements of section 108(1) of the Companies Act 1956, inter alia, is the a
proper instrument of transfer”duly stamped” and executed by or on behalf of the
transferor and by or on behalf of the transferee must be delivered to the
company. The section does not speak of any execution by the company. The
language used in the first proviso o section 108 (1) is interesting. It is as
follows:
“Provide that
where, on an application in writing made to the company by the transferee ad
bearing the stamp required for an instrument of transfer, it is proved to the satisfaction
of the board of directors that the instrument of transfer signed by or on
behalf of the transferor and by or on behalf of the transferee has been lost,
the company may register the transfer on such terms as to indemnity as the
board may think fit.”
The expression
used in this proviso is not “duly stamped” but “bearing the stamp”.
Thirdly, it
seems to me that the notification published in the Calcutta Gazette on July 24,
1941, merely contemplates a second cancellation by the company to render the
stamps permanently unfit for reutilisation . This second cancellation must be
made by the company. The notification clearly lays down “ even though the
stamps were previously canceled in accordance with section 12 of the Indian
Stamp Act, 1899”. The notification, in my opinion, gives in indication that the
stamps on the instruments of transfer are canceled in accordance with the
provisions of section 12 of the Stamp Act.
Lastly, I may
refer to Union of India v. Kulu Valley Transport Ltd. It was held inter alia,
by the Punjab High Court that, where the adhesive stamps on the transfer deeds
executed by the transferors were not canceled, the documents should be regarded
as unstamped; and to order rectification of the register of member in a case
where there is no duly stamped transfer deed, would amount to ordering the
company to act in contravention of section 108(1) of the Companies Act, 1956.
For reason
aforesaid, I am of opinion that the company in the present case was justified
in refusing registration of the shares concerned.
In the result,
therefore, this application is dismissed.
I make no
order a to costs since I find from the correspondence that passed between the
parties that the company raised various objections to registration but never
wrote to the petitioner that the stamps had not been canceled. It is stated in
paragraph 8 of the affidavit-in- opposition being the affidavit of Kalipada Sen
affirmed on November 8, 1960, that this defect was pointed out when the
original deeds were delivered to the company; but I am told that the company
accepted the registration fees from the petitioner and granted receipts
therefor. I also direct the company to return to the petitioner the relevant
share script along with the instruments of transfer within a fortnight from
date.
[1988] 64 Comp. Cas. 775 (
v.
Asok Kumar Saha
APPEAL NO. 117 OF 1984
February 3, 1986
P. C. Sen for the Appellant.
A. K. Mukherjee for the Respondents.
Prabir Kumar Majumdar, J.—This appeal arises
out of the judgment and order dated December 16, 1983, passed by a learned
single judge of this court on an application made by the respondent, Asok Kumar
Saha, under section 155 of the Companies Act, 1956, for rectification of the
share register of respondent No. 1, Nuddea Tea Co. Ltd, By the said judgment
and order, the court of the first instance allowed the said application.
On or
about August 1, 19.79, the respondent, Asok Kumar Saha, purchased 100 fully
paid-up equity shares of Rs. 100 each of the appellant, Nuddea Tea Co. Ltd.
(hereinafter referred to as "the company"), through a broker in the
stock market. At the time of purchase of the aforesaid 100 equity shares by the
respondent, they stood in the register of the company' in the joint names of
the following persons:
(1) Late Jadu Nath Sarkar, (2) Late Bijoy Nath
Sarkar, (3) Late Anadi Nath Sarkar, (4) Late Birendra Nath Sarkar, (5) Late
Akhil Nath Sarkar, (6) Late Sasi Sekhar Sarkar, (7) Sri Probodh Kumar Sarkar,
(8) Sri Sukumar Sarkar, (9) Late Anil Kumar Sarkar, (10)Sri Bijon Kumar Sarkar,
and (11) Sri Arabinda Sarkar. It is not in dispute that seven out of the eleven
joint holders of these shares were dead at the time of purchase of the shares
by the respondent.
On or about August 5, 1979, the respondent sent the
above shares to the company together with the transfer deed as executed by the
surviving shareholders as well as the heirs of the deceased joint-holders. On
or about September 27, 1979, the respondent received a letter from the company
signed by its secretary to the effect that all these documents forwarded by the
respondent together with the said shares had been placed at the meeting of the
board of directors of the company and it was the view of the board of directors
that it would not be lawful for the company to register the transmission of
these shares without having a clearance and/or exemption certificate from the
Controller of Estate Duty in respect of the aforesaid shares. By the said
letter, the respondent was requested to submit the above certificate to the
company and on receipt of the same the whole case would be reviewed by the
board of directors. The respondent, by a letter dated October 20, 1979,
informed the company referring to section 84(2) of the Estate Duty Act, 1953,
as well as the clarification of the Government of India to the effect that
Indian companies do not insist on the production of the estate duty clearance
certificate in transmitting shares.
On or about December 4, 1979, the respondent received
another letter from the company to the effect that under article 44 of the
company's articles of association, an heir,, executor or administrator of a
deceased member was required to obtain a succession certificate, grant of
probate or letters of administration or other legal representation, as the case
may be, in respect of shares held by the deceased member from a competent court
in India and produce the same for the company's perusal. The company referred
to section 370 of the Indian Succession Act, 1925, in this connection. The
company thus asked for the necessary succession certificate or probate or
letters of administration. By the said letter, the respondent was further informed
that until the said documents were produced before the company, the application
of the respondent for the necessary transmission of shares and/or rectification
would remain in abeyance. The respondent informed the company that production
of such succession certificate was not necessary and further that the dividends
payable by the company on the shares held (jointly) by the deceased
shareholders were being regularly paid to Sukumar Sarkar, one of the surviving
joint holders of those shares and before payment of such dividends the company
never asked for production of the succession certificate or estate duty
clearance certificate or any other documents.
The company, however, did not make the necessary
transmission of shares in favour of the respondent nor the necessary
rectification in the shares register. In the event of such non-action or
refusal by the company, the respondent made an application under section 155 of
the Companies Act, 1956, for a direction to the company to transmit the shares
held by the deceased shareholders in the names of the legal heirs of the said
seven deceased joint shareholders and thereafter to transfer-the same in the
name of the respondent and for necessary rectification in the relevant shares
register by entering therein the name of the respondent in respect of the said
100 equity shares. As stated above, the said application has been allowed by
the court of the first instance.
Mr. P. C. Sen, learned counsel appearing for the
appellant, submits that there has been no default on the part of the appellant
in making the necessary rectification in the company's share register as prayed
for by the respondent. Mr. Sen submits that under section 108 of the Companies
Act, 1956, a company shall not register a transfer of shares unless, a proper
instrument of transfer was duly stamped and such stamped instrument of transfer
was delivered to the company. It is the submission of Mr. Sen that in the
present case» admittedly, the transfer, deeds which were submitted by the
respondent to the appellant-company for effecting and recording transfer of
shares in the share register of the company were not duly stamped in the sense
that the (adhesive) stamps as affixed on each of the said transfer deeds were
not duly cancelled by the respondent as required by section 12 of the Indian
Stamp Act, 1899.
For the purpose of this appeal, the relevant portions
of section 108 of the Companies Act, 1956, are set out below:
"108(1).
A company shall not register a transfer of shares in, or debentures of, the company,
unless a proper instrument of transfer duly stamped and executed by or on
behalf of the transferor and by or on behalf of the transferee and specifying
the name, address and occupa tion, if any, of the transferee, has been
delivered to- the company along with the certificate relating to the shares or
debentures, or if no such certificate is in existence, along with the letter of
allotment of the shares or debentures:
Provided that where, on an application in writing
made to the company by the transferee and bearing the stamp required for an
instrument of transfer, it is proved to the satisfaction of the board of
directors that the instrument of transfer signed by or on behalf of the
transferor and by or on behalf of the transferee has been lost, the company may
register the transfer on such terms as to indemnify as the board may think fit:
Provided further that nothing in this section shall
prejudice any power of the company to register as shareholder or
debenture-holder any person to whom the right to any shares in, or debentures
of, the company has been transmitted by operation of law.
(1A) Every instrument of transfer of shares shall be
in such form as1 may be prescribed, and—
(a) every such form shall, before it is signed by or on behalf of the transferor and before any entry is made therein, be presented to the prescribed authority, being a person already in the service of the Government, who shall stamp or otherwise endorse thereon the date on which it is so presented, and
(b) every instrument of transfer in the prescribed form with the date of such presentation stamped or otherwise endorsed thereon shall, after it is executed by or on behalf of the transferor and the transferee and completed in all other respects, be delivered to the company—
(i) in
the case of shares dealt in or quoted on a recognized stock. exchange, at any
time before the, date on which the register of members is closed, in accordance
with law, for the first time after the date of presentation of the prescribed
form to the prescribed authority under clause (a) or within two months from the
date of such presentation, whichever is later;
(ii) in any other case, within two months
from the date of such presentation".
The relevant provisions of section 12 of the Indian Stamp
Act, 1899, are as follows:
"12. Cancellation of adhesive stamps.—(1) (a) Whoever affixes any adhesive stamp to any instrument chargeable with duty which has been executed by any person shall, when affixing such stamp, cancel the same so that it cannot be used again; and
(b) Whoever executes any instrument on any paper
bearing an adhesive stamp shall, at the time of execution, unless such stamp
has been already cancelled in manner aforesaid, cancel the same so that it
cannot be used again.
(2) Any instrument bearing an adhesive stamp which has
not been cancelled so that it cannot be used again, shall, so far as such stamp
is concerned, be deemed to be unstamped.
(3) The person required by sub-section (1) to cancel
an adhesive stamp may cancel it by writing on or across the stamp his name or
initials or the name or initials of his firm with the true date of his so
writing, or in any other effectual manner".
Mr. Sen contends that in order to enable the company
to record the transfer of shares, the transfer deed has to be duly stamped. In
his submission, such stamping is a condition precedent as provided under
section 108 of the Companies Act. Mr. Sen submits that section 12 of the Indian
Stamp Act, 1899, provides:—(a) the adhesive stamp as affixed has to be
cancelled at the time of execution, and (b) if not cancelled the instrument is
deemed to be unstamped. Therefore, according to the submission of Mr. Sen,
learned counsel appearing for the appellant, on reading section 108 of the
Companies Act along with section 12 of the Indian Stamp Act, it appears that
there is total statutory prohibition for the company to make a transfer in the
circumstances as stated above. He further submits that in the present case the
stamp affixed in the instrument is admittedly an adhesive stamp and admittedly
not being cancelled in terms of section 12 of the Indian Stamp Act, and at all
material times the instruments "were and still are unstamped within the
meaning of section 108 of the Companies Act, 1956, read with section 12 of the
Indian Stamp Act, 1899. Mr. Sen in this connection cites two decisions of this court, one in the case of Babulal Choukhani
v. Western India Theatres Ltd. AIR 1957 Cal 709; [1958] 28 Comp Cas 565; and
another in the case of Coronation Tea Co. Ltd., In re, AIR 1961 Cal 528;
[1962] 32 Comp Cas 568. Mr. Sen submits that the requirement of section 108 of
the Companies Act is mandatory. In support of such proposition, Mr. Sen cites a
decision of the Supreme Court in the case of Mannalal Khetan v. Kedar Nath
Khetan [1977] 47 Comp Cas 185; AIR 1977 SC 536; [1977] Tax LR 1638.
Mr. Sen contends that, in these circumstances, the
court cannot direct the company to effect registration on the basis of an
instrument of transfer which is not duly stamped due to not being cancelled,
because in doing so, the court would direct the company to do an illegal act.
In support of this contention, Mr. Sen cites a decision in the case of Jagdish
Mills Ltd., In re [1954] 24 Comp Cas 241; AIR 1955 Bom 79, and also another
Bombay decision in the case of New Citizen Bank of India v. Asian Assurance Co.
Ltd. [1945] 15 Comp Cas 53; AIR 1945 Bom 149.
It has been submitted by Mr. Sen that the tender of a
properly executed and duly stamped transfer deed is a condition precedent to
the right of the applicant to get relief under section 155 of the Companies
Act, 1956, and such application, if filed, discloses no cause of action.
Mr. Sen submits that if it is held by this court that
the said transfer deed not being duly stamped nor duly cancelled within the
meaning of section 108 of the Companies Act or section 12 of the Indian Stamp
Act, the company cannot be directed to make rectification of the register as
prayed for by the respondent, then in that case, it may not be necessary for
the court to hold whether the production of the succession certificate or
probate or estate duty clearance is necessary or not. Since the point has been
urged in the court of first instance by the respondent-petitioner, Mr. Sen
submits that article 44 of the articles of association of the company confers a
discretion upon the directors whether or not to recognise the heirs of a
deceased shareholder without production of the succession certificate or
probate, as the case may be. He submits that, in the facts and circumstances of
the case, the directors did not know personally either the deceased
shareholders or their heirs. Most of the deceased jointholders died a long time
ago and in that view of the matter, the directors exercised their discretion
properly in asking for the succession certificate or probate, as the case may
be. Mr. Sen draws our attention to the provisions of sections 370 and 372 of
the Indian Succession Act. ' Section 370(2) provides that security will include
stock or debenture or shares in a company. Therefore, in the absence of such
succession certificate, the respondent cannot have the shares transferred. In
this connection, Mr. Sen relied on a decision of this court in the case of New Mankhooshi Tea Co. Ltd., In re, AIR 1967 Cal
196.
Mr. A. K. Mukherjee, learned counsel appearing for
the respondents, submits that the shares of a public limited: company are
freely transfer able and the board of directors of the company can only refuse
to transfer subject to the provisions in the articles of association. However,
such refusal to register the transfer of the shares has to be made by a
resolution duly passed by the board. Learned counsel for the respondents
further submits that; section . 108 of the Companies Act, 1956, restricts the
validity of the transfer deed, inter alia, for, a period of two months from the
date of its presentation with the prescribed authority so far as its delivery
to the company by the transferor or transferee is concerned. According to him,
this section does not envisage any embargo upon the company to register a
transfer beyond the period of said two months from the date of the said
presentation provided the transfer deed is duly delivered to the company within
the said two months. He submits that in the present case, on or about August 8,
1979, the respondents sent the shares to the company with necessary documents
for transmission and transfer simultaneously. He submits that on one pretext of
the other, the company refused to rectify the share register and did not
transmit or transfer the said shares on some pretended grounds such as absence
of estate duty clearance certificate or production of a succession certificate
or probate, so on and so forth.
Learned counsel also submits that the court has wide
jurisdiction under section 155 of the Companies Act, 1956, to direct the
company to allow the petitioner-respondent to cancel the stamps at the back of
the transfer deed and direct the company to transfer the shares in the name of
the respondent on the strength of the same transfer deed already delivered to
the company within the aforesaid limitation period of two months. Learned
counsel also cites decisions of various High Courts to show that even when the
provisions Contained in section 108 of the Companies Act, 1956, were not complied
with, the court, in the facts and circumstances of the case, directed the
company to make the necessary rectification of register of transfer under
section 155 of the Companies Act, 1956, or under section 111 of the Companies
Act, 1956. The cages cited by the
respondents are: Rangpur Tea Association Ltd: v. Makkanlal Samaddar [1973] 43
Comp-Cas 58; [1972] Tax LR 2439 (Cal), Babulal Choukhani v. Western India
Theatres Ltd. [1958] 28 Comp Cas 565; AIR 1957 Cal 709, Bajaj Auto Ltd. v. N.
K. Firodia [1971] 41 Comp Cas 1; AIR 1971 SC 321, Hoshiarpur Azad Transporters
P. Ltd. [1983] 54 Comp Cas 254 (P & H), Gulabrai Kalidas Naik v. Laxmidas
Lallubhai Patel [1978] 48 Comp Gas 438; [1978] Tax LR (NOC) 33 (Guj), Jatia
Cotton Mills Ltd. v. Ram Prosad Bajoria [1975] 45 Comp Cas 686; [1975] Tax LR
1489 (Cal). Learned counsel also relies on two English cases, one, Imperial
Chemical Industries Ltd. [1936] 2 All ER 463 and another, Sussex Brick Co.
[1904] 1 Gh 598.
Learned counsel appearing for the respondent submits
that until the hearing of the case before the court of first instance, the
appellant never raised any objection as to stamps as a ground for refusal to
transfer shares in the name of respondent No. 1. The only objection taken by
the company until the filing of this application by the respondent under
section 155 of the Companies Act was that the transfer could not be made in the
absence of the production of necessary estate duty clearance certificate or the
production of succession certificate or probate. Learned counsel submits that
it is only after the petition was filed in the court of first instance, this
ingenious objection as to stamps has been raised by the company in its
affidavit filed in the court of first instance. Here also in this appeal, the
appellant takes it up as a principal ground in its argument. In this
connection, learned counsel has drawn our attention to the observation of the
learned judge of the court of first instance which runs thus:
"The next submission of Mr. Sen, on behalf of the
company, was on the basis of non-cancellation of the stamps in the share
transfer deed. Reference was made in this connection under section 108 of the
Companies Act. Reference was made to several authorities in support of the
proposition that this is not a formal defect but cancellation is a mandatory
requirement before transfer can be effected. I am merely recording this
contention of Mr. Sen as I do not want to go into this question in any detail
or express my views thereon. This is because in the correspondence disclosed in
the instant case, although the company had been taking various grounds
including some shifting grounds, non-cancellation of stamps is not one of them.
Although this point is indicated in paragraph 9 of the affidavit of Mr. Nihar Ranjan
Roy mentioned above is in my view, a clear afterthought. It follows that in my
view, this question should not be allowed to be canvassed by the company in the
present application"
We will now consider first the mandatory character of
section 108 of the Companies Act, 1956. Mr. Sen, learned counsel for the
appellant, contends that under the provisions of section 108 of the Companies
Act, 1956, a company "shall not register" transfer of share unless a
proper instrument of transfer duly stamped is delivered to the company. This,
according to Mr. Sen, is a mandatory requirement and if there is any
non-compliance with the provisions contained in section 108 of the Companies
Act, the company will be justified in refusing to transfer the share in the
names of the respondents as stated above. In support of this contention, Mr.
Sen cites a decision of the Supreme Court in the case of Mannalal Khetan v.
Kedar Nath Khetan [1977] 47 Comp Cas 185; AIR 1977 SC 536; [1977]Tax LR 1638..
The question that arose in that case was whether the provisions of section 108
of the Companies Act, 1956, were mandatory in regard to the transfer of shares.
Considering the said question, the Supreme Court observes that the words
''shall not register" are mandatory in character and such mandatory
character is strengthened by the negative form of the language. It is the view
of the Supreme Court in this case that the prohibition against transfer without
complying with the provisions of the Act is emphasised by the negative language
and such negative language is worded to emphasise the insistance of compliance
with the provisions of the Act. It is further observed by the Supreme Court in
this case (at page 191): "Prohibition and negative words can rarely be.
directory. It has been aptly stated that there is one way to obey the command
and that is completely to refrain from doing the forbidden act. Therefore,
negative, prohibitory and exclusive words are indicative of the legislative
intent when the statute is mandatory". The Supreme Court further observed
that (at page 192): "If anything is against law, though it is not
prohibited by the statute but only a penalty is annexed, the agreement is void.
In every case, where a statute inflicts a penalty for doing an act, though the
act be not prohibited, yet the thing is unlawful, because it is not intended
that a statute would inflict a penalty for a lawful act".
In the case of New Citizen Bank of India v. Asian
Assurance Co. Ltd, [1945] 15 Comp Cas 53; AIR 1945 Bom 149, the Bombay High
Court had to consider several points, one of such was whether the company was
bound to accept the transfer deed not duly stamped for the purpose of
rectification of share register. Section 34, sub-section (3), of the Indian
Companies Act, 1913, which corresponds to section 108 of the Companies Act,
1956, was in the following terms:
"It shall not be lawful for the company to
register a transfer of shares in, or debentures of, the company unless the proper
instrument of transfer duly stamped and executed by the transferor and the
transferee has been delivered to the company along with the scrip".
The case before the Bombay High Court was an appeal
from the judgment of Chagla J. (as he then was) under section 38 of the Indian
Companies Act, 1913, ordering rectification of the appellant company's
register. It has been quoted in that judgment in New Citizen Bank of' India v.
Asian Assurance Co. Ltd. [1945] 15 Comp Cas 53; AIR 1945 Bom, ' 149, in extenso,
the views of the learned judge on the question which are as follows (at page 53
of 15 Comp Cas):
"The only other question that remains to be
considered is the contention raised by respondent No. 1-bank that inasmuch as
the transfer forms sent by the petitioners along with their shares were not
stamped, the petitioners are not entitled to maintain the petition. This is an
entirely unmeritorious defence. Fortunately, there is no reason why it should
prevail, as it is not supported either by authority or principle. It is not
disputed that the transfer forms which were sent by the petitioners to the
respondent bank were not stamped. Under section 34 of the Companies Act, it is
provided that it shall not be lawful for the company to register a transfer of
shares unless the proper instrument of transfer duly stamped and executed by
the transferor and the transferee has been delivered to the company along with
the share scrips. Mr. Daphtary contends that in asking for an order of
rectification of the register pursuant to unstamped transfer forms, the
petitioners are asking respondent No. 1-bank to do something which is unlawful;
and he further argues that before the petitioners could maintain this petition,
it was incumbent upon them to have got the transfer forms properly stamped.
Now, it has to be remembered that right up to the time the petition was filed,
there never was any dispute between the petitioners and respondent No. 1 bank
on the question of stamps. Respondent No. 1 bank resisted the application of
the petitioners to transfer the shares to its name only on the ground that it
has a lien on these shares. It was never suggested by the bank that the
transfer forms should be stamped nor did it ever call upon the petitioners to
stamp them with the proper stamps. Nor is there any suggestion that the
petitioners ever refused to stamp their transfer forms with the proper stamps.
It is only after the petition was filed that this ingenious defence is raised.
The fact that it could not be raised earlier is clear from the relationship of
the parties and the course of business between them".
The Bombay High Court in that case also referred to
an unreported decision in the case of F.A. No. 46 of 1942 decided by Beaumont
C.J. and Wassoode J. (Vinayak Balvant
Gokhale v. Commonwealth Assurance Co. Ltd.). In that unreported case
referred to, it was alleged that the company's practice in the past had been to
accept instruments of transfer together with moneys sufficient to pay the stamp
duty, the object of that practice being that if the company decided to register
the transfer, they would buy the stamp and affix it to the instrument of
transfer, but if they decided not to transfer, then no money having been
expended in buying the stamp, the money would be returned to the shareholder.
Commenting on that, Beaumont C.J., delivering the judgment of the court of
appeal in that unreported case, observed as follows which observation is quoted
in the judgment in New Citizen Bank of India v. Asian Assurance Co. Ltd. [1945]
15 Comp Cas 53; AIR 1945 Bom 149 (at page 55 of 15 Comp Cas):
"But the difficulty in this case is that in
point of fact no duly stamped instrument of transfer has ever been delivered.
Putting it at the highest, and assuming that the company agreed with the
applicant that they would apply the proceeds of his cheque towards buying the
necessary stamp, and would affix such stamp on the instrument of transfer as
soon as the company decided to register the transfer, and assuming that the
company ought to have decided to register the transfer, even so the position is
that the agreement by the company has not been carried but, and we have no
jurisdiction in a summary application under section 38 to direct the company to
carry out its agreement. All that we can do is to order rectification of the
register, and to order rectification of the register, when in fact there has
been no duly stamped instrument of transfer delivered to the company, although
that omission may be due to the company's own default, would be for us to order
the company to act in contravention of the statute".
Stone C.J. delivering the judgment in the case of New
Citizen Bank of India v. Asian Assurance Co. Ltd. [1945] 15 Comp Cas 53; AIR
1945 Bom 149, observed that:
"Of the merits of the matter we have no concern,
when the statute is mandatory in its terms, and admittedly has not been
complied with. That being so, how can it be said that the transferee's name was
omitted from the register without any sufficient cause. The petitioners did not
comply with section 34, sub-section (3), and did not deliver a proper
instrument of transfer duly stamped. The company would have been breaking the
law if they had registered the transfer. 1 think, if I may say so with greatest
respect to the learned trial judge, that he was led away by the controversy on
the question of lien and has not given sufficient weight to this condition
precedent".
With this observation, the learned judges of the
Bombay High Court set aside the order of the trial court.
The next case cited by Mr. Sen is the case of Jagdish Mills Ltd., In re [1954] 24 Comp Cas 241; AIR 1955 Bom 79.; The Special Bench of the Bombay High Court in this case held that if a company registered an instrument of transfer of shares which was not duly stamped, it would be doing something which was not lawful, and further that there was no provision in the Companies Act or in the Stamp Act, which would make the company liable for payment of the proper stamp duty.. The liability to pay stamp duty in the case of an instrument of transfer was only upon the executant and not on the company.
The next case cited by Mr. Sen was the case of
Coronation Tea Co. Ltd. In re AIR 1961 Cal 528; [1962] 32 Comp Cas 568. In this
case there were instruments of transfer but they were not duly stamped, that
is, the stamps which had been affixed had not been cancelled. S. P. Mitra J.
(as he then was) delivered the judgment and, in interpreting the expression
"duly stamped" as appears in section 2(11) of the Indian Stamp Act,
section 12 thereof and in other provisions of the Companies Act and also the
Stamp Act, observed that the company in the present case was justified in
refusing registration of the shares .on the ground that the instrument of
transfer was not duly stamped within the meaning of section 108 of the
Companies Act. The. learned judge in that case also observed that a company
could not register a transfer of shares unless a proper instrument of transfer
"duly stamped" had been delivered to the company. It may also be
pointed out that there also an objection as to the stamp was raised for the
first time at the time of hearing of the application under section 155 of the
Companies Act. In that case too, the company raised various objections to
register the transfer, but never raised any objection that the stamp had not
been cancelled until the hearing of that application.
Mr. Sen next relies on a Bench decision of this court
in the case of Babulal Choukhani v.
Western India Theatres Ltd., AIR 1957 Cal 709; [1958] 28 Comp Cas 565.
The Division Bench held that the company was justified in refusing to register
a transfer of shares on the ground that the transfer deed was not stamped as
required by law. It further observed that the obligation was not of the company
but of the transferee to deliver the transfer deed duly stamped and executed
and such stamp must be put at the time of or before the execution of the
transfer- deed. The Division Bench also observed that whether the company in
refusing registration was acting under a particular provision of the articles
of association which provided absolute discretion to the directors to refuse
registration of transfer of shares or not was immaterial, as the law gave the
company power to refuse to register in case the transfer deed was not duly
stamped. In this case, what happened was that the petitioner sent a cheque for
the value of stamps necessary to be affixed on the transfer deed to the company
and the company failed to affix necessary stamps on the transfer deed. In this
case too, the company refused the registration on other grounds but not on the
ground of not putting due stamps on the transfer deed and it was contended in
this case that the said objection of stamp had not been taken at the time of
registration. P. B. Mukharji J. (as he then was), speaking for the Bench,
answered the said contention by observing as follows: (at page 583)
"Assuming that it was only under Article 52 that
the company had rejected the registration of the transfer of the shares, but
the law gives the company power to refuse to register in case the transfer deed
is not duly stamped. That point was taken in the written statement of the
defendant company. In fact, it is one of the main issues in the suit. The issue
was ' Was the transfer deed duly completed?' If the law requires stamp on the
transfer deed, it cannot be said to be complete without the stamp".
We have heard the respective contentions of learned
counsel appearing for the parties. It is the admitted position that the
adhesive stamp affixed on the document was not cancelled as required under
section 12 of the Indian Stamp Act, 1899. Under section 12(2) of the Indian
Stamp Act, 1899, any instrument bearing an adhesive stamp which has not been
cancelled shall be deemed to be unstamped. Under section 108 of the Indian Companies
Act, 1956, a company shall not register the transfer of shares or debentures of
the company unless a proper instrument of transfer duly stamped and executed by
or on behalf of the transferor and by or on behalf of the transferee has been
delivered to the company along with the certificate relating to the shares or
debentures. Therefore, the requirement under section 108 of the Companies Act,
1956, is that the instrument of transfer should be duly stamped and that the
same should be delivered to the company. It is the requirement under section
12(1) (a) of the Indian Stamp Act, 1899, that whoever affixes any adhesive
stamp to any instrument chargeable with duty which has been executed by any
person shall, when affixing such stamp, cancel the same so that it cannot be
used again. Therefore, under section 12 of the Indian Stamp Act, 1899, such
cancellation of stamp should be made at the time of execution of the document.
If any instrument does not bear the requisite stamps and if such stamps are not
cancelled, then such instrument shall be deemed to be unstamped.
Reading the two sections, namely, section 108 of the
Companies Act, 1956, and section 12 of the Indian Stamp Act, 1899, it comes to
this that the instrument should bear the requisite stamps and that the adhesive
stamps should be cancelled at the time of affixation of such stamps and
execution of the document. If such requirements are not complied with, then the
instrument, although bearing an adhesive stamp but not cancelled in the manner
as contemplated in the Indian Stamp Act, 1899, cannot be said to be an
instrument "duly stamped".
Section 108 of the Companies Act, 1956, provides that
the company shall not register unless a proper instrument of transfer duly
stamped and executed by and on behalf of the transferor and by and on behalf of
the transferee has been delivered to the company. The question that arises in
this appeal is whether the provisions of section 108 of the Companies Act,
1956, are mandatory in nature. Learned counsel appearing for the appellant
contends that it is mandatory and that the company is not bound to effect the
transfer on the basis of an instrument not duly stamped and his submission is
also that the court cannot give any direction to the company to effect the
transfer of shares and rectify the share register on the basis of the
instrument of transfer which has not been duly stamped. Learned counsel,
appearing for the respondent, contends that the company, before refusing the
transfer of shares or rectifying the register of shares should give notice to
the petitioner that such transfer cannot be made on the ground of
non-cancellation of stamp on the back of the transfer deed. Learned counsel for
the respondent, further contends that had the petitioner such notice, then the defect
could be rectified by cancelling the stamp before registering the transfer. It
is also the contention of learned counsel for the respondent that in any event,
the company itself could have cancelled the stamp before registering the
transfer.
It is provided by section 12 of the Indian Stamp Act
that an adhesive stamp must be cancelled at the time of affixation of the stamp
and also at the time the execution of the instrument. Therefore, such
cancellation, in our view, cannot be made subsequent to the execution of the
instrument. If such stamp was not cancelled before the execution of the
document, then such instrument and/or document would be deemed to be an
unstamped document and such cancellation made at a later stage will not be
taken as proper cancellation, within the meaning of section 12 of the Indian
Stamp Act, 1899. Therefore, it seems to us that it is the obligation of the
parties executing the transfer deed chargeable with a duty to cancel the stamp,
if such stamp is adhesive stamp, at the time of execution of the document and
then only such instrument would be an instrument "duly stamped"
within the meaning of section 108 of the Companies Act, 1956. It is contended
by learned counsel for the respondent that if respondent No. 1 was informed of
such non-cancellation of stamps at the time when such instrument was delivered
to the company, then respondent No. 1 could have taken steps for rectifying the
defect. In our view, such defect could only be rectified by withdrawing or
cancelling the entire document so delivered and submitting a fresh and proper
instrument duly stamped together with cancellation if adhesive stamps are
affixed and executed by and on behalf of the transferor and by and on behalf of
the transferee. After the execution of the instrument by the transferor and the
transferee, the adhesive stamp borne on
the instrument, if not cancelled at the time of execution, will render the
instrument an unstamped instrument. Therefore, even if respondent No. 1 was
informed of such defect and if respondent No. 1 cancelled the stamp at that
stage, then, by such cancellation of the stamp, the instrument could not have
been regarded as duly stamped, because the cancellation was made long after the
affixation of stamp and also the execution of the document. The only remedy
then left to respondent No. 1 was to submit a fresh instrument duly stamped and
executed by the parties.
Regarding the
contention of learned counsel for the respondent that the company itself could
have cancelled the stamp before registering the transfer, in our view, the
company is not obliged to do so and even if the company deliberately has not
done that, no court can compel the company to effect the transfer of share and
rectify the register even though the adhesive stamps were not cancelled at the
time of execution of the document. It is our view that it is not the obligation
of the company under the law that the company should have cancelled the stamp
and rectified the share register accordingly. This point has been fully considered
in the Bombay decision reported in [1954] 24 Comp Cas 241; AIR 1955 Bom 79
(Jagdish Mills Ltd., In re), and also the decision of this court in
Babulal Choukhani v. Western India Theatres Ltd. AIR 1957 Cal 709, [1958] 28
Comp Cas 565.
Learned counsel appearing for the respondent also
contended that such non-cancellation was merely a formal defect and on the
ground of such formal defect, the company could not refuse to rectify the share
register. In support of his contention he relies on a decision of "this
court in the case of Madanlal Patodia v. Luxminarayan Cotton Mills Ltd. [1976]
80 CWN 1070, [1978] 48 Comp Cas 747. The learned judge in this case observed
that "the appeal by the petitioners before the Company Law Board under
section 111 of the Companies Act was rejected solely on the formal defect that
the stamps on the transfer deed were not cancelled and as such, according to
the decision of this court referred to above, the transfer deeds were deemed to
be not duly stamped". The decision of this court referred to in that
observation is the decision of Coronation Tea Co. Ltd., In re, AIR 1961 Cal
528; [1962] 32 Comp Cas 568, which was noted earlier in our judgment. We are
unable to agree with the said observation of the learned judge in the case
reported in [1976] 80 CWN 1070; [1978] 48 Comp Cas 747 (Madanlal Patodia v.
Laxminarayan Cotton Mills Ltd.) that such non-cancellation of stamp was a mere
formal defect and that that should not be a bar to the rectification of the
share register in terms of section 108 of the Companies Act, 1956.
It has been observed by the Bombay High Court in the
case of 'New Citizen Bank of India v.
Asian Assurance Co. Ltd. [1945] 15 Comp Cas 53; AIR 1945 Bom 149, that
the statute is mandatory in this respect and when the petitioner did not comply
with section 34, sub-section (3), and did not deliver a proper instrument of
transfer duly stamped, the company would have been breaking the law if they had
registered the transfer. In the said judgment, Stone C.J. quoted an observation
of Beaumont C.J. made in another unreported judgment cited in that case to the
effect that to order rectification of the register, when in fact there has been
no duly stamped instrument of transfer delivered to the company, although that
omission may be due to company's own default, would be to order the company to
act in contravention of the statute. We respectfully agree with the decision in
the case of New Citizen Bank of India v. Asian Assurance Co. Ltd. [1945] 15
Comp Cas 5.3; AIR 1945 Bom 149, and also the observation expressed by Stone
C.J. in New Citizen Bank's case. We have already referred to those cases in
detail in the earlier part of our judgment. In this appeal, we are invited to
give direction to the; company to register the transfer and rectify the
register although admittedly, the instrument delivered to the company has not
been duly stamped. In giving such direction, we will have to order the company
to act in contravention of the statute. We have no doubt in our mind that the
provisions contained in section 108 of the Companies Act are mandatory in
nature and that has been clearly spelt out in the case of Mannalal Khetan v, Kedarnath Khetan [1977] 47
Comp Cas 185; AIR 1977 SC 536; [1977] TLR 1638. In these circumstances,
if the company is asked to rectify the register by accepting such instrument
not duly stamped, the company will be acting contrary to law.
It has been contended by Mr. Mukherjee, learned
counsel for the respondent that even if any instrument is not found to be duly
stamped under the provisions of the Indian Stamp Act, 1899, such instrument,
not duly stamped, may be impounded and the person executing the stamp may put
in: the requisite stamps or duty upon the payment of penalty as provided in the
Indian Stamp Act, 1899. We do not find any substance in this contention of Mr.
Mukherjee for the reason that under section. 35 of the Indian Stamp Act, 1899,
the instrument not duly stamped cannot be admitted in evidence and to make such
instrument admissible in evidence, the instrument is required to be impounded
in accordance with the provisions contained in Chapter IV of the Indian Stamp
Act, 1899. This is not the case in this present appeal. The question in this
appeal, as we have already noted is whether the company is bound in law to
accept any instrument not duly stamped within the meaning of section 108 of the Companies Act or section 12 of the Indian
Stamp Act, 1899, and to make registration, of transfer and rectify the share
register.
On the
question of obtaining succession certificate by respondent No. 1, Mr. Sen has
referred to sections 370 and 372 of the Indian Succession Act, 1925, and also
referred to article 44 of the articles of association of the company. According
to Mr. Sen, the company was justified in asking for the succession certificate.
According to Mr. Sen, article 45 of the articles of association of the company
confers a discretion upon the director whether or not to recognise the heirs of
the deceased shareholders without production of the succession certificate or
probate, as the case may be. It is admitted that most of the deceased joint
holders died along time ago and in that view of the matter, according to Mr.
Sen, the company was justified in asking for the succession certificate or
probate, as the case may be. In that connection, Mr. Sen refers to sections 370
and 372 of the Indian Succession Act, 1925. It is his contention that in the
absence of such certificate, the registration cannot be effected. Mr.
Mukherjee, for the respondent, contends that while paying dividends on the
shares to the surviving joint holders, the company did not insist on production
of any succession certificate and the company exercised the discretion after
considering the facts and circumstances involved in the case. Therefore, it is
mala fide act on the part of the company to ask for the succession certificate
at the time of registration of transfer and rectification of the share
register. It is the contention of Mr. Mukherjee that the company has been
shifting its stands, first they insisted on production of estate duty clearance
certificate and after it was properly explained by the respondent that it was
not necessary, the company then insisted on production of the succession
certificate although, admittedly, while paying dividends in respect of the
identical shares to the surviving joint holders, the company did not ask for
any succession certificate. According to Mr. Mukherjee, this is not the bona
fide stand of the company. We feel that there is some substance in the contention
of Mr. Mukherjee. If it is the discretion of the company to insist or not to
insist on the production of the succession certificate in terms of article 44
of the articles of association of the company, then we do not find any proper
basis for using such discretion. In the facts and circumstances of the case, no
such basis has clearly been indicated or established by the company in its
affidavit filed before the trial court. Since it is a discretionary power of
the company, we do not wish to express any view on the question whether, in the
facts and circumstances of the case, the succession certificate would be
necessary or not.
The appellant will return the transfer deeds to
respondent No. 1 and respondent No. 1 will be at liberty to file fresh transfer
deeds to the appellant in accordance with law.
For the reasons aforesaid, this appeal is allowed.
The judgment and order of the trial court is set aside.
There will, however, be no order as to costs.
R. N.
Pyne J.—I agree.
[1986] 60 COMP. CAS. 65
(ORI)
v.
Orient Engineering Works P. Ltd.
P. C. MISRA J.
COMPANY ACT CASE NO. 4 OF 1984
MARCH 1, 1985
Asok Mohanty,
Bimal Pr. Das and Sashi Das for the petitioner.
Jagannath
Das,
P. C. Misra J.—This is an application under
sections 237, 397, 398 read with section 402 of the Companies Act of 1956 (for
short, hereafter "the Act"), praying for appointment of a special officer
or administrator to take custody of the books, papers, documents and assets of
M/s. Orient Engineering Works (P.) Ltd. (hereafter called "the
company") and also to take over the affairs and management of the company.
A further prayer has also been made for directing an investigation to be made
into the dealings of the funds, assets and affairs of the company by opposite
parties Nos. 2 to 6 and for other consequential reliefs.
The petitioner claims to have become a shareholder of
the company in the year 1975-76 and after acquiring 460 equity shares of Rs.
100 each became a full time executive director in the year 1979 with a
remuneration of Rs. 1,500 subject to an enhancement of Rs. 250 per year.
Opposite party No. 2, Trailokyanath Mohanty, is the managing director of the
company. According to the petitioner, the company after its incorporation took
various loans from the Orissa State Financial Corporation and from the State
Bank of
A preliminary counter-affidavit has been filed on behalf
of opposite parties Nos. 1,2,4 and 5 denying all the allegations made in the
application. It has been stated in the counter-affidavit that the petitioner
not being a member or a shareholder of the company on the date of filing of the
application has no locus standi to maintain the same.
I need not make a mention of all the objections taken
in the counter-affidavit as by order dated December 14, 1984, an inquiry was
directed on the preliminary issue as to whether the petitioner has the locus
standi to maintain this application. In the counter-affidavit, it has been
alleged that the petitioner has transferred all his shares in the company and
has voluntarily resigned from the directorship of the company more than a year
back and thus he was not a shareholder of the company on the date of
presentation of this application on March 23, 1984. Both the parties were
allowed to lead evidence, both oral and documentary, on this preliminary issue.
Admittedly, the petitioner was a shareholder of the company at some point of
time. The opposite parties have alleged that the petitioner has transferred all
his shares in the company in favour of opposite party No. 2 which became
effective from March 8, 1983, by necessary entry in the share register
whereafter the petitioner ceased to be a shareholder of the company. The
petitioner disputes the fact of transfer of shares as also of the validity
thereof. In these circumstances, the burden of proof that the petitioner has
transferred all his shares in the company in favour of opposite party No. 2 as
alleged in the counter-affidavit lay on the opposite parties and, therefore,
the opposite parties were directed to lead evidence first.
The opposite parties have examined three witnesses
including opposite party No. 2 himself whereas the petitioner has examined
himself as the sole witness on his behalf. Several documents have been
exhibited on behalf of the opposite parties.
Before I go into the evidence adduced by the parties,
it may be mentioned that this is a composite application in which reliefs under
sections 397 and 398 of the Act have been claimed. Unless the petitioner is
found to be a shareholder of the company, he would have no locus standi to
maintain this application and in such an event, the court need not go into the
merits of the allegations made in the application.
The first witness examined on behalf of the opposite
parties is opposite party No. 2 who is the managing director of the
company—opposite party No. 1. According to him, the petitioner joined the
company in the year 1979 and initially purchased 60 shares each of Rs. 100 from
one Gopinath Das and thereafter purchased 400 shares for which he partly paid
the money. In the meeting held on November 24, 1982, the managing director of
the company informed the board of directors that the petitioner was no more
interested to continue in the company and had been intending to offer his
resignation from the company. It was, however, agreed in that meeting that the
managing director would persuade the petitioner to continue in the company and
to remain in charge of some of the affairs of the company. The minutes of the
proceedings dated November 24, 1982, have been marked as exhibit 1 which are in
the handwriting of O.P. W. 1. The minutes of the proceedings were confirmed in
the next meeting held on February 8, 1983, the minutes of which have been
marked as exhibit 2. In the meeting held on February 8, 1983, opposite party
No. 2 intimated the board of directors that the petitioner intended to sell
away his entire share as he no longer wanted to remain in the company. Opposite
party No. 2 also expressed his desire to purchase the said shares as no others
in the company came forward to purchase the same. It was resolved in the said
meeting that opposite party No. 2 would be permitted to purchase the said
shares. According to this witness (O. P. W. No. 1), he and the petitioner both
went to the house of Shri G. Pande, the chartered accountant, who has been
examined in this case as O. P. W. No. 2, to consult him as to how the transfer
of shares should be effected. In accordance with the advice of O. P. W. No. 2,
the prescribed form was presented before the Registrar of Companies on March 1,
1983, and was brought back by this witness (O. P. W. No. 1), from the Registrar
of Companies after the same was duly sealed and signed by the Registrar of
Companies. Opposite party No. 2 thereafter went to the house of Shri Pande (O.
P. W. No. 2) on the following day along with the accountant of the company, who
has been examined in this case as O. P. W. No. 3, and the petitioner where the
form was filled up and signed by the petitioner and by opposite party No. 2 in
the presence of O. P. W. No. 2. The form was thereafter kept with the
petitioner and all of them, namely, opposite party No. 2, the petitioner and
the accountant of the company (O. P. W. No. 3), proceeded to the office of the
company, where opposite party No. 2 claims to have paid Rs. 26,000 to the
petitioner in cash. On receipt of the said amount, the petitioner made over the
form to the opposite party No. 2 along with the letter of resignation from the
directorship of the company. The prescribed form containing the signatures of
the petitioner, opposite party No. 2 and the witnesses has been marked as
exhibit 3, in this case. The letter of resignation said to have been typed and
signed by the petitioner has been marked as exhibit 4. The transfer of shares
thus made in favour of opposite party No. 2 was approved in the meeting of the
board held on March 8, 1983, the minutes of which have been marked as exhibit 5
in the resolution book. Opposite party No. 2 has proved the certified copy of
the intimation in Form No. 32 to the Registrar of Companies (exhibit 8) in
which the resignation of the petitioner has been intimated to the Registrar of
Companies. The annual general body meeting was held on September 30, 1980, the
proceedings of which are exhibit 9. Opposite party No. 2 has also proved
exhibit 10, the certified copy of the annual return of the company made up to
September 30, 1983. O. P. W. No. 2 is the chartered accountant who has deposed
that the petitioner and the opposite party No. 2 came to him in connection with
the transfer of shares and he advised them as to how the statutorily prescribed
form was to be filled up. He also deposes that the form was filled up in his
presence and both the petitioner and opposite party No. 2 signed thereunder. He
is one of the witnesses to the statutory form in exhibit 3 and his signature
appearing thereon has been marked as exhibit 3/a .The last witness examined on
behalf of the opposite parties is the accountant of the company who has stated
that he had accompanied the petitioner and opposite party No. 2 to the house of
O. P. W. No. 2 in connection with the transfer of shares and on the advice of O.
P. W. No. 2, the prescribed form was filled up and signed in his presence. He
has further deposed that prior to their visit to the house of O. P. W. No. 2,
he had applied for the statutory form to the Registrar of Companies and had
obtained the form which was taken with them to the house of O. P. W. No. 2 on
March 2, 1983. He is also one of the witnesses to exhibit 3 and his signature
appearing on exhibit 3 has been marked as exhibit 3/b. The petitioner in his
affidavit dated December 14, 1984, denies having signed any instrument of
transfer on March 2, 1983, or at any point of time as alleged. The receipt of
Rs. 26,000 by him as alleged by opposite party No. 2 has also been denied in
the said affidavit. But in his evidence, the petitioner has admitted his
signatures appearing in exhibit 3, the statutory transfer of shares form, and
in exhibit 4, the letter of resignation, which have been marked as exhibits 3/c
and 4/a respectively. It was suggested to O. P. W. No. 1, that the signature of
the petitioner was taken in the share transfer form (exhibit 3) without his
knowledge and nothing was suggested to him so far as his signature in exhibit 4
is concerned. Similarly, nothing was suggested to O. P. W. No. 3 relating to
the petitioner's signature in exhibit 3 though he purports to be a witness to
the execution of exhibit 3. In his evidence, the petitioner does not explain as
to how his signatures were obtained in exhibits 3 and 4.
Section 41 of the Act defines who is a member of a
company. According to the said definition, the test of membership of a company
is whether the name of the person appears on the register of members of the
company. Section 164 of the Act provides that the register of members of the
company and the returns, etc., thereof shall be the prima facie evidence of any
matter authorised to be inserted therein by this Act and the court shall accept
the same as correct until it is rebutted. Exhibit 6 is the relevant entry
relating to the petitioner in the register of shareholders of the company. In
the said entry, it has been mentioned that the transfer of the shares of the
petitioner has been registered on March 8, 1983, and exhibit 10 which is the
certified copy of the annual return of the company made up to September 30,
1983, omits to mention the name of the petitioner as a shareholder of the
company. Therefore, under the' circumstances, the presumption would be that the
petitioner no more continues to be a shareholder of the company until the same
is rebutted by the petitioner. Section 155 of the Act provides for
rectification of the register of shares if the name of a person is entered in
the register or omitted therefrom without sufficient cause. On an application
made under this section, the court may decide any question relating to the title
of the person aggrieved by the improper omission of his name from the register.
Evidently, the petitioner has not filed any application for such relief.
The evidence of the managing director (O. P. W. No.
1) has been fully corroborated by O.P.W. Nos. 2 and 3. Nothing substantial has
been brought about in the cross-examination of O.P.W. No. 2 to disbelieve his
testimony. O.P. W. No. 2 is admittedly the statutory auditor of the company. It
was argued on behalf of the petitioner that O. P. W. No. 2 is highly interested
in opposite party No. 2 and he had borne a grudge as the petitioner had pointed
out to him that he had not audited the accounts of the company for 10 years.
But the petitioner in his evidence does not breathe a word about the same. In
these circumstances, the evidence of O. P. W. No. 2 cannot be disbelieved. O.
P. W. No. 3 is the accountant of the company who is admittedly interested in
opposite party No. 2, the managing director of the company. His presence at the
time of execution of the document of transfer cannot be disbelieved and he is
one of the witnesses to the same. I have already stated that the petitioner
does not dispute his signature in exhibit 3, the share transfer form, and no
explanation has been furnished in his evidence as to how his signature appears
therein. In the circumstances, there is no other alternative than to hold that
the share transfer form (exhibit 3) was signed by the petitioner with the full
knowledge of its contents. The petitioner is admittedly an educated person
having passed M.Sc. and was looking after the affairs of the company as one of
its directors from 1979. It cannot be believed that he has put his signature in
exhibit 3 without going through its contents and even if he has done so, he
would be bound by the document he has executed. So far as exhibit 4 is
concerned, the only explanation that has been offered by the petitioner is that
he does not know typing and the evidence adduced on behalf of the opposite
parties that he himself typed out that document and had put his signature
thereon should not be believed for that reason. I have already mentioned that
the petitioner has not offered any explanation as to how his signature in
exhibit 4 came into existence. The learned counsel appearing for the petitioner
has argued that the petitioner was required to put his signature on various
forms, papers and registers during his continuance as a director of the company
and in that process, his signature was obtained in a piece of paper which was
later on converted into the letter of resignation. Such a story cannot be
believed on the basis of the evidence of the petitioner in court where he says
that on exhibit 4, the signature and the date have been given in his hand. The
petitioner does not say that on March 2, 1983, he had signed any other paper of
the company. But on the other hand, his definite case is that after his return
from foreign tour in January 1981, he was not allowed to participate in the
management of the company. Though there are no materials to believe that the
contents of exhibit 4 were not typed out by the petitioner himself, but
assuming that it is so, it cannot be believed that the petitioner put his
signature on exhibit 4 without going through its contents. Consequently, the
petitioner will be bound by the effect of the documents in exhibits 3 and 4 to
which he is a party.
Exhibit 5 is the minutes of the proceeding of the meeting of the board of directors held on March 8, 1983, in which a resolution was adopted accepting the transfer of shares by the petitioner in favour of the opposite party No. 2 and directing recording of necessary entry in the register of members of the company maintained under section 150 of the Act. The letter of resignation of the petitioner was placed before the board and the board accepted the same. An objection was taken by the petitioner that it is opposite party No. 2 who alone has signed the said resolution and it does not contain the signatures of all the members of the board of directors. The said objection is misconceived in view of the provisions in section 193 of the Act. Section 193 of the Act requires the minutes of the proceedings of the meeting of the board of directors to be signed by the chairman of the said meeting or by the chairman of the next succeeding meeting. It does not require that all the members of the board of directors should sign the same. Section 194 of the Act provides that the minutes of the meetings kept in accordance with the provisions of section 193 of the Act shall be the evidence of the proceedings recorded therein and section 195 of the Act provides that the meeting in which the said minutes were recorded shall be deemed to have been called and held until the contrary is proved. Thus, the transfer of shares effected under exhibit 3 shall be taken to have been duly accepted and given effect to in pursuance of which a correction was made in the share register (exhibit 6).
Nothing has been pointed out by the petitioner that
the transfer of shares as per exhibit 3 does not comply with the requirements
of section 108 of the Act except that the same was not duly stamped on the date
of execution. According to the petitioner, the stamps were obtained from the
treasury on March 8, 1983, whereas exhibit 3 is purported to have been executed
on March 2, 1983. An application was filed on January 18, 1985, in this court
praying to call for the (stamp) register from the Treasury Officer, Main
Treasury, Cuttack, to show that the stamps were obtained for the purpose on
March 8, 1983. By order dated January. 18, 1985, this court did not pass any
order and allowed the said application to lie over till the next date as the
learned counsel for the petitioner wanted some time for obtaining the certified
copy of the relevant entry in the said register. The learned counsel for the
petitioner argued that he had applied for the certified copy but the same was
not granted by the concerned authority. Accepting that the stamps were obtained
on March 8, 1983, the learned counsel for the opposite parties had stamps to be
affixed on the document prior to its execution. He refers to section 108(1A)(b)
of the Act which provides that every instrument of transfer in the prescribed
form with the date of such presentation stamped or otherwise endorsed thereon
shall, after it is executed by or on behalf of the transferor and the
transferee and completed in all other respects, be delivered to the company
within the time specified in the said section. According to the learned counsel
for the opposite parties, all that the aforesaid provision in section
108(1A)(b) of the Act requires is that before delivery, the stamps should be
affixed and it does not require the stamps to be affixed prior to execution of
the document. This argument of the opposite parties appears to be acceptable in
view of the language used in this section. Some arguments were also advanced as
to the due compliance of the requirements of section 110 of the Act. In my
view, unless an application is made by the transferor, no notice under the said
section is required to be issued to the transferee.
The learned counsel for the petitioner has pointed
out some discrepancies in the evidence of the witnesses examined on behalf of
the opposite parties to build up an argument that the incident deposed to by
the said witnesses leading to the execution of exhibit 3 and payment of
consideration thereunder cannot be believed being highly discrepant. Having
recorded the evidence of each of the witnesses and having gone through the same
carefully, I do not find any material discrepancy in the evidence which would
discredit the intrinsic evidence of the said witnesses.
It has been argued by the learned counsel for the
petitioner that the board of directors has not issued any notice in writing
offering to sell the shares to the existing members of the company and,
therefore, the transfer made under exhibit 3 must be held to be invalid being
violative of clause 9 of the articles of association of the company. This
argument advanced on behalf of the petitioner is not acceptable in view of the
fact that the petitioner cannot be said to be aggrieved even if it is held that
clause 9 of the articles of association of the company has been violated.
Besides, there has been substantial compliance of the said clause inasmuch as
the matter was discussed in the meeting of the board of directors and the
proposal for transfer in favour of opposite party No. 2 was accepted. The
learned counsel for the petitioner has next contended that the stamps affixed
to exhibit 3 have not been duly stamped. For the aforesaid proposition, the
learned counsel has relied upon a decision in Coronation Tea Co. Ltd., In re
AIR 1961 Cal 528 ; [1962] 32 Comp Cas 568. It is not the case of the petitioner
that exhibit 3 has been insufficiently stamped. Adhesive stamps have been affixed
on the reverse of exhibit 3. The said stamps have been cancelled by putting
"cross" ("X") marks in ink over the same. The learned
counsel for the petitioner relying on the aforesaid decision of the Calcutta
High Court has urged that the adhesive stamps used in exhibit 3 have not been
properly cancelled as putting of cross ("X") marks is not sufficient
cancellation. Section 12 of the Indian Stamp Act, 1899, provides the mode of
cancellation of adhesive stamps. It says that whoever affixed any adhesive stamp
to any instrument chargeable with duty which has been executed by any person
shall, when affixing such stamp, cancel the same so that it cannot be used
again. In the Calcutta case, the State Government issued a notification under
section 75 of the Indian Stamp Act, 1899, prescribing the mode of cancellation
of share transfer stamps under which it was stated that the stamps shall be
cancelled by the company by means of a punch which can perforate either the
word "cancel" or an abbreviation thereof. Nothing has been brought to
my notice that in this State any such rule has been issued by the State
Government. The manner in which the "cross" ("X") marks
have been put on the stamps in exhibit 3 renders the same unfit for use and,
therefore, amounts to proper cancellation in the language of section 12 of the
Indian Stamp Act.
On a discussion of the evidence on record, I,
therefore, come to the conclusion that the petitioner has duly transferred his
shares in the company in favour of opposite party No. 2 which has taken effect
in the relevant registers of the company. The petitioner was, therefore, not a
person having any share in the company and the petition filed by him under
sections 397 and 398 of the Act is, therefore, not maintainable.
In the result, the application is dismissed, but in
the facts and circumstances of the case, there would be no order as to costs.
The order of stay granted on December 14, 1984, by
this court in M.C.No. 27 of 1984 is hereby vacated. The amount of rent damages
so far deposited by the petitioner shall be continued to be in deposit until
the fixation of the quantum, if any, payable by the petitioner for the house he
is occupying, is decided by an appropriate court in which event the said amount
shall be withdrawn and adjusted by the company.
[1944]
14 Comp Cas 163 (PAT.)
High Court of
v.
Behar Engineers and Contractors, Ltd.
Fazl Ali, C.J.
and Chatterji, J.
October 19, 1943
Jaleshwar Prasad and B.K. Sinha, for the appellant.
N.C.
Ghosh, for the respondents.
JUDGMENT
Fazl Ali, C.J —This is a Letters Patent appeal from an order of a single Judge of this Court which was pronounced in the following circumstances. On 5th May 1937 the appellant, who was one of the directors of the Behar Engineers and Contractors, Ltd., purported to transfer 501 shares of the company which were held by him to one Lachmi Debi for a sura of Rs. 2,505. The deed of transfer was stamped with two one-anna revenue stamps only and therefore clearly it was not "duly stamped." On the strength of this document, however, Lachnu Debi made an application to the directors of the company for the registration of her name in place of the appellant and her name was eventually registered. This registration took place by reason of a resolution which was passed at a meeting of the directors held on 30th May 193/. At this meeting the directors present were the transferor himself and two others and it was resolved that the transferee be registered in respect of 501 shares.
On 4th January 1039, an application was made for winding up the company and after the commencement of the winding up proceedings the Official Liquidator filed a petition on 31st March 1941 before the learned Judge who was in seisin of the proceedings for the settlement of the list of contributories and in that petition sought the direction of the Court as to whether the appellant or Lachmi Debi was to be included in the list as a contributory. The learned judge after hearing the parties came to the conclusion that inasmuch as the instrument of transfer was not properly stamped in accordance with Art. 62 of the schedule to the Stamp Act, the directors of the company should have ignored the transfer and should not have registered the name of the transferee. The learned judge upon this view directed that the name of the transferee should be removed from the register of shareholders and that of the appellant placed on the register in respect of the shares in question. The learned Judge did not say in so many words who was to be included as a contributory, but the inevitable consequence of his order is that the appellant and not Lachmi Debi is to be treated as a contributory so far as the shares in question are concerned.
The appellant has attacked the order of the learned Judge on a number of grounds but two of these grounds appear to me to require serious consideration. The first ground is based on Section 35 of the Stamp Act, which after providing that no instrument chargeable with duty shall be admitted in evidence or shall be acted upon unless such instrument is duly stamped proceeds to state as follows:
"Provided that any such instrument not being an instrument chargeable with a duty of one anna or half an anna only, or a bill of exchange or promissory note, shall, subject to all just exceptions, be admitted in evidence on payment of the duty with which the same is chargeable, or, in the case of an instrument insufficiently stamped, of the amount required to make up such duty, together with a penalty of Rs. 5, or, when ten times The amount of the proper duty or deficient portion thereof exceeds Rs. 5, of a sum equal to ten times such duty or portion."
In the present case the learned Judge has directed 1he document to be impounded and the Registrar to realise the penalty payable under Section 35 of the Act. The appellant is prepared to pay the amount which is payable under the above proviso to Section 35 and contends that upon such payment the document should be admitted in evidence. It seems to me that in view of the mandatory provision to which reference has been made the document cannot be ruled out of consideration when the appellant is willing to pay the requisite amount, chargeable.
Another ground of attack is provided by the decision of the Privy Council in Hansraj Gupta v. N.P. Asthana. That, decision has reference to Section 156, Companies Act, which while providing that in the event of a company being wound up every present and past member shall be liable to contribute to the assets of the company, subjects that rule to the following exception among others:
"a past member shall not be made liable to contribute if he has ceased to be a member for one year or upwards before the commencement of the winding up."
Under Section 40 of the Act a register of members is to be regarded as prima facie evidence of his membership. As the name of Lachami Debi is entered in the register therefore prima facie she is a member. The question, however, arises whether we can take into account at this stage, when more than a year has elapsed since her name was registered, the fact that she became a member under an instrument of transfer which being improperly stamped cannot be admitted in evidence or acted upon. The decision of the Privy Council to which I have referred had to deal with a case in which the name of a person was placed on the register in respect of certain shares by reason of a contract which was impugned as being illegal. Their Lordships of the Privy Council held that even assuming that the agreement was illegal, the person whose name was registered had to be regarded as a contributory. The observations which they made on this subject were as follows:
"Whatever may have been the rights and liabilities of the testator before winding up intervened, the position was altered by the happening of that event. At the commencement of the winding up he was and had for over three years been entered on the register of shareholder as the holder of the shires now in question with his full knowledge and assent. On the winding up, Section 156, Companies Act, came into play. His liability under that section in respect of the shares was absolute and flowed from the fact of his being on the register in respect of those shares. The original contract may supply the reason for his name having seen placed on the register in respect of the shares, but after the winding up his liability in respect of the shares arose ex lege and not ex contractu."
This case in my opinion is sufficient authority for the view that whatever the position might have been before the winding up proceedings commenced, after the commencement of those proceedings when Section 156 comes into play, it is too late to fall back upon the illegality of the transfer and to urge that the person whose name stands in the register is not to be treated as a contributory. In these circumstances I would allow the appeal and set aside the order of the learned Judge. The learned Advocate for the Official Liquidator tried to contend that the transfer in favour of Lachmi Debi was a fraudulent one and also that her name had been fraudulently registered in the company's books. It was suggested that the transferee was a person of no means and status, that she had paid no consideration for the transfer and that the transfer had been made by the appellant merely to avoid his liability in the event of the company being wound up which he anticipated as he had full knowledge of the affairs of the company. It was also suggested that the transfer had been made without the full knowledge and assent of the transferee as was indicated by the fact that the instrument of transfer does not bear her thumb impression or any other mark in token of her having assented to the transfer but merely purported to have been signed by her husband. Unfortunately, however, these matters are not to be found in the original petition filed on behalf of the Official Liquidator before the learned single Judge. If the Official Liquidator is in possession of any reliable materials to enable him to establish his allegations, they can be properly gone into only by the learned Judge and not in this Court. They have to be stated clearly in a regular petition and will have to be established before the learned Judge. As at present advised I am not prepared to commit myself to the view that the learned Judge has no jurisdiction to direct the removal of the name of the transferee from the register even though it is established that the transfer was fraudulent; but, as I have already said, that is a matter which should be properly pleaded and proved by the Official Liquidator. Having regard to all the circumstances of the case I will make no order as to costs.
Chatterji, J. —I agree.
[1954] 24 COMP. CAS. 241 (BOM)
CHAGLA C.J., DIXIT AND SHAH JJ.
CIVIL REFERENCE NO. 11 OF 1953
FEBRUARY 8, 1954
M.P. Amin, Advocate-General, with Little
&
Sir Jamshedji Kanga and N.A. Palkhivala, with Amarchand & Mangaldas, for the Executant.
Chagla C.J.— A rather interesting question arises as to the liability of a company
to pay stamp duty in respect of a transfer of shares not duly stamped, and the
question arises in the following way. The Jagdish Mills Ltd. is a public
limited company which was incorporated in
Now, one sample transfer deed has been
selected for the purpose of the question under reference and that sample
transfer deed was executed on August 15, 1945. The transferor is the Ambica
Mills Ltd. in Ahmedabad and the transferee is the Industrial and Prudential
Assurance Co. Ltd., a company having its head office in
Now, before we decide whether there is a liability to pay Indian stamp duty, we must decide whether there is any liability at all upon the company to pay any duty. For that purpose the first provision of the law to which attention might be drawn is Section 34(3) of the Indian Companies Act. That sub-section provides:
"It shall not be lawful for the company to register a transfer of shares in or debentures of the company unless the proper instrument of transfer duly stamped and executed by the transferor and the transferee has been delivered to the company along with the scrip."
Therefore, assuming that the company does register an instrument of transfer which is not duly stamped, it would be doing something which is not lawful. But there is no provision in the Indian Companies Act or, as we shall presently point out, in the Stamp Act, which would make the company liable for payment of the proper stamp duty. The liability to pay stamp duty in respect of instruments of transfer is to be found in Section 29 of the Indian Stamp Act, and that section provides: "In the absence of an agreement to the contrary, the expense of providing the proper stamp shall be borne" and the relevant provision is article 62(a) (transfer of shares in an incorporated company or other body corporate) "by the person drawing, making, or executing such instrument." Therefore, the liability to pay stamp duty with regard to this instrument of transfer we are considering was upon the executant. The Stamp Act deals with the consequences of not paying the stamp duty which is payable. In the first place, a document which is not properly stamped is liable to be impounded, and that is under Section 33. Then under Section 40, after the Collector has impounded a document, he may call upon under clause (b) to require the payment of the proper duty, but it is clear that the Collector can call upon only the person liable to pay the duty to make the necessary payment. What the Collector is doing in this case is, having impounded the documents which were produced to him by the company, he is calling upon the company to pay the necessary duty. But before he can do so he must satisfy us that the company is liable under the provisions of the Stamp Act. Then we have Section 48 which provides:
"All duties, penalties and other sums required to be paid under this Chapter may be recovered by the Collector by distress and sale of the movable property of the person from whom the same are due, or by any other process for the time being in force for the recovery of arrears of land revenue." Therefore, it is open to the revenue authorities to proceed against the executant of this instrument of transfer and recover the duty by any of the processes mentioned in Section 48. It is rather significant to note that under Section .62(2):
"If a share-warrant is issued without being duly stamped, the company issuing the same, and also every person who, at the time when it is issued, is the managing director or secretary or other principal officer of the company, shall be punishable with fine which may extent to five hundred rupees."
But there is no corresponding provision with regard to a company registering an instrument of transfer which is not duly stamped. Therefore, considering these sections, it is clear that the only liability to pay stamp duty in the case of an instrument of transfer is upon the executant. If he fails to do so, the revenue authorities can proceed against him. If the document is brought before the revenue authorities, the revenue authorities will impound it, but having impounded it the only right given to them to proceed for the recovery of the duty is against the person who was liable to pay the duty. Therefore, while the revenue authorities are perfectly within their rights in impounding a document, they are not right when they call upon the company to pay stamp duty.
Therefore, in the view that we have taken as to the liability of the company, it is unnecessary to answer the first question raised for our decision, and the answer to the second question is in the negative. The revenue authorities to pay the costs.
[1983] 54 COMP. CAS. 12 (
v.
Raj Kumar Kapoor
H.L. Anand J.
COMPANY PETITIONS NOS. 58, 86, 91 OF 1978, C.P. NO. 14
OF 1979
AND CRIMINAL MISCELLANEOUS (COMPANY) NO. 3 OF 1980
January 7, 1981
Daljit Singh
for the Petitioner.
D.R. Mahajan
for the Respondent.
This petition
under ss. 397 and 398 of the Companies Act, 1956, and the connected petitions
under s. 155 of the Act, being C.P. No. 86/78, C.P. No. 91/78 and C.P. No.
14/79, and Crl. Misc. (Company) No. 3/80 under s. 340 of the Cr. P.C.
surface disputes that have arisen between two groups in a private company
composed of close relations.
Himalaya Electricals Industries (
By C.P. No. 58/78, Khanna complains of oppression and
mismanagement and seeks directions with regard to the conduct of the affairs of
the company, as well as the cancellation of the transfer and registration of
shares belonging to Kanwal Khanna, M. L. Gaur and Ramesh Khanna, cancellation
of the additional shares issued and allotted to Kapoor and his nominee, removal
of the wife of Kapoor from the board, removal of Kapoor from the board,
reinstatement of Khanna on the board, and a direction for payment of arrears of
remuneration as a director. Kapoor and his wife are the respondents in this
petition. C.P. No. 86/78 is by Ramesh Khanna for rectification of the register
of members with regard to 27 shares held by him. C.P. No. 91/78 is for some
relief by Kanwal Khanna in respect of 10 shares held by him. C.P. No. 14/79 is
apparently in the nature of a counter-blast filed by Parshu Ram, at the
instance of Kapoor, to annul the transfer of 30 shares held by him to the wife
of Khanna: By Crl. Misc. (Company) No. 3/80, the Khannas seek to carry the
dispute beyond the limits of adjudication and want Kapoor to be prosecuted for
certain offences arising out of certain returns filed with the Registrar of
Companies and applications and affidavits filed in this court.
In support of their respective claims, parties
produced evidence by way of affidavits and documents. The petitioners also
examined two officials of the Registrar of Companies, inter alia, with a view
to establish that Kapoor had filed two successive returns, exs. P-A and P-B, as
also the circumstances in which and the dates on which these two returns were
filed. I have heard learned counsel for the parties at length on the various
questions in controversy between the parties.
The first question for consideration is as to the
true holdings of the parties and the validity of the transfers and registration
of four sets of shares held by Gaur (4), Kanwal Khanna (10), Ramesh Khanna (27)
and Parshu Ram (30). This would also involve the question as to the validity of
the additional issue of shares, as well as the dates on which and the
circumstances in which the two returns were filed by Kapoor and if, having
regard to all the circumstances, he is liable to be prosecuted for any offence.
As regards the transfer of 10 shares held by Kanwal
Khanna, according to the capital share account register of the company, these
shares were transferred by Kanwal Khanna to Kapoor on March 30, 1976. Kanwal
Khanna claims that he never transferred these shares and no transfer deed was
executed. He further claims that the share certificates were with Kapoor and he
misused the trust reposed in him. He further claims that by his letter of March
23, 1978, annex. P-2, he had sought the return of the share certificates from
Kapoor but there was no reply. Kapoor claims that these shares were purchased
by him from Kanwal Khanna because Kanwal Khanna was losing interest in the
company and Kanwal Khanna had been paid for these shares. According to him, the
transfer deed was duly executed but the relevant records were removed from the
offices of the company by the Khannas. In support of the valid transfer and
registration, Kapoor also relies on the fact that Ramesh Khanna, the brother of
Kanwal Khanna, had attended the annual general meeting of the company held on
June 22, 1976, as also later in December, 1976, and still later in March, 1977,
and even though Kanwal Khanna had never been sent notice of these meetings,
Ramesh Khanna raised no objection which he would have if Kanwal Khanna had not
transferred these shares. It is further claimed that the transfer was duly
reflected in the balance-sheets of the company for the years 1976, as well as
1977, which were duly signed by none other than Khanna, the father of Kanwal
Khanna.
True, the transfer deed in respect of these shares is
not available. Parties have made accusations and counter-accusations against
each other with regard to the transfer deed. The registration of the transfer is
not supported by the resolution of the Board because the present minute book of
the Board starts from July, 1976. Here again, there are accusations and
counter-accusations with regard to the previous minute book. There is also no
proof with regard to payment of consideration apart from the entry in the
capital account register itself. There is neither any cheque payment nor any
receipt executed by Kanwal Khanna. Kanwal Khanna did ask for the return of the
certificates in March, 1978. The transfer was, however, not challenged until
1978, and what appears to clinch the matter is the admitted fact that notices
for the annual general meetings held in June, 1976, and, thereafter, were not
sent to Kanwal Khanna because of the transfer and even though the meetings of
June, 1976, December, 1976, and March, 1977, were attended by Ramesh Khanna,
and some of these were attended by Ish Khanna, as also Khanna himself, no
objection was raised with regard to the non-receipt of notice by Kanwal Khanna.
If these shares had not been transferred, one would have expected an objection
by Kanwal Khanna as well as by the other members of the group. This clearly
shows that these shares had been duly transferred by Kanwal Khanna in favour of
Kapoor and it is, therefore, not possible to hold that these shares had not
been duly transferred.
Regarding four shares held by Gaur, it has been a
common case of the parties that Gaur has been a non-resident during the last
many years. No transfer deed has been placed on record. His shares could not
have been transferred without the prior permission of the Reserve Bank in view
of his admitted status as a non-resident. There is, however, no challenge by
him to the purported transfer and one does not know whether he claims to be a
shareholder of the company or has lost interest in it. In any event, in his
absence and in the absence of any records relating to this transfer and the
legal impediment to any such transfer, it is not possible to accept the
contention that these shares were duly transferred in favour of Kapoor or that
the transfer had been duly registered in the records of the company. The
transfer and its registration must, therefore, be ignored until their existence
and validity are determined in appropriate proceedings to which Gaur is a
party.
As for the shareholding of Ramesh Khanna, the
transfer was based on a transfer deed admittedly executed by Ramesh Khanna but
the contention of the Khannas is that this was a blank transfer deed, intended to
be used for the transfer of shares to the wife of Khanna. It is alleged that
the blank transfer deed, duly signed by Ramesh Khanna, had been delivered to
Kapoor for registration and since the share certificates were already lying
with him he misused the trust by transfer of shares in his favour or in favour
of his nominee. This contention does not stand to reason. If the transfer was
intended to be made in favour of Ramesh Khanna's mother, one is unable to
understand why a blank transfer deed duly signed by Ramesh Khanna was handed
over to Kapoor. Even with regard to this transfer, there is no proof of
consideration but it is reflected in the capital account register. There was no
requisition from Ramesh Khanna requiring Kapoor to return the transfer deed or
the share certificates. One would have expected such a requisition if the
shares were intended to be transferred to the wife of Khanna. The registration
of this transfer is based on the approval of the Board in its meeting held on
August 29, 1977, even though Khanna did not attend that meeting. The meeting
also approved the acceptance by the company of the resignation of Ramesh Khanna
from service. The admitted fact that contemporaneously with the transfer,
Ramesh Khanna resigned from the company and set up in co-operation with Kanwal
Khanna and with the blessing of Khanna, an independent business in the same
industry, gives support to the version of Kapoor with regard to this transfer.
Ish Khanna had also resigned earlier and Kanwal Khanna had transferred his
holding. These circumstances also lend support to the version with regard to
the transfer of these shares. From all these circumstances, it would be a
reasonable inference to draw that these shares had been duly transferred by
Ramesh Khanna. I have arrived at this conclusion independently of the
circumstances relied upon on behalf of Kapoor that the transfer was duly
reflected in the annual return for the year 1977, a subject I would presently
deal with in another context.
As for the transfer of shares registered earlier in
the name of Parshu Ram, an employee of the company, the case of Khannas is that
these shares were transferred by Parshu Ram to the wife of Khanna in September,
1974, for a consideration of Rs. 4,800, when the company had suffered huge
losses and that the transfer was duly registered in the records of the company
and Parshu Ram has filed the present petition in February, 1979, at the behest
of Kapoor after disputes started between the Kapoors and the Khannas and Khanna
filed the proceedings in court. It is interesting to notice in this context
that Parshu Ram never appeared in this court to pursue the petition and even
Kapoor could not deny that Parshu Ram ceased to be a member because the very
annual return on which Kapoor relies, whether of the year 1977 or earlier, do
not appear to list his name as a member of the company. If the shareholding was
transferred in 1974, and the challenge to the registration and transfer was not
made until 1979, the plea of Khanna appears to find support from this
circumstance. Kapoor was also unable to deny the charge of Khanna that this
transfer had been duly effected and registered in the records of the company in
1974 itself. The petition of Parshu Ram, therefore, appears to have been filed
at the instance of Kapoor as a measure of counter-blast and there is,
therefore, no ground to interfere in that behalf.
The transfer of shares and their registration in
respect of the aforesaid four batches were sought to be voided on the ground
that under art. 8 of the articles of the company, a transfer of shares could be
sanctioned by the Board only by a unanimous decision of the directors and that
none of these were sanctioned by such a decision. This is what art. 8 provides
:
"8. All transfer of shares shall be sanctioned
only with the unanimous decision of the directors and the directors may refuse
to register any transfer of a share without assigning any reason."
This article would regulate the sanction of transfers
because the power of the company under its articles to deal with transfers is
preserved by sub-s. (1) of s. 111 of the Act. Such a provision is also not
inconsistent with any provision of the Act and is, therefore, outside the reach
of s. 9 of the Act. A unanimous decision of the directors was, therefore,
necessary for a valid sanction of any transfer. Aid of art. 8 is, however,
unnecessary in the case of shares held by Gaur because I have already held that
there was no valid transfer. If there was no valid transfer, there was no
question, of registration whether or not art. 8 is invoked. So far as the
transfer of shares of Parshu Ram is concerned, art. 8 would not hit it, because
Kapoor does not join in the challenge to this transfer and this transfer
apparently had the concurrence of both the permanent directors. This can be
clearly inferred from the fact that the various returns filed by the company
and signed by Kapoor after the transfer consistently reflected this transfer,
including the return for the year 1977, on which Kapoor particularly relied, on
the ground that it had been signed by Khanna as well. I would deal with the two
returns for the year 1977, filed by Kapoor presently. There is, however, no
material to show that the registration of the transfers of 10 shares of Kanwal
Khanna and 27 shares of Ramesh Khanna had the sanction of the company with the
unanimous decision of the directors, as envisaged by art. 8 of the articles.
The records with regard to the first of these transfers were not available. The
registration of the second transfer was based on the decision of the Board in
its meeting held on August 29, 1977, which was attended by Kapoor and his wife
in the absence of Khanna. This registration could not, therefore, be said to be
with the unanimous decision of the directors. The expression "present and
voting" is not to be found in the phraseology of this article. The article
must, therefore, be construed to mean that the sanction should be with the
unanimous decision of all the directors of the company. That would be a
reasonable construction of the article in the absence of any words of
limitation. Unanimity among all the directors, therefore, was a condition for a
valid registration. The registration of these Transfers was. therefore,
vitiated on account of noncompliance with art. 8, and it would be open to the
transferees of these shares to seek the registration of these transfers in
accordance with law. Until then, the transfers which are otherwise valid would
not be given effect to by the company until they have been duly registered in
accordance with the decision of the Board in terms of art. 8 of the articles of
the company.
That takes me to the consideration of the contention
of Kapoor that, in any event, the objection to the validity of transfers of
shares of Kanwal Khanna and Ramesh Khanna and their registration was squarely
met because both the transfers and their registration were duly reflected in
the annual return, filed by the company for the year 1977 in the office of the
Registrar of Companies, and the concurrence of Khanna to the registration be
inferred from the fact that the return was signed by Kapoor as well as Khanna.
This calls for an examination of the circumstances in which two returns for the
same period were filed.
In the affidavit in opposition filed by Kapoor in
C.P. No. 58/78, Kapoor alleged that the return for the period ending December
31,1976, reflected the change in the shareholding in that year and the return
had also been signed by none other than Khanna himself. It was further alleged
that the change in the shareholding in 1977 was also reflected in the annual
return filed for that period but the further plea that the latter return was
also signed by Khanna was not made. This plea was never made until an
application, being C.A. No. 605/79, was filed on November 13, 1979, seeking
leave to file an additional affidavit of that date which was enclosed along
with the application. In this affidavit, two additional pleas were raised, that
the changes in the shareholdings in 1976 and 1977 were reflected in the annual
return filed for the year 1977, and that this return had been duly signed by
Khanna along with Kapoor. There is an interesting backdrop to this application
which can be reconstructed from the material that eventually came to light.
Annual return for the period ending December, 1977, was originally filed by
Kapoor on March 21, 1978, and is Ex. P-A. This return, which is signed by
Kapoor and his wife, Nirmala Kapoor, as directors of the company, inter alia,
indicates that Gaur and Kanwal Khanna had ceased to be members of the company
before the year 1977, and further that 27 shares held by Ramesh Khanna during
the year 1977 were transferred to Nirmala Kapoor, wife of Kapoor, on August 29,
1977. This document was apparently found defective by the Registrar of
Companies and a notice was admittedly sent to Kapoor in October, 1979,
requiring him to rectify the defects. Kapoor, on his own showing, went to the
office of the Registrar on the 9th and 12th of November, 1979, and according to
para. 9 of the affidavit, when he went there on the 9th November, 1979,
"corrections were made in certain documents for the years 1971, 1975 and
1977, etc.". He also stated that he went to the office of the Registrar
again on November 12, 1979. Para. 10 of the affidavit is significant and runs
thus : "10. That during the course of the visits on 9th and 12th November,
1979, t saw the annual return filed by the company for the year 1977. In that
return is mentioned the transfer of 27 shares by Shri Ramesh Khanna in favour
of Smt. Nirmala Kapoor and also the factum of the appointment of Smt. Nirmala
Kapoor as director of the company on March 21, 1977. The said annual return is
duly signed by me as managing director and also by Shri T.C. Khanna, the other
director of the company." By this application (C.A. No. 605/79), the court
was requested to summon the file of the Registrar so that the annual return for
the year ending December, 1977, could be examined by the court. Notice of this
was issued to the Registrar and when the file was produced, it was discovered
that there were two returns for the period, Ex. P-A, which was originally
filed, and Ex. P-B, which was sought to be substituted on November 12, 1979.
Evidence of the officials of the Registrar has since been recorded and what
appears to have happened is this. When Kapoor went to the office of the
Registrar on or about 12th of November, 1979, he carried with him a fresh
return for the same period incorporating certain changes which were required,
but on a form which had apparently been signed by Khanna blank, because none of
the entries is in his hand. This document, Ex. P-B, was filed on November 12,
1979, but the office of the Registrar put on it a stamp which had reference to
the document filed earlier in that it gives the number and date under which the
fee had been originally deposited when the return was filed in March, 1978.
Below the stamp, however, are the signatures of the officers under the date
line November 12, 1979. It appears that possibly the intention was to
substitute this document for the original return, and, either to take away the
original document or to ensure that that was not produced in court when the
record was summoned. This, however, appears to have misfired because the Khannas
were a little vigilant and on inspection found what had happened. This is how
the records when summoned contained both the returns, and the evidence of the
two officials of the Registrar, P.W. 1 and P.W. 2, abundantly establishes that
Ex. P-A, which is signed only by Kapoor and his wife, was filed on March 21,
1978, and the other return, Ex. P-B, which is on a form bearing the signatures
of Khanna, was filed only on November 12, 1979, a day before the application,
C.A. No. 605/79, was filed. Since Ex. P-B was filed in November, 1979, and Ex.
P-A filed in March, 1978, was not signed by Khanna, the affidavit-in-opposition
did not contain the plea that the return for the year 1977 had been signed by
Khanna. These preparations were apparently made to prepare the ground to urge
in the affidavit, enclosed with that application, that the return filed by the
company in respect of the year 1977 was duly signed by Khanna. The fact, that
the earlier return had not been signed by him and a subsequent document was
filed only a day before the application, was not disclosed to the court and an
impression was perhaps sought to be created by the application, as also the
accompanying affidavit, as if the only return for the year 1977 had been signed
by Khanna and that, therefore, the changes in the shareholding had his
concurrence. It is possible that Kapoor discovered an old form of a return
bearing the signature of Khanna, because Khanna could not have signed it in
1979 or even in 1978, because C.P. No. 58 was filed by Khanna in May, 1978. It
also follows that when Ex. P-A was filed by Kapoor in March, 1978, he was not
aware that a blank form of the annual return, signed by Khanna, was lying with
him, as, otherwise, the same would have been used on the earlier occasion. It
is also possible that the importance of such a form was not realised in March,
1978, because the petition was filed in May, 1978. That all the entries in both
the returns are exclusively in the handwriting of Kapoor closes the other
option. It is, therefore, reasonable to infer that with a view to reinforce the
validity and existence of these transfers, an attempt was perhaps made to
substitute the annual return in the office of the Registrar of Companies and a
false plea was sought to be raised in the affidavit that the only return for
the year 1977, reflecting these changes, had been signed by no other person
than Khanna. But for the vigilance of the Khannas, and perhaps, for the
intervention of someone in the office of the Registrar of Companies, an impression
could have successfully been created that the return filed in the office of the
Registrar for the year 1977 reflecting these changes had been signed by Khanna.
It also appears that such an attempt could not have been made without the
active connivance of someone in the office of the Registrar of Companies. There
may perhaps be another way of looking at the course of events. There may
possibly be some loose ends needing to be tied up and some questions calling
for explanation. In view, however, of the fact that I do not rely on this
return, it is unnecessary to take this matter any further.
In the circumstances, it cannot be said that the
aforesaid transfers had the concurrence of Khanna or that the annual return
reflecting these changes duly signed by Khanna had been filed so as to fix
Khanna with the knowledge of these exchanges. I would, therefore, ignore Ex.
P-B for the purpose of determining the validity of these transfers and their
registration. I have already held above that these two transfers were valid but
their registration was not. It would, therefore, be open to the transferees to
seek the registration of these transfers in accordance with law, but, until the
transfers are duly registered, the Khannas would not be entitled to exercise any
rights in relation to these two sets of shares.
That leaves for consideration the question whether
proceedings for the prosecution of Kapoor should be initiated for any offences
that he may have committed having regard to the circumstances in which Ex. P-B
was filed and the plea sought to be raised on its basis. I have already
discussed above in great detail the circumstances in which and the purpose with
which Kapoor might have filed the two annual returns for the period ending
December, 1977, and how and why, pursuant to the filing of the second return,
Ex. P-B, an application, being C.A. No. 605/79, was filed by him on November'
13, 1979. I have already observed that the application and the affidavit
enclosed with it were perhaps intended to create a wrong impression that the
return for the period ending December, 1977, filed by the company with the
Registrar of Companies, had been signed by Khanna along with Kapoor and to
conceal the fact from this court that the original return filed for the period
did not bear the signature of Khanna. It is, however, true that neither the
affidavit nor the returns have had the desired effect partly because the
attempt was more or less frustrated but primarily because the way I had looked
at the validity of the transfer of two batches of shares and of their
registration, the reinforcement that these transfers had been duly reflected in
the return said to have been signed by Khanna would not affect the ultimate
decision in the case. It is true that perjury is rampant in court proceedings
at almost all levels and because of the burden of normal judicial work,
presiding officers are reluctant to get involved in the trial of collateral
matters, because it is time-consuming. I was for that reason (not ?) inclined
to consider the question of prosecution of Kapoor. The Khannas and the Kapoors,
are, however, very closely related and any further proceedings between them or
involving them is bound to cause further bitterness, which would not be
conducive to their personal relations or to the conduct of the future business
of the company. Kapoor has apparently acted rather indiscreetly in an attempt
to establish a valid transfer of shares in his favour and was probably
misguided into an attempt to use a blank form of return signed by Khanna to
reinforce his case. No useful purpose would, therefore, be served by pursuing
the matter any further in the peculiar circumstances of this case.
The next question is as to the validity of the
allotment of further shares by the Board of Directors of the company on
February 24, 1978. In this meeting 102 equity shares of the value of Rs. 51,000
were allotted to the Kapoor group. The validity of the allotment is challenged
on the ground that by virtue of the provision contained in art; 6 of the articles,
the unallotted shares were put under
the control and at the disposal of the Directors, who may allot the same
at their absolute discretion, but "only with their unanimous
consent". The allotment of the additional shares must, however, be voided
on the short ground that no notice of the meeting was sent to Khanna in view of
his purported removal. For the reasons I would presently give, while dealing
with the question of the validity of the removal of Khanna, his removal was bad
and that being so, he was entitled to the notice of the meeting which
authorised the allotment. Notice of this meeting admittedly was not issued to
him. Besides, allotment of further shares could have been done only with the
unanimous decision of the Board. There was no unanimity either, if Khanna
continued in law to be a director, in view of the invalidity of his removal.
The allotment of further shares must, therefore, fall with the decision in
respect of the removal of Khanna and the Kapoor group must be confined to the
shareholding as subsisted prior to the date of the meeting. The payment, if
any, made by the Kapoor group to the company for the additional shares would be
refunded to Kapoor or his nominees, as the case may be.
The next question is with regard to the validity of
the removal of Khanna from the Board. Khanna is apparently the promoter of the
company and was one of the two permanent directors of the company, under art.
10 of the articles, entitled to hold office for life, unless he voluntarily
resigned, and was designated as director-in-charge by that article. Kapoor was
the other permanent director and was designated by that article as the managing
director of the company. Article 14 further provides that in case of the death
of any permanent director a "person nominated by such a director in his
lifetime shall be permanent director of the company in place of the deceased
director". Article 17 further provides that every director, other than the
permanent director,, shall retire at the annual general meeting. Article 23
further empowers the managing director and the director-in-charge to carry on
the business of the company and certain powers of management are entrusted to
the director-in-charge by that article.
According to Kapoor, Khanna fell seriously ill in April, 1975,
and was admitted to a nursing home and even though by August, 1975, he had
recovered, by September, 1975, he "became almost invalid" "as he
had undergone a major brain operation" and was, therefore, unable to look
after the affairs of the company except to attend the meetings of the Board and
that in spite of this, out of regard, the company had been paying his salary
regularly for a period of almost three years. According to Kapoor, Ramesh
Khanna had been attending the meetings of the Board and'the annual general
meeting of the company as a representative of the Khanna Group even though the
sons of Khanna had been carrying on independent business in competition with
the business of the company. It is claimed that on a requisition from two
shareholders for the removal of Khanna, a meeting of the Board of Directors was
held on March 30, 1978, a notice of which had been sent to Khanna on March 27,
1978, and the Board resolved to convene an extraordinary general meeting to
consider the question of removal. The extraordinary general meeting was
convened for April 26, 1978, and a notice of it was sent to all the
shareholders, including Khanna, on April 3, 1978, and the requisition for
removal was enclosed with the notice. It is claimed that in the extraordinary
general meeting held on April 26, 1978, Khanna was removed from the Board. It
is alleged that the Khannas knew of this meeting because it was only after
receipt of the notice of the meeting that they illegally purported to convene a
meeting of the Board for April 27, 1978, to create confusion and that none of
the Khannas attended the extraordinary general meeting as part of their
concerted action. The validity of the removal of Khanna from the Board depends
on the answer to the questions if the appointment of the wife of Kapoor to the
Board on March 27, 1977, and the meeting of the board of directors of the
company held on March 30, 1978, and the extraordinary general meeting of the
company held on April 26, 1978, were valid as also in the way one resolves an
apparent conflict between the provisions of some of the articles and the
provisions of the Companies Act.
The first question to be considered is the validity
of the appointment of the wife of Kapoor to the Board. This is important
because until she was appointed to the Board in the meeting held on March 27,
1977, Kapoor and Khanna were the only directors of the company. If the meeting
of the Board said to have been held on March 30, 1978, was to have taken a
valid decision to convene an extraordinary general meeting to consider the
motion for the removal of Khanna with any claim of legitimacy, someone must be
added to the Board, obviously because Khanna would not agree even if he was
present in such a meeting and if he absented himself, a meeting could not be
held for want of quorum. It was for this reason apparently that the process of
removal of Khanna had perforce to be initiated by the induction of a friendly
director in the Board by Kapoor. This appears to be a clear genesis of the
appointment of the wife of Kapoor as a member of the Board. She was appointed a
director of the company by virtue of a resolution passed at the extraordinary
general meeting of the company held on March 21, 1977. Exception is taken to
this meeting by Khanna on the ground that this was done without any notice to
him but there is no substance in this objection because this meeting, among
others, was attended by Ramesh Khanna. The validity of the appointment is,
however, challenged on the ground that in terms of art. 16, permanent directors
had the power by their unanimous decision "only" to induct a new
director. This is how art. 16 reads :
"16. The permanent directors shall have power
from time to time and at any time by their unanimous decision only to appoint
any qualified person as a director of the company so that the total number
shall not at any time exceed five."
It empowers the permanent directors to appoint a
director of the company only by their unanimous decision but it is difficult to
hold that there is anything in the language of the article which excludes the
exercise of that power by the company in the general meeting. The expression
"unanimous decision only" merely underscores that the decision of the
permanent directors shall be unanimous but it is difficult to read in the
article a provision that the permanent directors alone are entitled, by
unanimity or otherwise, to appoint additional directors. It is, therefore, not
possible to void the appointment of the wife of Kapoor as a member of the Board
of Directors of the company.
The next question that, however, arises is whether
Khanna had notice of the meeting of the Board of Directors held on March 30,
1978, and of extraordinary general meeting held on April 26, 1978, since it is
claimed that these meetings had been duly held in the absence of the Khanna
group and the decisions taken at the meetings were duly recorded in relevant
minute books. According to Kapoor, a notice had been received from G. C.
Khanna, a member of the company to move a resolution for the removal of Khanna
on the ground that he was unable to discharge the duties and responsibilities
of a director by virtue of physical incapacity and a meeting of the Board of
Directors of the company was convened for March 30, 1978, by a notice of March
24, 1978, inter alia, to consider the convening of an extraordinary general
meeting in terms of the requisition received from the shareholders; It is
claimed that the notice of this meeting was duly sent to Khanna and on March
27, 1978, under certificate of posting, an intimation with regard to the
requisition was also sent by a separate letter with which a copy of the
requisition is said to have been enclosed. A photo copy of the certificate of
posting has been produced to show that four covers were posted, two of which
were addressed to Khanna while the third and the fourth were addressed to
Kapoor and his wife on March 27, 1978. It is further claimed that the Board met
on March 30, 1978, in the absence of Khanna and decided to convene an
extraordinary general meeting on April 26, 1978, to consider the motion for the
removal of Khanna. It is interesting to notice in this context that by a
registered A. D. letter of March 23, 1978, annex. P-9, Ish Khanna and Kanwal
Khanna made a grievance to the managing director that they had not been receiving notice of the annual general
meetings or copies of the balance-sheet, etc. A registered A. D. letter
of March 27, 1978, annex. P-19, was also sent by the wife of Khanna making a
similar complaint. The meeting of the Board convened for March 30, 1978, was
obviously expected to be a controversial one since a permanent director was
sought to be removed. There was, however, no explanation why, in spite of this,
a registered notice was not sent for the meeting even though the registered
letters were being received from the Khanna group almost at the same time when
the notice was supposed to have been sent under certificate of posting to
Khanna. It has often been pointed out that though the requirement of the
Companies Act is satisfied by posting a communication under certificate of
posting, service by this mode is the easiest stand for any one to take at any
time and it is not a sheer coincidence that in practically all controversial
meetings, the party claiming to have held the meetings and to have notified the
others almost always relies on a certificate of posting clearly pointing to the
possibility that such meetings are invariably managed rather than held. This is
because of the unfortunate circumstance that certificates of posting are
readily available. If the meeting of the Board had, therefore, been held, I see
no reason why a registered A. D. notice was not sent to Khanna even though that
may not be the strict legal requirement. The . so-called certificate of posting
also does not appear to meet the requirement of law because, in the first
instance, there is no averment that the postal covers had been duly posted and
the certificate of posting had been duly issued and received. All that has been
filed is a photo copy of a list of four names with postal stamp marking. I am
not prepared to accept these as sufficient proof of the despatch of the notices
to Khanna and in holding that they have been notified of the meeting of the
Board scheduled to be held on March 30, 1978. What I have said above with
regard to the meeting of the Board is equally true of the extraordinary general
meeting said to have been held on April 26, 1978. The extraordinary general
meeting was supposed to have been held on April 26,1978. Notice of this meeting
is of March 31, 1978, and is supposed to have been sent under certificate of
posting on April 1, 1978. It is interesting to notice in this context that
between March 24, 1978, and April 24, 1978, there were at least half a dozen
letters written to the company on behalf of Khanna group which were registered
A.D. covers and which remained unreplied. These are P-7 to P-9, and three of
these are registered A.D. covers. Neither of these were replied to by the
company; In that kind of a situation, one would have expected the company to
send registered A.D. notice to Khanna whose removal was due to be considered
even though it may be conceded that in view of the reduced majority of the
Khanna group by that time, partly on account of the transfers and partly on account
of the increased allotment, the decision with regard to Khanna would have been
a foregone conclusion. It follows, therefore, that either these meetings were
never held or if they were held, Khanna was not properly notified of the same.
The question still remains, if Khanna, a permanent
director of the company, could have been removed by the company in a general
meeting in spite of the provision in the articles. If neither of the two
meetings were valid, because Khanna had no notice of these, even though he was
intended to be removed from the board, his removal is bad in law irrespective
of the way one looks at the power of the company in a general meeting to remove
a permanent director, who is appointed as such by name in the articles. I
would, however, consider the question since it was raised. No doubt, Khanna was
a permanent director named in art. 10 to hold office for life. In terms of art.
14, he also had a right during his lifetime to nominate his successor on the
Board in the event of his death. He could, nevertheless, be removed under s.
284 of the Act. Section 284 is based on s. 184 of the English Act and applies
to all types of companies, public and private, and the only exceptions are
those that are built into the section itself. A person appointed as a life
director or permanent director by the articles or by any agreement is,
nevertheless, removable by the company in general meeting and has no security
of tenure in office. While the shareholders have no power, apart from that
given in the statute or the articles, to intervene in the management of the
company's affairs, this section was designed to enable them to control the
directors by their removal. The only exceptions are the directors appointed by
the Central Govt. under s. 408, and life directors holding office on April 1,
1952. The only other exceptions are nominee directors of financial
institutions, with which we are not concerned. No doubt, art. 14 empowers a
permanent director to nominate a director to take his place after his death, but
even that does not save the tenure from the operation of s. 284. True, s. 184
of the English Act specifically excludes the operation of articles which s. 284
does not, but that was not necessary in view of the scheme of the Indian Act,
because s. 9 of the Act provides that the provisions of the Act would have
effect, notwithstanding anything to the contrary contained in the articles of
the company. No further provisions for exclusion of provisions in the articles
to the contrary was necessary. Khanna could have, therefore, been removed, if
the requirements of s. 284 and of a valid meeting had been satisfied. This was,
however, of no avail, because, as observed earlier, the proceedings oi the
meetings which led to the removal were invalid in the absence of notice to
Khanna either of the proposed motion, or of the proposed meeting of the Board
and the extraordinary general meeting of the company. The effect, therefore, is
that Khanna continues to be a permanent director notwithstanding his purported
removal from the Board.
The next question is as to the regulation of the
conduct of the affairs of the company in future and as to the directions that
may be necessary and proper in the circumstances to ensure the smooth conduct
of the business of the company. In view of all that has happened, there seems
to be very little possibility of the two groups being able to get along. There
are also other genuine difficulties. Kapoor has certainly been running the show
almost on his own during the last many years since 1975-76, when Khanna got
incapacitated. He must have also made not only substantial investment, but
devoted considerable time to business. Meanwhile, Khanna has not only remained
incapacitated, but on his own showing, has been virtually blind and, therefore,
obviously unable to look after the business or even to indirectly participate
in the conduct of the affairs of the company as a member of the Board, much
less as director-in-charge, to which position he was appointed by the articles.
His sons have admittedly been carrying on for some time now an independent
business in the same industry, though confined to certain other items. He has
also admitted to have given them assistance in establishing the business by
offering to mortgage his property to enable them to raise bank credit. The
Khannas were, therefore, not averse in this situation to be bought out of the
company provided they get not only a fair value for their admitted holding, but
are also paid their entitlement such as arrears of salary of Khanna as director
and towards the amount standing to their credit in the books of account of the
company, if any. Since Kapoor was responsible for taking a series of
precipitate steps to exclude Khaonas and to perpetuate his hold over the
company, Khanna would ordinarily be entitled to an option to buy out Kapoor on
reasonable terms. It would, however, not be possible to compel Kapoor to
transfer his holdings to Khanna because of the peculiar compulsions referred to
above. It is also necessary to make a provision for the smooth functioning of
the company until Khanna has been paid.
There was some controversy between the parties with
regard to the opening of a new bank account in the name of the company by
Kapoor in the Kamla Nagar Branch of the Canara Bank and as to the
accountability of the management of the company with regard to the operation of
the bank account. The opening of this account was an apparent sequel to the
instructions by Khanna to the existing banker of the company with regard to the
disputes that had surfaced between the two groups and which may have possibly
led to the disruption of the normal banking channel for the conduct of the
business of the company. In any event, whatever the compulsions for the opening
of this account, it was nevertheless the account of the company and even though
operated upon by Kapoor exclusively, he is answerable to the company for the
various transactions reflected in this account. In any event, all the directors
of a company who are conducting the business of the company on its behalf or in
its name are always accountable to the company for the funds or property of the
company that they deal with in the course of the discharge of their duties.
There was also some controversy as to how much funds each of the groups had made
available to the company in addition to their respective contributions to the
capital. Some of the credits to which the groups are entitled are apparently
duly reflected in the books of account of the company. It is possible that some
of the credit entries may be exaggerated or fictitious as was alleged on behalf
of Khanna with regard to the period during which his group had remained ousted
from the management of the company and the affairs of the company were being
managed by Kapoor. These matters can be adequately dealt with on the completion
of the accounts of the company and the preparation and audit of the
balance-sheet and profit and loss account of the company to date. If any of the
groups is not satisfied with the accounts or their audit, they would be
entitled to raise these matters in the next meeting of the Board, as also
indeed, in the general meeting of the company and solicit an appropriate
decision at any of the two levels to ensure that the rights and liabilities of
the directors and the creditors of the company qua the company are properly
reflected in the balance-sheet and they are dealt with accordingly.
Having regard to all the circumstances, I would make
the following directions:
(i) Of the total
issued capital of Rs. 1,25,500, divided into 251 equity shares of Rs. 500 each,
the valid holding of the Khanna group in respect of which they are entitled to
exercise their rights is 96. The valid holding of the Kapoor group in respect
of which they are entitled to exercise their rights would be 114. 4 shares
continue to be held by Gaur. 10 shares of Kanwal Khanna and 27 shares of Ramesh
Khanna continue to be registered in their names but having been transferred to
the Kapoor group, Kanwal Khanna and Ramesh Khanna would not be entitled to
exercise any right with regard to these shares. Shares held by Parshu Ram;were
duly transferred and registered.
(ii)The additional allotment of 102 further shares in
favour of Kapoor on February 24, 1978, having been voided, Kapoor or his
nominee would not be entitled to exercise any right in relation to these shares
and would have the corresponding right to the refund of the amount, if any,
that may have been paid by him or his nominee to the company on account of the
consideration for these shares.
(iii)The removal of Khanna from the Board is void and
he throughout continued to be a permanent director of the company as well as
director-in-charge in terms of the articles. He would be entitled to be paid
the salary that was being drawn by him as director-in-charge but only for a
period of 18 months. The amount would be paid within a period of six months by
equal monthly instalments. The first instalment would be paid over before
February 10, 1981. He would continue to be the permanent director until he
resigns or is removed. He would, however, not be entitled to draw any salary in
future and would be liable to be removed in accordance with law.
(iv)Khanna would have the option to be purchased out
of the company by Kapoor on payment of the face value of the shares registered
in the name of Khanna besides the arrears of salary referred to above and any
amount that may be found due to any member of the Khanna group on the audit of
the balance-sheet and profit and loss account for the period ending December,
1980. The option may be exercised by Khanna within 3 months and the payment
would be made within 3 months of the acceptance of the offer by the Kapoors.
The Kapoors would be bound to accept the offer within one week of the receipt
of the same. If the Khannas do not exercise the option, Kapoor would have the
option to be bought out of the company on the same terms.
(v)The Khanna group would be paid such amount as may
be standing to their credit in the books of account of the company on the basis
of the certificate of the auditor to be furnished on the completion of the
audit of the books of account to date. The certificate would be furnished
within 3 months and the payment would be made within 3 months thereafter in
equal monthly instalments.
(vi)The Board of Directors of the company would,
until the exercise of the option or settlement between the parties otherwise,
be presided over by Justice Prithvi Raj, former judge of this court, who would
be the chairman of the company. All decisions of the Board would be unanimous,
but failing that, with the concurrence of the chairman. The business of the
company would, however, continue to be carried on during the period by Kapoor
under the overall supervision of the Board. The Chairman would be paid a remuneration
of Rs. 750 per month and would continue to hold office for a period of six
months unless it is extended by the Board or by the company in its annual
general meeting. The Company would also have the liberty to substitute any
other person acceptable to both the parties for the aforesaid incumbent as
Chairman. The chairman would generally supervise the conduct of the business of
the company and would, inter alia, explore the possibility of a smooth
transition to the exclusive control by the one or the other of the groups.
(vii)Liberty to the Chairman and to the parties to
obtain directions of the court from time to time with a view to carry out the
above directions.
(viii)C.P. No. 58/78, C.P. No. 86/78 and
C.P.No. 91/78 are disposed of in the aforesaid terms.
(ix)C.P. No. 14/79 and Cr. Misc.
(Company) No. 3/80 are dismissed,.
(x)Khanna would have his costs. Counsel
fee is assessed at Rs. 750.
[1986] 59 COMP. CAS. 46 (
HIGH COURT OF
v.
Kanthal India Ltd.
T.K. BASU, J.
COMPANY PETITION NO. 332 OF
1981.
OCTOBER 12, 13, 1982
S.B. Mukherjee for the Applicant.
P.R. Mridul for the Respondents.
Basu, J.—This is an application under ss. 397
and 398 read with ss. 402, 403 and 406 of the Companies Act, 1956 (hereinafter referred
to as "the Act"). The facts relating to the making of the present
application may be noted.
Since 1937-38, M/s. B.M. Singh and Sons, petitioner
No. 5 herein, had business association and connection with A.B. Kanthal Sweden,
which later on amalgamated with the Bulten group of industries. The company is
now known as "Bulten Kanthal A.B.", which is respondent No. 2 herein
(hereinafter referred to as "the Swedish company").
Petitioner
No. 5 used to sell the products of the Swedish company which were electrical
resistance wires and strips in
In July, 1961, A.B. Kanthal, prior to its
amalgamation with the Bulten group, applied to the Government of India for
permission to set up an electrical resistance wires and strips mill in India.
This proposal, which is annexure "B" to the main petition, envisaged
60% of the shares of the proposed company to be held by the Swedish company and
40% by the Indian shareholders.
In anticipation of a company being incorporated in
India, an agreement was entered into on September 23, 1964, between A.B.
Kanthal on the one hand and Jagdiswar Singh and others being the partners of
petitioner No. 5 on the other. This agreement, inter alia, provided for the
authorised capital, the issued capital, the respective shareholding, the number
of directors, quorum of board meetings, etc., the details of which need not
detain us. Suffice it to say that some of these provisions were incorporated in
the articles of association of the company, which was formed later on, as will
appear from what is stated hereinafter.
Similarly, another agreement was entered into on the
same date between A.B. Kanthal and the partners of petitioner No. 5 which was
known as the "shareholders' agreement".
The Government of India, by its letter dated April
18, 1964, approved of the formation of a company with foreign capital
participation on condition that the foreign collaborators would be entitled to
only 49% capital participation.
In pursuance of the agreement between the Swedish
company and the partners of petitioner No. 5, a company called "Kanthal
India Ltd." (hereinafter referred to as the Indian company), was
incorporated on April 22, 1965. Although this company was initially
incorporated as a private limited company, it became a public company by reason
of the insertion of s. 43A of the Act, which came into force on and from
September 12, 1967. Thereafter, as provided in the formation agreement and
consequent upon the incorporation of the Indian company, a sole selling agency
agreement was entered into between the Indian company and the partners of
petitioner No. 5, whereby and whereunder, petitioner No. 5 was appointed the
sole selling agent of the products of the Indian company. Although the sole
selling agency agreement had been renewed from time to time its basic features
remain more or less the same. The last of such renewal took place in 1978 and
is valid for a period of five years and would be in force till May, 1983. Both
the original agreement and the last renewal thereof have been duly approved by
the Central Govt. in accordance with the provisions of the Act. One of the
clauses of the agreement provides for termination of the agreement by twelve
months' prior notice in writing.
Since the inception of the Indian company, the Indian
group of shareholders and the Swedish group of shareholders had 49% shares each
in the capital of the Indian company. The balance 2% of the shares of the
Indian company was held by one A.C. Daphtary, since deceased, in whom
admittedly both groups had full faith and confidence. Mr. Daphtary was the
Swedesh Consul in Calcutta and was appointed the chairman of the board of
directors of the Indian company as a nominee of the Swedish group of
shareholders. It is evident from the records that as long as Mr. Daphtary was
alive, there has never been any major rift between the Swedish group of
shareholders and the Indian group of shareholders of the Indian company.
The articles of association of the Indian company,
which was initially a private limited company and is now a section 43A-company,
contained restrictions on the right to the transfer of shares and the articles
also vested in the shareholders a right of pre-emption. The relevant articles
around which a lot of controversy in this case centered are arts. 3, 34, 35,
36, 38 and 40. These articles may be conveniently set out herein below :
"3. The company being a private company, the
following provisions shall have effect, namely:—
(a) the
number of members of the company (not including persons who are in the
employment of the company and persons, who, having been formerly in the
employment of the company, were members of the company while in that employment
and have continued to be members after the employment ceased) is not to exceed
fifty, but where two or more persons
hold one or more shares in the company jointly, they shall for the purpose of
this paragraph, be treated as a single member ;
(b) an invitation to the public to subscribe for
any shares in, or debentures of, the company is hereby prohibited;
(c) the right of transfer of shares of the
company shall be restrict ed in the manner, hereinafter in these articles
provided.
34. Subject
to the provision of section 111 of the Act, the board may, in its absolute and
uncontrolled discretion, refuse to transfer any proposed transfer of shares and
shall not be required to give any reasons for such refusal but subject thereto
with the prior consent of all the other members of the company, shares may at
any time be transferred by a member or other person entitled to transfer to any
person whether he be a member or not: Provided that where a member is a body
corporate, it shall be entitled to transfer its shares to another body
corporate (whether incorporated in India or not) which is its subsidiary or
holding company and shall also be entitled to transfer any of its shares to any
persons who will hold such shares as its nominees.
35. Except
where shares are transferred by a member or other per son entitled to transfer
in pursuance of the aforesaid article, the person proposing to transfer any
share (hereinafter called 'the proposing trans feror') shall give notice in
writing (hereinafter called 'the transfer notice') to the company that he
desires to transfer the same. Such notice shall constitute the company as his
agent for the sale of the share to any member of the company or person selected
by the board willing to purchase the share (hereinafter called 'the purchasing
member') at a fair value to be agreed upon between the proposing transferor and
the purchasing member and in default of such agreement at the 'fair value' to
be fixed by the auditors in accordance with article 38 hereof. A transfer
notice may include several shares and in such case shall operate as if it were
a separate notice in respect of each. A transfer notice shall not be revocable
except with the sanction of the board.
36. If the
company shall within six months from the date of the transfer notice or from
the date when the 'fair value' is fixed find a purchasing member and shall give
notice thereof to the proposing transferor, he shall be bound upon payment of
the agreed fair value or the ' fair value' as fixed in accordance with art. 37
hereof to transfer the share to the purchasing member provided that the
time-limit prescribed in this article shall be extended for such reasonable
period as may be necessary for obtaining any approval required by any law for
the time being in force in respect of such transfer,
38. If in any case the proposing transferor, after
having become bound as aforesaid, makes default in transferring the share, the
proposing transferor shall be deemed to have appointed any one director of the
company as his agent to execute the transfer of the share to the purchasing
member and upon the execution of such transfer and upon receipt of the purchase
money the company shall cause the name of the purchasing member to be entered
in the register as the holder of the share and shall hold the purchase money in
trust for the proposing transferor. The receipt of the company for the purchase
money shall be a good discharge to the purchasing member and after his name has
been entered in the register in purported exercise of the aforesaid powers, the
validity of the proceedings shall not be questioned by any person. If the
proposing transferor fails and neglects to hand over the share certificate
after the purchasing member had paid in full the purchase money, the board
shall have a right to issue a duplicate share certificate and to cancel the
share certificate which the proposing transferor may have failed and neglected
to hand over to the purchasing member.
40. The shares specified in any transfer notice shall
be offered by the board to the members as nearly as may be in proportion to the
existing shares of the company held by them. If a member should not be willing
to accept the full number of shares offered to him within the time specified in
the transfer notice, the offer shall elapse with regard to the unaccepted
shares and the board shall offer such shares to such other members who have
fully accepted shares offered to them as nearly as may be in proportion to the
existing shares held by them respectively. If no member shall accept the offer
of any share within the time specified, which shall not be less than three
months or shall give notice that he does not wish to accept the offer, the
board shall be entitled, to offer the shares to any person or persons selected
by it as the person or persons whom it is desirable to admit to
membership."
The only other articles of association of the Indian company
which require to be noted are the following. Article 115 provides that the
chairman of the board of directors of the Indian company would be nominated by
the Swedish company so long as they hold 49% of shares in the Indian company.
Article 75 provides that the chairman would have a casting vote at the general
meetings. Article 118 provides that the chairman would have a similar casting
vote at the meetings of the board of directors.
The Foreign Exchange Regulation Act, 1973
(hereinafter referred to as "the FERA"), came into operation on
January 1, 1974, Section 29 of the FERA, inter alia, provided that a company in
which the non-resident holding is more than 40% would require permission of the
RBI to carry on business in India. Section 29(4) also provided that any
non-resident holding more, than 40% shares in such Indian companies would be
required to apply to the RBI for permission to hold such shares and the RBI may
either allow them to continue to hold such shares or give directions for
dis-investment or impose appropriate conditions while granting licence to carry
on business in India.
It appears from the records that on June 26, 1974,
the Indian company made an application to the Exchange Control Department of
the RBI for permission under s. 29 of the FERA. The copy of the covering letter
is annexure to the petition wherefrom it appears that - all the necessary
particulars and documents were sent along with the application. The RBI,
however, refused to grant permission to the company and it wanted that the
foreign equity shares of the company should be reduced to 40%. On May 21, 1976,
the Indian company again applied to the RBI for reconsideration of its
decision. The RBI granted permission to the company to continue its operation
in India and to have non-resident share holdings in excess of 40%, inter alia,
on condition that the Indian company was to earn foreign exchange by export of
goods manufactured by it at ex-factory cost (less excise duty, if any) and the
export in each year being not less than 10% of the ex-factory cost of the
Indian company's total production during the relevant year. The export
obligation would be in force till such time the non-resident's interest in the
company would continue to be more than 30/40%.
On May 5, 1978, the Indian company in terms of the
RBI's sanction executed an undertaking whereby it undertook to earn foreign
exchange by export of goods manufactured by it. On January 9, 1981, the RBI
informed the Indian company that it had failed to comply with the conditions
contained in para. 2(iv) of its letter dated November 26, 1977, and called upon
the Indian company to bring down the foreign equity capital to 40%.
On March 8, 1981, at a meeting of the board of
directors of the Indian company, it was resolved to issue fresh equity shares
of Rs. 20,00,000 and offer shares worth Rs. 4,41,000 to Bulten Kanthal A.B. so
that together with the shares already held by them and the shares that would be
offered to the Swedish company, the total shareholding of the Swedish company in
the Indian company after the fresh issue will come down to 40%. The
distribution of the balance of the fresh issue was also decided upon. At the
meeting, the chairman of the board of directors was authorised to take
necessary action to implement this decision of the board.
In pursuance to this decision, a letter dated April
1, 1981, was written to the RBI informing them about the aforesaid proposal.
By its letter dated July 2, 1981, the RBI rejected
the proposal with regard to the increase of capital as suggested by the Indian
company. It further suggested a proposal for dilution by disinvestment of 9%
shares held by the non-resident shareholders and called upon the company to
submit an application under s. 19(5) of the FERA. It may be mentioned at this stage
that this last requisition of the RBI for an application under s. 19(5) of the
FERA is a little mystifying because at the hearing before me it was accepted by
both the parties that s. 19(5) of the FERA has. no application to the present
case.
At a meeting of the board of directors of the Indian
company held on July 27, 1981, the letter of the RBI dated July 2, 1981, was
considered and it was resolved, inter alia, that a sub-committee consisting of
Mr. D.C. Singhania and Mr. G.K. Thanawala should ascertain the reaction of the
authorities towards the proposal of either to issue additional shares of Rs.
10,00,000 so that the quantum of shares held by the Swedish company in the
Indian company is reduced to 40% or the 9% shares of the Swedish company be diluted
by transfer of those shares in favour of Mr. M.T. Shah, who at that time was
the chairman of the board of directors of the Indian company. It was also
resolved that if the reaction of the Controller of Capital Issues is not
favourable to the aforesaid proposal, the sub-committee was to evolve another
alternative proposal which may be acceptable to the RBI and to report back to
the board for consideration and submission of the final proposal to the RBI.
There is another factual aspect of this case which may
be conveniently noted at this stage. As mentioned above, Mr. A.C. Daphtary, who
was holding 2% of the shares of the Indian company and who was appointed
chairman of the board of directors, died on April 27, 1980, leaving his wife, a
son and a daughter. He also left a will dated August 28, 1979, whereby and
whereunder he appointed one Mr. Jagjit Singh as his sole executor. Under the
will, which will be set out hereinafter in full, Mrs. Leila Daphtary, the widow
of Mr. Daphtary, was to be the sole legatee in respect of his entire estate.
In or about September, 1980, Mr. M.T. Shah was
nominated by the Swedish company as the chairman of the board of directors of
the Indian company in place and stead of Mr. Daphtary, since deceased. At the
instance of the Swedish company, the board of directors of the Indian company
was also reconstituted. This was done consequent upon the change in the control
of the Swedish company in Sweden.
The board of directors of the Indian company met on
June 23, 1981, in Bombay and transacted various items of business. In the
minutes of the meeting, the following statement appears :
"Shares of late Mr. A.C. Daphtary : G.
Hildingson reported that Mrs. L. Daphtary had met him in Europe recently and
offered to sell the shares of the late Mr. A.C. Daphtary to Mr. M.T. Shah on
the transmission of the shares in her favour and the board took note of this
report."
It appears from the records that on August 18, 1981,
Mrs. Leila Daphtary is alleged to have executed a power of attorney in favour of
Mr. M.T. Shah in respect of the 812 shares which stood in the name of the late
Mr. A.C. Daphtary, reciting therein that she had received full consideration
for transfer of the shares from Mr. M.T. Shah.
Thereafter, a meeting of the board of directors of the
Indian company was held on August 25, 1981. Two of the nominee directors of the
Singh group of shareholders asked for adjournment but such request was not
acceded to. Consequently, the meeting held on the 25th August, was attended
only by the nominee directors of the Swedish company. Among the various
resolutions passed, there were only two resolutions which featured in the
controversy between the parties in the present case and may be set out
verbatim. At page 205 of the annexures, the following resolution occurs:
"Resolved
that, as previously decided in the last meeting of the company held on
July 27, 1981, a proposal may be submitted to the RBI to divest Bulten Kanthal
A.B. of 9% of the shares held by them in favour of Mr. M.T. Shah."
The second resolution is as follows:
"Recordal
of Will of Late Mr. A.C. Daphtary.
The will dated August 28, 1979, of late Mr. A.C. Daphtary sent to the
board by Mrs. Leila Daphtary, vide her letter dated March 14, 1981, was placed before
the board by Mr. M. Subramanyam for consideration. After discussion it was :
Resolved that the
Will dated August28, 1979, of late Mr. A.C. Daphtary be and is hereby recorded.
Resolved
further that 812 shares held in the name of late Mr. A.C. Daphtary be
and are hereby transmitted in favour of Mrs. Leila Daphtary, the heir of late
Mr. A.C. Daphtary, and that the secretary and director or two directors of the
company be and are hereby authorised to transmit the shares in her favour.
Since the secretary expressed his inability to affix
his signature on the share certificates, the transmission was effected by two
directors, Mr. C.K. Thanwala and Mr. Subrarhanyam, and the secretary was
directed to make the appropriate entries in the register of shareholders."
In pursuance of these resolutions an application was
made to the RBI on September 23, 1981, under s. 19(5) of the FERA. The
forwarding letter was sent on behalf of the company by Mr. M.T. Shah as its
chairman.
These two resolutions precipitated the situation and
was followed by a series of correspondence between the parties inter se and
between Singh group of shareholders and their advocates-on-record and the RBI.
Ultimately, the Swedish company by their telex dated September 15, 1981,
declined to sell 9% shares to the petitioners and expressed their desire to
sell the shares to Mr. M.T. Shah only.
The only other factual aspect to be noted before I
come to the controversy between the parties is that, according to the
petitioners, at the instance of the nominee directors of the Swedish
shareholders, M/s. S.R. Batliboi & Co., chartered accountants, were
appointed to make a special review of the accounts of the Indian company for
the accounting year ended December, 1979. In the report which was submitted to the
Indian company, there are. certain adverse remarks against Mr. B. Singh
regarding the Indian company's transactions with Beni Ltd., Pratap Development
Co. P. Ltd. and Kantilal T. Garach & Co. According to the petitioners,
these findings are totally baseless. In support of this, the petitioners caused
a report to be prepared by M/s. K. Prosad and Co., chartered accountants,
dealing with the findings of M/s. S.R. Batliboi and Co.
At a meeting of the board of directors held on June
23, 1981, the board considered both the reports and decided not to pursue the
matter for the present.
According to the petitioners, at the instance of Mr.
M. T. Shah, who is stated to be openly hostile to the Singh group of
shareholders, the board purported to take up the issue and appointed a
sub-committee to make a recommendation on the basis of the report of M/s. S. R.
Batliboi and Co., notwithstanding the previous resolution of the board
mentioned above.
In these circumstances, the petitioners have filed the
present petition complaining of acts which are prejudicial to the public
interest, prejudicial to the interest of the company and acts oppressive to the
petitioners as shareholders of the Indian company.
The first controversy between the parties was with
regard to the 2% shares of the Indian company numbering 812 shares which were
held by Mr. A. C. Daphtary, since deceased. As mentioned earlier, Mr. Daphtary
died on April 27, 1980. As also indicated earlier and it is the admitted case
that Mr. Daphtary left a will whereby and whereunder he appointed one Mr.
Jagjit Singh of New Delhi as his sole executor under the will. The text of the
will is material for our purposes and is set out herein-below :
"A8, Maharani Bagh,
New Delhi-110 065.
August 28, 1979.
I, Anil Chandra Daphtary, do hereby declare this as
my last will and testament.
I wish that, in the event of my death, all my
property and possessions be given to my wife, Leila. In the event that my wife
predeceased me, my possessions should be equally divided between my children,
Anjali and Vivek. Those of my possessions which are physically indivisible may
be retained jointly by my children if they so agree between themselves. If they
are unable to agree, the particular item or asset should be sold under the
direction of my executor and the proceeds equally divided between my children.
I hereby appoint Mr. Jagjit Singh of E29, Panehsheel
Park, New Delhi, as sole executor to my estate.
(Sd/-) Anil Chandra
Daphtary"
It may be mentioned at this stage that a copy of the
will was forwarded to the directors of the Indian company by Mrs. Daphtary. The
letter dated March 14, 1981, contained the following paragraphs:
"I would be most grateful if the request for
transmission can be granted. I shall send the share certificate for appropriate
endorsements and the same can be returned to me"
Admittedly, no probate has yet been granted of the
will of Mr. Daphtary.
According to the petition, this letter of Mrs.
Daphtary although dated March 14, 1981, forwarding the copy of the will was
never placed before the board of directors of the Indian company until the
controversial board meeting held on August 25, 1981, when none of the nominees
of the Singh group were present. From the minutes of the board meeting dated
August 25, 1981, it appears that the letter of Mrs. Daphtary was with Mr.
Subramanyam, an alternate director of the Indian company, who produced the
letter.
At an earlier meeting of the board held on June 23,
1981, the board took note of a report of Mr. G. Hildingson, a Swedish director
of the Indian company, who reported that Mrs. Daphtary had met him in Europe
and offered to sell her husband's share to Mr. M. T. Shah, on transmission of
the said shares in her favour. It is the petitioner's apprehension that there must
have been some confidential arrangement regarding the shares of Mr. Daphtary
with the nominees of the Swedish company.
At the hearing, it was not disputed that these 812
shares representing 2% of the equity share capital of the Indian company still
stand registered in the name of the late Mr. Daphtary. This fact had been
recorded by me in the course of the hearing in the minutes of this court on
January 21, 1982.
The main controversy with regard to this question was
as to the relevant article which is applicable with regard to the transmission
of these shares. The two relevant articles on these questions are arts. 48, 49
which may be set out hereinbelow :
"48. The executor or administrator or succession
certificate holder of a deceased member (not being one of several joint
holders) shall be the only person recognised by the company as having any title
to the share registered in the name of such member, and in case of the death of
any one or more of the joint holders of any registered share, the survivor shall
be the only person recognised by the company as having any title to or interest
in such share, but nothing herein contained shall be taken to release the
estate of a deceased joint holder from any liability on the share held by him
jointly with any other person. Before recognising any executor or administrator
or succession certificate holder, the board may require him to obtain a grant
of probate or letters of administration or other legal representation, as the
case may be, from a competent court in India and having effect in Calcutta.
Provided nevertheless that in any case where the board in its absolute
discretion thinks fit it shall be lawful for the board to dispense with the
production of probate of letters of administration or such other legal representation
upon such terms as to indemnity or otherwise as the board, in its absolute
discretion, may consider adequate.
49. Any committee or guardian of a lunatic or minor
member or any person becoming entitled to or to transfer a share in consequence
of the death or bankruptcy or insolvency of any member upon producing such
evidence that he sustains the character in respect of which he proposes to act
under this article or of his title as the board thinks sufficient, may, with
the consent of the board (which the board shall not be bound to give), be
registered as a member in respect of such shares, or may subject to the
regulations as to transfer hereinbefore contained, transfer such share. This
article is hereinafter referred to as "the transmission article".
According to Mr. S. B. Mukherjee, who appeared on
behalf of the petitioners, in the present case, art. 48 squarely applies to the
facts of the present case. According to Mr. Mukherjee, arts. 48 and 49 are
mutually exclusive. According to this contention, since art. 48 applies, art.
49 can have no application to the present case. It was submitted on an analysis
of art. 48 that upon the death of a shareholder, only the executor, the
administrator and the holder of a succession certificate are the persons who
can be recognised by the company and brought on its register of members in
place and stead of the deceased shareholder. Before it recognises such an
executor, etc., the board may require the executor to produce a grant of
probate or letters of administration, as the case may be. The board, however,
has absolute discretion to dispense with the production of such a grant of
probate on such terms as to indemnity as it may think fit. But the principal
provision of art. 48, on which considerable emphasis was laid was that, on the
death of a shareholder, nobody but the executor, the administrator or the
holder of a succession certificate could be recognised by the board.
Turning to the facts of the present case, it was
submitted that admittedly one Jagjit Singh is the executor of the entire estate
of the late Mr. Daphtary under his will. There is nothing to show that Mr.
Jagjit Singh, the executor, has ever applied to the company for being
registered in place and stead of the late Mr. Daphtary. There is no dispute
that no probate has been granted of the will of Mr. Daphtary. Consequently, it
was submitted that Mrs. Daphtary, at this stage, had no locus standi to apply
to the company for having the shares of the late Mr. Daphtary transmitted in
her favour.
On the assumption for the sake of argument that art. 49 could be said to be applicable to the present case, it was contended by Mr. Mukherjee that art. 49 gives two options and puts the person who is entitled to the shares to an election. Such a person at his option may either :
(i) be registered as a holder of the shares ; or
(ii) transfer the shares.
In the instant case, Mr. Mukherjee submitted that
even assuming that Mrs. Daphtary could get herself registered as holder of the said
shares, she could, however, not transfer the said shares without complying with
arts. 34, 35 and 40. These articles which have been set out hereinabove, give a
pre-emptive right to the existing shareholders to take these shares. Only if
such a right is waived by the existing shareholders, it can be given to an
outsider. In other words, unless the existing shareholders give their consent
to a transfer in favour of an outsider, it cannot be done. Since Mr. M. T.
Shah, in whose favour these two per cent, shares have been purported to have
been transferred, is an admitted outsider, such a transfer is violative of the
relevant articles of association of the Indian company.
On this aspect of the matter, Mr. Mookherjee further
submitted that the letter of Mrs. Daphtary dated March 14, 1981, was
deliberately not placed before the meeting of the board of directors of the
Indian company held on June 23, 1981. It was placed only at the. board meeting
of August 25, 1981, when none of the nominees of the Singh group were present.
There was no item on the agenda of the board meeting of August 25, 1981, with
regard to the transmission of shares in favour of Mrs. Daphtary. Such action on
the part of the nominee directors of the Swedish group, it was submitted,
lacked in probity and was not bona fide.
According to the petitioner, incentives were given to
Mrs. Daphtary for transfer of the shares of the late Mr. Daphtary in favour of
M. T. Shah by paying her a sum of Rs. 42,000. Such payment was made without any
resolution of the board of directors and was at the instance of Mr. M. T. Shah.
It was submitted that it will appear from the record that the petitioners'
group objected to the proposed transfer of these 2% shares to Mr. Shah by a
letter dated September 8, 1981, addressed 2% M/s. Rajesh Khaitan & Co.,
advocates-on-record for the petitioners to the Indian company. The petitioners
also offered to purchase the said 2% shares. It was pointed out with reference
to certain documents annexed to the second interim application that a power of
attorney has been executed by Mrs. Daphtary in favour of M.T. Shah wherein Mrs.
Daphtary described herself as the "executrix". In the power of
attorney it has also been declared that Mrs. Daphtary has received full
consideration from Mr. Shah for the transfer of the shares.
Mr. Mukherjee drew my attention to the fact that
contradictory statements have been made on behalf of the respondents on this
aspect of the matter. In the first amdavit-in-opposition it has been stated
that the shares were agreed to be purchased by Mr. M. T. Shah whereas in the
second affidavit-in-opposition, it has been stated that the shares have already
been purchased by Mr. Shah.
Consequently, it was submitted that proper reliefs
should be given with regard to this purported transfer by directing the sale of
the said two per cent, shares to the petitioners in accordance with the
articles of association of the Indian company.
Mr. P. R. Mridul, who appeared for the contesting
respondents, submitted that the transaction in question was not governed by
art. 48 of the articles of association of the company. It was Mr. Mridul's
contentions that this transaction is fully governed by art. 49 which provides
for the transfer of shares in consequence of the death of a member. It was
submitted by Mr. Mridul with reference to the paras. 50A, 56 and 65 of the
petition that these paragraphs show that the petitioners are willing to deal
with Mrs. Daphtary in respect of the 2% shares of the late Mr. Daphtary.
I must say that it is difficult to appreciate this
contention of Mr. Mridual on the basis of the abovementioned paragraphs. To
illustrate, I quote a portion of para. 50A of the petition, which is in the
following terms :
"Your
petitioners are desirous of and/or willing to purchase the said 9% holding of
the said Swedish company and are willing to pay a price in accordance with the
provisions of the articles of association of the said company and sanction of
the RBI. Indeed, by several letters all dated September 8, 1981, addressed on behalf
of the petitioners to the said Swedish company, Mrs. Leila Daphtary, the said
company and its directors, with copies to the Central Government authorities,
your petitioners exercised their pre-emptive right and evinced their desire to
purchase the said 9% holding of the said Swedish company and the 2% shares held
by late A. C. Daphtary."
Paragraph 56 of the petition contains the following
statements:
"In the premises and facts stated hereinbefore
aforesaid, to wind up the said company would unfairly prejudice the interest of
the public, the said company as well as your petitioner, but otherwise the
facts would justify the making of a winding-up order on the ground that it was
just and equitable. It is indeed of paramount interest to the said company that
the hon'ble court be pleased to pass an order directing the said Swedish group
to transfer their equity holding to the extent of the 9% to the aforesaid Singh
group and to the extent of the 2% by the said Mrs. Leila Daphtary to your
petitioners so that the continuing oppression by the majority over the minority
cease for all times to come."
It is evident from these two paragraphs that the
petitioners are expressing an unequivocal desire to purchase the 9% holding of
the Swedish group, an aspect which will be dealt with hereinafter as also the
2% shares of the late Mr. Daphtary and are asking the court to direct such
transfer and sale in favour of the petitioners. It will follow that on the
basis of the above averments, I am entirely to come to the conclusion that the
petitioners have not at any stage consented either expressly or impliedly to
the transfer of the 2% shares of the late Mr. Daphtary either in favour of Mrs.
Daphtary or in favour of Mr. M. T. Shah.
As already indicated, it was the submission of Mr.
Mridul that the action of the board of directors in permitting the transmission
of shares to Mrs. Daphtary falls within the purview of art. 49 as Mrs. Daphtary
was a person who became entitled to transfer all the shares in consequence of
the death of late Mr. Daphtary and the board of directors would transmit the
shares to her upon production of evidence that she sustained a character in
respect of which she proposed to act under the said article. It was pointed out
by Mr. Mridul that the board had received a copy of the will, as will appear
from the letter dated March 14, 1981, written by Mrs. Daphtary by which she had
offered to produce the share certificates. In fact, according to Mr. Mridul,
the board received the share certificate in the meeting dated August 25, 1981,
through Mr. M. T. Shah who was the transferee. The evidence before the board,
viz., the will and the share certificates, sustained the board's action. The
board correctly took the view that Mrs. Daphtary was the person who became entitled
to the transfer of the shares in consequence of the death of the late Mr.
Daphtary.
In trying to meet the submission of Mr. S. B.
Mukherjee that even assuming that art. 49 applies and Mrs. Daphtary became
entitled to have the shares transferred in her favour on the death of late Mr.
Daphtary, such transfer can only be in compliance with the other articles of
association of the Indian company and in particular art. 34 thereof, Mr. Mridul
submitted that art. 34 does not confer any right of pre-emption. According to
Mr. Mridul, art. 34 merely restricts the right of a shareholder in the manner
prescribed therein. It was submitted that this article comprised of four limbs
:
"(i) The first limb makes article subject to
section 111 of the Act;
(ii) The
second limb confers absolute and uncontrolled discretion of the board to refuse
or accept transfer ;
(iii) The
third limb is subject to the second limb. It envisages that a member can
transfer shares to any other member or a non-member but such transfer has to be
effectuated with the prior consent of all other members. ' Prior consent' does
not confer a right of pre-emption but merely enables the other members to
object reasonably to the unsuitability of a member or a non-member being made
the transferee shareholder;
(iv) The
proviso, which is the fourth limb of the article, is an independent provision.
It authorises a body corporate, inter alia, to transfer its shares to its
'nominee' unrestrained by the requirements of the third limb."
The second principal item of controversy between the
parties was with regard to the sale of the 9% of the shares of the Indian
company held by the Swedish company. The factual background to this controversy
may be noted.
Prior to the
incorporation of the Indian company, the Swedish company wanted to have 60% of
the shares of the Indian company and the other 40% was to be held by the Indian
shareholders. This will appear from a letter dated July 20, 1963, addressed by
the Swedish company to the Ministry of Commerce and Industries, Government of
India. The formation agreement dated September 23, 1964, between the Swedish
company and the Singh group, however, provides that the Indian shareholders
will have 51% of the shares and the Swedish company 49%. The matter was,
however, set at rest by a letter of the Government of India dated April 18,
1964, by which the Swedish company was allowed to have 49% of the equity
participation of the Indian company. The. admitted position is that, since its
incorporation, 49% of the shares of the Indian company were held by the Swedish
company, 49% by the Singh group and 2% by the late Mr. Daphtary. According to
the petition, although the majority of the directors were nominated by the
Swedish company and the Singh group had always been a minority in the board of
directors, there was no hitch of any kind whatsoever between the two groups
with regard to the functioning of the company until the arrival of Mr. M. T.
Shah on the scene.
Some time in
the early part of 1977, the Indian company made an application before the RBI
under s. 29(2)(a) of the FERA to carry on their existing business activities in
India. On or about November 26, 1977, the RBI granted that permission subject
to the following conditions :
"The
company shall earn foreign exchange by export of the goods manufactured by it,
the ex-factory cost (less excise duty, if any) of such exports in each year
being not less than 10(ten) per cent, of the ex-factory cost (less excise duty,
if any) of the company's total production during the relative years. This
export obligation shall be fulfilled within two years from the date of receipt
of our letter No. EC. CO. FCS. 1203/641 (Activity) 30. II. 17/77 dated May 6,
1977, and subsequently the company's exports in each year out of its own
production shall continue to be maintained at a level not less than the minimum
level of export performance stipulated above. The said export obligation shall
be in force till such time the nonresident interest in your company continues
to be more than 40%."
Admittedly,
the Indian company failed to honour its exports commitment in terms of the
above conditions imposed by the RBI whereupon the Reserve Bank directed that
the non-resident holding in the Indian company should be diluted to 40% as
provided in the FERA.
As indicated
curlier, initially the Indian company proposed to dilute the non-resident
interest by increasing its share capital as appears from the minutes of the
meeting of the board of directors dated March 30, 1981. This proposal was, however,
rejected by the RBI. At a board meeting held on July 27, 1981, a sub-committee
consisting of Mr. Singhania and Mr. Thanawalla was constituted to ascertain the
views of the Controller of Capital Issues which, however, did not materialise.
Ultimately, at the board meeting held on August 25, 1981, where the Singh group
did not participate, the following resolution was passed :
"Resolved
that, as previously decided in the last meeting of the company held on July 27,
1981, a proposal may be submitted to the RBI to divest Bulten Kanthal A.B. of
9% of the shares held by them in favour of Mr. M.T. Shah."
It is this
decision of the board of directors of the Indian company to allow the transfer
of all these 9% shares of the Indian company held by the Swedish company in
favour of Mr. M.T. Shah which is challenged before me in this application.
The principal
ground of challenge of Mr. S. B. Mukherjee on this aspect of the matter is
founded on art. 34 of the articles of association of the Indian company which
has been set out hereinabove. It is submitted by Mr. Mukherjee that these 9%
shares of the Indian company held by the Swedish company could only be
transferred to a non-member or an outsider with the consent of all the other
shareholders. It was submitted that at the meeting of July 27, 1981, no consent
of the other shareholders to the sale of 9% shares to Mr. Shah was either given
or recorded. It was submitted that such consent under art. 34 cannot be the
subject-matter of a board meeting or even a general meeting. It is an
individual right of a shareholder and such consent must be evidenced either in
writing or by some overt act on the part of each shareholder. It was submitted
that, in the facts of this case, such consent of the shareholders was
conspicuous by its absence. It was submitted that at the board meeting there
was nobody representing the Swedish group as shareholders qua shareholders. Mr.
A.C. Daphtary being dead, nobody, it was submitted, could represent him at the
meeting. Mr. B. Singh, who was present at this meeting, holds about 12% of the
shares of the Indian company but he had no authority to consent to any transfer
on behalf of the other shareholders of the Singh group. It was submitted that
there was not even an allegation in the affidavit-in-opposi-tion that the Singh
group of shareholders consented to the sale of 9% of the shares to Mr. Shah.
In support of
the submission that the Singh group never consented to the 9% shares of the
Indian company being transferred to Mr. Shah, Mr. Mukherjee strongly relied on
two telex messages.
In one telex
message from the Swedish company the following sentence occurs:
"AS WE ARE
COMPELLED TO DECREASE OUR SHAREHOLDING WE DO NOT AGREE THAT THE ARTICLES ARE
APPLICABLE AND WE FIRMLY HAVE TO STATE THAT WE WISH TO TRANSFER 9 PER CENT. TO
Mr. M. T. SHAH AND NOBODY ELSE."
The above
telex message was replied to by another telex message from Mr. B. Singh dated
September 19, 1981, where the following statement occurs:
"ARTICLES
ARE APPLICABLE IRRESPECTIVE WHETHER COMPELLED SALES OR VOLUNTARY SALES WE DO
NOT AGREE TO TRANSFER OF YOUR 9 % SHARES TO Mr. M.T. Shah WE DO NOT UNDERSTAND
THE REASON WHY YOU WANT TO SELL
YOUR SHARES TO MR. M.T. SHAH ONLY AND NOBODY ELSE WHEN WE ARE ENTITLED UNDER
INDIAN LAWS AS WELL AS WILLING TO PAY PRICE. PLEASE LET US KNOW PRICE OFFERED
BY MR. SHAH WE AGREE TO PAY SAME PRICE SUBJECT TO APPROVAL OF the RESERVE BANK
OF INDIA."
According to
Mr. Mukherjee, this telex message from B. Singh, on behalf of the Singh group,
clearly shows that there was no question of the Singh group of shareholders
agreeing to the transfer of these 9% shares to Mr. M.T. Shah.
Mr. P. R.
Mridul, who appeared for the respondents, placed strong reliance on a decision
of the English Court of Appeal in the case of Express Engineering Works Ltd.,
In re [1920] 1 Ch 466 (CA). In that case, a syndicate of five persons formed a
private company, in which they were the sole shareholders, and sold to it for £
15,000 in debentures of the company, property which they had, a few days before,
acquired for £ 7,000. The contract for the sale and the issue of the debentures
was carried out at a meeting of the five who and there then appointed
themselves directors. This meeting was described in the minutes as a board
meeting. At a subsequent meeting, the seal of the company was affixed to the
debentures. The articles of the company provided that no director should vote
in respect of any contract or arrangement in which he might be interested. In
the winding up of the company, the liquidator claimed a declaration that the
issue of the debentures was invalid and should be set aside.
It was held
by the English Court of Appeal that there being no suggestion of fraud, that
the company was bound in a matter intra vires by the unanimous agreement of its
members. Although the meeting was styled a directors' meeting, all the five
shareholders were present, and they might well have turned it into a general
meeting, and transacted the same business. In these circumstances, the issue of
the debentures was not invalid.
As will be obvious from the facts narrated
hereinabove that this decision sought to be invoked by Mr. Mridul as an
authority for the proposition that by reason of the silence and absence of
protest on the part of the nominees of the Singh group of shareholders on the
board, the court should infer that the Singh group of shareholders consented to
the transfer of the 2% shares in favour of Mrs. Daphtary and the 9% shares of
the Swedish company to Mr. M.T. Shah.
Mr. S. B. Mukherjee submitted that the above English
decision has no application whatsoever to the facts of the instant case. It was
submitted factually this case is clearly distinguishable. In the English case,
all the shareholders were the directors of the company and a decision taken at
a meeting of the board of directors in which all the shareholders-directors
were present was considered to be a meeting of shareholders. In the instant
case, none of the directors is a shareholder. It was pointed out that there was
no allegation that the shareholders present were the only shareholders of the
Indian company or that the directors present were representing all the
shareholders in their capacity as shareholders or had authority to consent on
behalf of all the shareholders. It was submitted that the right to consent or
not to consent to a transfer is a personal right of each shareholder and cannot
be vicariously waived.
Mr. Mukherjee strongly objected to the submission of
Mr. Mridul that Mr. B. Singh represented the entire Singh group of shareholders
at the meetings of the board of directors. It was pointed out, in the first
place, that Mr. B. Singh as the president of the company was merely an observer
at these meetings and had no right to vote. It was further submitted that the
provisions of the articles of association and the provisions in the
pre-incorporation agreement and the correspondence between the parties would
clearly show that Mr. B. Singh was not representing the Singh group of the
shareholders. In any case, it was pointed out that no such case had been made
out in the affidavits.
A pertinent question was posed by Mr. Mukherjee that
if the Swedish group of shareholders were so sanguine that consent had been
given by the Singh group of shareholders to the transfer of the 2% and 9% of the
shares of the Indian company, then why were the resolutions passed in an
unseemly haste at the meeting of August 25, 1981, when these were not on the
items of the agenda of the meeting and when no one representing the Singh group
of shareholders was present at the meeting ? It was submitted emphatically that
there can be no question of any waiver or acquiescence of the Singh group of
shareholders in respect of the above-mentioned transfers at this meeting.
Coming to the articles of association of the Indian
company on this aspect of the matter, Mr. Mukherjee submitted that the relevant
articles are arts. 34 to 40 which have been set out hereinabove. It was
submitted that these articles should be read together so that a harmonious
construction may be arrived at by the court.
Mr. Mukherjee analysed the articles in a manner which
may now be adverted to.
According to his submissions, art. 34 has four parts.
First, it confers a power on the board to refuse registration of transfers.
Secondly, it provides that a member or a person entitled to transfer may
transfer his shares with prior consent of all the other shareholders to any
person whether he is a member or not. Thirdly, a shareholder which is a body
corporate may transfer its share to its subsidiaries or a holding company.
Fourthly, the body corporate may also transfer its share to any person who
would hold the same as its nominee. In the event of the last two types of
transfers, the consent of the other shareholders is not necessary.
Mr. Mridul, for the respondents, sought to advance an
argument in this connection to that effect that the transfer of 9% of the
shares of the Indian company held by the Swedish company in favour of Mr. M.T.
Shah is governed by the proviso to art. 34 and, as such, the consent of the
other shareholders was not necessary. This contention was sought to be repelled
by Mr. Mukherjee on the ground that Mr. Shah is not a nominee of the Swedish
company. Reference was made in this connection to the first
affidavit-in-opposition, paras 54, 62, 64 and 65.
On this aspect of the matter, it was submitted by Mr.
Mukherjee that the transfer to a nominee under art. 34 would not transfer the
beneficial interest in the shares unless the provisions of s. 187C of the
Companies Act, 1956, were complied with. In any event, art. 34 cannot be
construed as conferring a higher right on the foreign shareholders to hold more
than 40% shares in an Indian company unless permitted by the RBI. In other
words, in the absence of any permission from the RBI, a foreign company cannot
hold either by itself or through its nominees more than 40% shares of an Indian
company. Admittedly, in any case, no such permission had been obtained by the
Swedish company from the RBI for the transfer of 9% of its shareholding in the Indian
company in favour of Mr. M.T. Shah, assuming that Mr. Shah was its nominee.
As an elaboration of this aspect of the argument it
was submitted that if the contention of Mr. Mridul is accepted, then the entire
purpose of enacting the prohibition of holding of more than 40% of the equity
shares of an Indian company by a foreign company would be completely defeated.
In other words, if this contention is accepted, the Swedish company would
continue to hold 49% of the shares of the Indian company by itself and through
its nominees, notwithstanding the prohibition in the FERA.
Coming back to the article, it was submitted that
arts. 35 to 45 provide the mechanics of transfer of shares by the members of
the Indian company. The first condition is a notice of the intention of
transfer to be given to the company which will constitute the company as an
agent of the member for the purpose of finding out whether any other member is
willing to purchase the shares. It was pointed out that, in the facts of this
case, no such notice was given. It was pointed out that it is only, after such
a notice has been given, that the company becomes an agent of the member for
the purpose of transfer and the mechanics contemplated in art. 40 of the
articles comes into play. If there is a dispute as to the fair value of the
shares, it is to be resolved in terms of arts. 36 and 37. There may be a
default by the selling member which is dealt with in art. 38. There may be a
default by the company which is dealt with in art. 39. There may be a default
by a purchasing member where the remedies are provided by art. 40. It was
submitted that art. 40 must be read in conjunction with art. 35. It was pointed
out by Mr. Mukherjee that there can be no question of offering these 9% shares
to the Swedish company, an argument that was sought to be advanced by Mr. P. R.
Mridul.
Reference was made in this connection by Mr.
Mukherjee to the recent and well-known decision of the Supreme Court in the
case of Needle Industries (India) Ltd.
v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743.
In that case, it was held that where the equity participation of a foreign
company has to, be diluted by virtue of the provisions of the FERA, there is no
question of offering the shares which are to be divested by the foreign company
for the purpose of dilution to itself, i.e., the foreign company.
At this stage, I would like to deal with certain
objections of a preliminary nature which were raised by Mr. P. R. Mridul,
appearing on behalf of the respondents.
Mr. Mridul submitted that the petition before me does
not make out a case for invoking either s. 397 or s. 398 of the Act. He started
with the rather well-known proposition that s. 397 would be attracted only if
it can be shown that on facts there is a case for the winding-up of the
company. In support of this proposition Mr. Mridul referred to two well-known
decisions of the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351
(SC) and Needle Industries (India) Ltd. v. Needle Industries Newey (India)
Holding Ltd. [1981] 51 Comp Cas 743 (SC). He next referred to another
well-known proposition that, under s. 397, the gist of the cause of action is
injury to the rights of shareholders qua shareholders. Consequently, he
submitted that any grievance pertaining
to injury to the petitioner in their capacity as directors or creditors or
selling agents or in respect of any breach of any pre-incorporation agreement
would be irrelevant and cannot be taken into account. In support of this
proposition, Mr. Mridul referred to two English decisions in the case of H. R.
Harmer Ltd., In re [1958] 3 All ER 689; [1959] 1 WLR 62 ; 29 Comp Cas 305 (CA)
and Westbourne Galleries Ltd., In re [1971] 1 All ER 561; [1971] 2 WLR 618
(CA).
It was next
submitted that individual or isolated illegal acts do not necessarily and by
themselves amount to oppression within the meaning of s. 397 of the Act. It is
only when illegal acts are of such a nature as would show that the majority is
abusing its power or is otherwise guilty of burdensome, harsh and wrongful
conduct that the provisions of s. 397 can be said to be attracted. Then there
would be "oppression" so as to attract the provisions of s. 397 of
the Act. In support of this proposition, Mr. Mridul relied on the decision of
Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd.
[1964] 34 Comp Cas 777 (Guj) and the decision of the Supreme Court in Needle
Industries' case [1981] 51 Comp Cas 743 which has been noted above.
It was
submitted that one of the tests of what constitutes "oppression"
within the meaning of s. 397 of the Act is to see whether the majority is
taking an unfair advantage of its position as a majority. In support of this
proposition, reference was made to the English case of Five Minute Car Wash
Service Ltd., In re [1966] 1 All ER 242 ; [1966] 1 WLR 745 ; [1966] 36 Comp Cas
566. The second test, it was submitted, is to find out whether in exercise of
its fiduciary power the group concerned was attempting to destroy the existing
majority or to create a new majority which did not exist previously. In support
of this proposition, reference was again made to the recent Supreme Court
decision in Needle Industries (India) Ltd. v. Needle Industries Neieey (India) Holding
Ltd. [1981] 51 Comp Cas 743 which has been mentioned above.
It was next
submitted that the concept of "just and equitable" as applicable to
the situations governed by s. 397 is a restricted concept. Merely because there
is dissatisfaction at being out-voted or dissatisfaction as a result of a
minority of shareholders not getting what it desired to get, it cannot be said
that there is a justifiable lack of confidence so as to attract the "just
and equitable" clause. Reliance was placed in this connection on the case
of Loch v. John Blackwood Ltd. [1924] AC 783 (PC) and Hind Overseas Pvt. Ltd.
v. Raghunathprasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC).
Finally, it
was submitted as a proposition of law that two cumulative conditions are
necessary before interference under s. 397 can be said to be warranted.
They are, first, that it is just and equitable to wind up the company and,
second, that the affairs of the company are conducted in a manner oppressive to
its members. Reference was again made to the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351
(SC).
Turning to the facts of the instant case, it was
submitted that no case whatsoever has been made out to wind up the company. The
company owns two factories one at Varanasi and the other at Pune. Both the
factories are doing very well. There has been progressive increase in
dividends. In the year 1980, the company declared 10% dividend. The products of
the company and in particular the electrical resistance wires, which are manufactured
in the Varanasi factory, enjoy a very stable market as mentioned in para. 54 of
the petition. The precision castings manufactured by the company are supplied
to Bhaba Atomic Research Centre and various Defence and Government
organisations. The demand for this product is more than the existing
manufacturing capacity in India.
The board of directors of the company consist of
three directors nominated by the Swedish group, two directors nominated by the
Singh group and one appointed by the U.P. Industrial Finance Corporation. There
is no allegation that there is any deadlock in the functioning of the board of
directors or functioning of the company. Mr. B. Singh is the president of the
company. Mr. M. T. Shah is the chairman of the company. There is no allegation
that they cannot carry on the business of the company or that there is any
friction in the management. There is no plea that any directors of the Singh
group have been excluded from the management. There is no plea that Mr. B.
Singh is prevented from functioning as the president of the company.
It was further submitted that the company is not a
glorified partnership.
The relations between the Singh group and the Swedish
group arose out of commercial transaction. There is no element of personal
relationship. Hence, it was submitted that the principles of winding-up
referable to a partnership are not available in the present case. Even assuming
that these principles were applicable, there is no breach of faith or lack of
probity in the conduct of the Swedish group. Thus, the preliminary requirement
for the applicability of s. 397 of the Act is not fulfilled.
The provisions of s. 398 of the Act, it was
submitted, has no manner of application because there was no allegation of
mismanagement or even any apprehension of mismanagement in the affairs of the
Indian company or of any allegation of any material change having taken place
in the management or control of the Indian company. Reference was again made in this connection to the Supreme Court
decision in the case of Shanti Pra-sad Jain v. Kalinga Tubes Ltd. [1965] 35
Comp Cas 351 (SC).
It was
pointed out that, as admitted in paragraph 17(a) of the petition, the Swedish
company held 49% shares of the Indian company and the Singh group held 49%
shares. It was further admitted in para. 17(b) of the petition that the 2%
shares were held by Mr. Daphtary until his death as the nominee of the Swedish
company. Thus, the pattern of shareholding has been that the Swedish group has
51% and the Singh group 49%. The fact that 2% shares held by late Mr. Daphtary
is transmitted to Mrs. Daphtary who, in turn, transfers them to Mr. M.T. Shah
does not result in any material change in the control of the company. Hence, s.
398 of the Act is not attracted. Lastly, on this aspect, it was submitted that
the common legal determinant both for ss. 397 and 398 of the Act relevant for
the present petition is conduct lacking in probity and such conduct resulting
in injury to the company or to the interest of the public or of the minority
shareholders. It was submitted that in the facts of this case, the said
determinant was totally absent.
Mr.
Mukherjee, appearing for the petitioners, submitted that the preamble to the
FERA and the policy guidelines issued by the Central Govt. under ss. 75 and 76
of the FERA in relation to s. 29 of the Act make it clear that one of the
objectives of the Act is to control dealings in securities. The entire idea is
to provide for Indian participation in companies where there is a foreign
equity holding. The guidelines issued by the Central Govt., a copy of which was
produced in the course of the hearing by Mr. Mridul and has been made part of
the records of this case, clearly go to show that as a condition to the grant
of what is called a COB licence under s. 29 of the Act, the RBI could insist
upon the dilution of foreign shareholding. The intention clearly, according to
Mr. Mukherjee, is not to allow the continuation of such foreign shareholding
either directly or through nominees.
It was
submitted by Mr. Mukherjee that the recent Supreme Court decision of Needle
Industries' case [1981] 51 Comp Cas 743 clearly establishes that the
non-resident shareholding cannot be permitted to continue beyond the limit laid
down in the FERA and the result of such continuation would be a clear violation
of the provisions of the FERA resulting in an automatic cessation of the COB
licence. Even if the foreign non-resident shareholders be willing to take up
more shares, they cannot be permitted to do so in view of the express provisions
regarding the foreign shareholding in the FERA. It was submitted that the
principles laid down in Needle Industries' case [1981] 51 Comp Cas 743 on this
aspect of the matter applies in full force to the instant case.
It was submitted that when under the provisions of
the Act, the RBI asked for or required disinvestment of foreign shareholdings,
the Reserve Bank is not merely concerned with the repatriation of foreign
exchange but it is also concerned with Indianisation in the sense that there should
be bona fide participation by Indian shareholders in the equity capital of such
a company. This, it was submitted, is evident from the preamble of the FERA,
the provisions of ss. 19 and 29 and the guidelines issued under s. 29. It was
submitted that the Supreme Court decision in Needle Industries' case [1981] 51
Comp Cas 743 clearly goes to show that foreign shareholders have no option but
to dispose of their shares in accordance with the directives of the RBI. It was
further submitted that the above decision is an authority for the proposition
that if dilution of foreign holdings takes place by issue of further shares,
the Swedish company would not have any right to the further shares. Similarly,
they would have no right, in a case where the disinvestment becomes necessary
as distinct from expansion of the capital base to disinvest in favour of a
nominee, to permit such a disinvestment in favour of a nominee or nominees of
the foreign shareholders would have the effect of violating the provisions of
the FERA.
Another factual aspect of the controversy between the
parties may be alluded to at this stage. It has been submitted, on behalf of
the respondents, that the genesis of the dispute between the Swedish company and
the Singh group is the threat of termination of the sole selling agency of
petitioner No. 5, M/s. B. M. Singh and Sons. It has been further alleged that
the report of M/s. S. R. Batliboi & Co., a firm of chartered accountants,
who were appointed by the Indian company to review the accounts of the Indian
company in the year 1979 was adverse to the Singh group. It has been submitted,
on behalf of the respondents, that the sole object of the present proceedings
is to forestall any action which the Indian company might take for termination
of the sole selling agency of petitioner No. 5. It has also been submitted that
the petitioner is not entitled to invoke the "just and equitable"
clause because they have not come with clean hands. It was further submitted
that the petitioners have been guilty of misappropriation.
On behalf of the petitioners it was pointed out that
although the expression "misappropriation" have been used several
times in the affidavit by Mr. Shah, those allegations are not only false but are
reckless and without any particulars whatsoever. It was further pointed out
that in the ante item correspondence between the parties, there is no whisper
of any misappropriation of funds by the Singh group.
With regard to the reference to para. 23(a)of the
main petition by the respondents to show that petitioner No. 5 had received a
sum of Rs. 52 lakhs odd as agency commission, it was submitted, on behalf of
the petitioners, that there was nothing wrong in this. The agency commission
was payable in terms of the agreement between the Indian company and petitioner
No. 5. Such agreement has not only been approved by the shareholders of the
Indian company but it has also been approved by the Central Government. It was
mentioned that it was only after Mr. Shah joined the board of directors that
the payment of commission to petitioner No. 5 was temporarily stopped. There is
no dispute, according to the petitioners, with regard to the quantum of
commission payable to petitioner No. 5. This would be evident from the Indian
company's balance-sheet which has been approved by the shareholders and all the
directors of the Indian company. The last balance-sheet for the year ended
December 31, 1980, shows that a sum of Rs. 5,40,000 is still due and payable by
the company to petitioner No. 5 on account of sole selling agency commission.
It was pointed out on behalf of the petitioners that
para 23(b) of the main petition, which was not referred to by the respondents, would
go to show that the Swedish company has received a sum of Rs. 83 lakhs odd for
basic raw materials as against Rs. 52 lakhs odd which was received by
petitioner No. 5 from the Indian company. It was also pointed out that about
Rs. 9 lakhs is still due and payable by the Swedish company to the Indian
company and part of it may not be recoverable as being barred by limitation.
It was further submitted, on behalf of the
petitioners, that the sole selling agency agreement provided for termination at
twelve months' notice in writing prior to the date of expiry. The agreement is
due to expire in May, 1983. In view of the highhanded and mala fide conduct of
Mr. Shah, who is the chairman of the board of directors and has a casting vote,
the petitioners have prayed for and obtained an injunction restraining the
Indian company from terminating the agency pending the disposal of the main
petition. Such injunction is not one of the final reliefs in the proceedings
but is an only interim relief in aid of the final relief that may be granted.
It was pointed out that the report of M/s. S. R.
Batliboi & Co. is factually incorrect. This report has been dealt with in
the report of M/s. K. Prosad and Co., another firm of chartered accountants.
The latter report has been heavily relied upon by the petitioners on this
aspect of the matter. In the report of M/s. S. R. Batliboi & Co., it has
been alleged that Mr. B. Singh did not disclose his connection with Beni Ltd.
to the board of directors of the Indian company. It was submitted, on behalf of
the petitioners, that Mr. B. Singh is not a director of the Indian company.
Under an agreement with the Indian company, he has certain advisory functions.
Therefore, neither under the law nor under any contractual relationship with
the Indian company is Mr. Singh obliged to make any disclosures to the Indian
company about the financial position of Beni Ltd. of which he is the managing
director. However, full facts relating to Beni Ltd. were known to the directors
of the Indian company. Each and every transaction of the Indian company with
Beni Ltd. was approved by the board of directors of the Indian company. The
board of directors of the Indian company could have easily found out that
supplies were being made to Beni Ltd. without payments being received therefor.
Reference was made in this connection to the minutes of various board meetings
of the Indian company which were tendered and forms part of the records of this
case by virtue of my order dated January 25, 1982. It will appear from the
minutes of the meetings that the board was fully aware of the actual position.
As will appear from the language used in the board resolutions, the board
"considered", "examined", "scrutinised" the
transactions between the Indian company and Beni Ltd. and approved of such
transactions at various board meetings. Pointed reference was made to the fact
that notwithstanding the report of M/s. S.R. Batliboi & Co., the board of
directors of the Indian company at their meeting held on March 30, 1981, at which
three directors representing the Swedish group were also present, resolved to
support the scheme propounded by Beni Ltd. It was further pointed out that at
the board meeting held on July 27, 1980, it was recorded that the amount due
and payable by Beni Ltd. was considered "good and realisable".
In so far as the adjustments of the sole selling
agency commission with the claim of Kantilal T. Garach & Co. is concerned,
it was pointed out that it is the case of the petitioners that no money was
received by petitioner No. 5 from M/s. Kantilal T. Garach & Co. Since the
above company was introduced to the Indian company by petitioner No. 5 and the
company's goods have been sold to them and since an insinuation was made that
this money would not be paid by the above company, petitioner No. 5 asked the
Indian company to adjust the claim of the Indian company against the above
company against the selling agency commission admittedly payable by the Indian
company to petitioner No. 5. In fact, such adjustment was made in or about 1979
and nobody has ever challenged the same. It was further pointed out that the
Indian company has filed a suit against the above company for recovery of the
balance amount after taking into account the above-mentioned adjustments. It
was further pointed out that under the sole selling agency agreement, payments
were to be made by the buyers directly to the Indian company and there was no
guarantee by the sole selling agent to recover these moneys from the buyers or
to pay them to the Indian company in the event of default by the buyers. It was
submitted, on behalf of the petitioners, that these misleading allegations have
been made with the sole object of prejudicing the mind of this court, if such a
thing was possible.
With regard to the loan to Pratap Development Co.
(P.) Ltd., it was pointed out that the board of directors of the Indian company
had approved the loan. If in doing so the board of directors had violated any
statutory provisions, they would be responsible for the same. It was further
pointed out that this question is now of academic interest since the entire
amount with interest has been paid by Pratap Development Co. (P.) Ltd.
With regard to the report of M/s. S.R. Batliboi &
Co., the findings of which have been discussed above, it was pointed out that
at a meeting of the board of directors of the Indian company held on June 23,
1981, it was resolved not to pursue the above report. Thus, at the point of
time when the present application was made, there was no apprehension at all of
any proceedings being initiated on the basis of the report of M/s. S.R.
Batliboi & Co. It is only after the present application was moved and the
interim orders obtained that at a meeting of the board of directors held on
September 25, 1981, it was resolved to constitute a sub-committee to devise a
method for taking steps in pursuance of the report of M/s. S.R. Batliboi &
Co. According to the petitioners, it will appear from the draft minutes of the
board meeting dated September 25, 1981, as circulated by the secretary of the
Indian company and as purported to have been corrected by the chairman, that
the chairman, Mr. Shah, has manipulated the minutes and inserted an item
therein for revival of the report of M/s. S.R. Batliboi & Co. although this
was not one of the items of the agenda for that meeting.
Mr. S.B. Mukherjee submitted that in the context of
the above facts and circumstances, the petitioners had cause for genuine
apprehension when they came to court regarding the termination of the sole
selling agency agreement. This apprehension, according to Mr. Mukherjee, is
fully justified by the extremely hostile attitude which is taken by Mr. M.T.
Shah in his affidavit-in-opposition. It was submitted that the court should not
allow the termination of the sole selling agency by the present board of
directors in which the Swedish group have a majority particularly in view of
the fact that the sole selling agency agreement is valid up to May, 1983. The
agreement is renewable every five years and requires twelve months' notice in
writing before termination. The agreement was approved by the shareholders and
the Central Government.
According to Mr. Mukherjee, the conduct of the
respondents lacked in probity and fair dealing and they have acted in a manner
which is oppressive, burdensome, harsh
and wrongful. Illustrations of such conduct were catalogued and may be noted
below.
"(a) When the auditors of the company gave the
report for the year ended December 31, 1980, to the effect that about Rs. 9
lakhs payable by the Swedish company has not been confirmed by them, the
Swedish group and their nominee directors wanted to charge the auditors. It is
significant to note that in the affidavit filed by the Central Government, this
particular amount which is outstanding and payable by the Swedish company has
been highlighted.
(b) The Swedish group have also tried to
forestall any action being taken with regard to the claim of about Rs. 10 lakhs
which have not been recovered on the ground of export rejection.
(c) The Swedish group have tried to perpetuate
their 49% share holdings by attempting to transfer 9% of their shares to Mr.
M.T. Shah in contravention of the provisions of the FERA.
(d) As soon as Mr. Shah joined the board of
directors and at the first meeting which he attended and presided over in
December, 1980, a resolution was passed stopping the payment of selling agency
commission to Mr. B.M. Singh and Sons, petitioner No. 5. This action has been
sought to be justified by saying that similar payment of dividends to the
Swedish shareholders was also suspended. It was submitted by Mr. Mukherjee that
dividends are declared only once in a year unless there is an interim
declaration of dividends and the amount of the dividends can only be
repatriated after a considerable time has elapsed in obtaining the approval of
the RBI.
(e) Mrs. Daphtary's letter dated March 14, 1981,
forwarding a copy of her husband's will which was lying with Mr. M. Subramonium
which was not placed before the board of directors till the controversial meeting
of August 25, 1981, in which it was resolved to transmit the shares in the name
of Mrs. Daphtary in clear violation of articles of association of the Indian
company.
(f) A sum of Rs. 42,000 was paid to Mrs.
Daphtary without any resolution of the board of directors and at the instance
of Mr. Shah as an inducement for transfer of 2% shares in favour of Shah.
(g) The meeting of the board of directors was
held on August 25, 1981, notwithstanding the request for adjournment by Mr.
Singhania by his letter dated August 10, 1981, and by Mr. Jalan in his telex
dated August 18, 1981. Significantly, the most vital and important decisions re
garding the transfer of 9% shares to Mr. Shah and the transmission of 2% shares
in favour of Mrs. Daphtary were taken at this board meeting although none of
these items featured in the agenda of this meeting. And although the agenda was
circulated on August 21, 1981, none of the nominee directors of the Indian
shareholders were present at the meeting.
(h) At the meeting of the board of directors
held on June 23, 1981, it was resolved that the report of M/s. S.R. Batliboi
and Co. should not be pursued for the time being. This was sought to be revised
at the instance of Mr. Shah by manipulating the minutes of the meeting of September
25, 1981. Mr. Shah tried to smuggle in a few lines regarding this matter.
(i) The minutes of the meeting of the board of
directors on September 25, 1981, were wrongfully manipulated and changed."
Mr. S.B.
Mukherjee also catalogued the acts which, according to the petition, are
oppressive to the petitioners as shareholders and/or prejudicial to the public
interest and/or prejudicial to the company and may be noted below:
(a)(i) It has not been disclosed that Shah is a
nominee of the Swedish group in the application purported to have been filed
under s. 19(5) of the FERA. Retention of control over this 9% shares by the
Swedish group is not only an indirect violation of the Act but also is a direct
violation in view of the provisions of s. 29(4) of the Act. The licence to
carry on business, it was submitted, was liable to be cancelled for mis leading
the authorities and suppressing material facts from them.
(ii)If shares
are sold to Mr. Shah, it will only sow the seeds of future discord and
litigation. The attitude of Shah is extremely hostile towards the petitioners
as will appear from his affidavit-in-opposition.
(ii)Violation
of the provisions of the FERA may lead to closure of the business of the Indian
company. My attention was drawn to the well-known decision of the Supreme Court
in the case of Needle Industries (India) Ltd, v. Needle Industries (Newey)
India Holding Ltd. [1985] 51 Comp Cas 743.
At p. 825 of the report the
following passage occurs :
"A permission granted
subject to the condition that such dilution shall be effected would cease
automatically on the non-compliance with the condition at the end of the
stipulated period or the extended period as the case may be."
(b) It was pointed out that in view of the
auditor's report which has been referred to above, the recovery of money from
the Swedish com pany by the Indian company is in jeopardy.
(c) A sale in favour of Shah will perpetuate
foreign control to the extent of 49% of the shareholders. In other words, this
disinvestment will not Indianise the Indian company to the extent of 60% of the
Indian shareholding which is the declared policy of the Government of
India. This would be directly prejudicial to the public interest.
(d) The
device adopted to acquire the 2% shares of Mrs. Daphtary and its transfer to
Mr. Shah is directly wrongful and illegal as to deprive the petitioner of their
pre-emptive right granted by the articles of association of the Indian company.
It was pointed out by Mr. Mukherjee that the real
opposition in this case is not from the Swedish group but from Mr. Shah. It was
pointed out that the affidavit filed, on behalf of the Swedish group, by Mr.
Subramonium merely adopts the statements made in the affidavit of Mr. Shah. It
was pointed out with reference to the main petition that initially there was
complete confidence in M.T. Shah. It was submitted that this is not unusual in
the case of companies which are really governed by the principles of
partnerships that relations are founded on mutual faith and confidence.
However, a point of time may arrive when such mutual faith and confidence is
lost. It was submitted that the petitioners in the instant case are justified
in losing their confidence in Mr. Shah because of the hasty steps he took since
the passing of the board resolution at the meeting held on August 25, 1981,
regarding the transfer and transmission of shares which were entirely for the
personal benefit of Mr. Shah. Reliance was placed in this connection on the
well-known English case of H.R. Harmar Ltd., In re [1958] 3 All ER 689 ; [1959]
29 Comp Cas 305. The following passage was relied on by Mr. Mukherjee : (at p.
333 of 29 Comp Cas):
"That being so, it seems to me that the question
which arises in this case, as indeed in almost any other case of this
character, is a pure ques tion of fact to be determined in accordance with the
circumstances of the particular case. In the course of the argument it was
suggested that the approach to this issue of fact was in some ways analogous to
the approach to the question of fact which arises in a matrimonial cause where
the petition is on the grounds of cruelty. I am disposed to think there is some
force in the suggestion that there is a similarity between the two
proceedings,......."
It was pointed out that the affidavit-in-opposition
filed by Mr. Shah is full of false, reckless and scandalous allegations against
the Singhs. Mr. Shah is neither a shareholder nor a creditor of the company and
has no stake whatsoever. In the circumstances of the case, the Singh group has
no reason whatsoever to repose any confidence in Mr. Shah.
A point was taken by the respondents that the
petition is not maintainable because B.M. Singh and Sons, petitioner No. 5, who
have no shares in the Indian company, have been made party to the petition.
This contention was sought to be repelled by Mr. Mukherjee on the ground that at one point of time large sums of money
became due and payable by the Indian company to petitioner No. 5. At a meeting
of the board of directors of the Indian company held on May 15, 1968, it was
decided to allot 4,500 equity shares to petitioner No. 5 in lieu of the
company's liabilities to the firm. These shares were, however, allotted to the
four individual partners of the firm and not to the firm. In any event, it was
submitted that the addition of petitioner No. 5, although not registered as a
shareholder, makes no difference to the maintainability of the application. It
was submitted that the application can be held to be valid in any event at the
instance of the other four petitioners.
It was
submitted by Mr. Mridul that it should be held, in the facts of this case, that
the executor of the will of late Mr. Daphtary, namely, Mr. Jagjit Singh, had
assented to the legacy of the 2% shares in favour of Mrs. Daphtary.
My attention
was drawn in this connection to s. 333 of the Indian Succession Act, 1925,
which is in the following terms :
"333(1). The assent of the executor or administrator to a special
bequest shall be sufficient to divest his interest as executor or administrator
therein, and to transfer the subject of the bequest of the legatee, unless the
nature of the circumstances of the property require that it shall be
transferred in a particular way.
(2) This assent may be verbal, and it may be either express or implied
from the conduct of the executor or administrator."
Although
considerable arguments were advanced by Mr. Mridul which were sought to be
repelled by Mr. Mukherjee, in my view, the legal position on this aspect of the
matter is perfectly simple. Mr. Mridul's submission on this point is totally
unacceptable for two reasons. In the first place, s. 333 of the Indian
Succession Act can only be invoked when there is a question of the executor's
assent to a specific legacy. As will appear from the will of the late Mr.
Daphtary which has been set out in an earlier part of this judgment, the entire
estate of the late Mr. Daphtary was bequeathed to his wife. In other words,
there was no specific legacy which was the subject-matter of bequest under the
will. To put it differently, the 2% shares of Mr. Daphtary cannot be said to be
a specific legacy under the will to which the executor could have assented in
favour of Mrs. Daphtary. Section 333 of the Indian Succession Act, in my view, is
totally inapplicable in this case.
The second
reason for rejecting the contention of Mr. Mridul is that on the materials on
record there iss nothing to show that the executor had in fact assented either verbally
or in writing or such assent can be implied from his conduct. For these two
reasons, the contention of Mr. Mridul on this aspect of the matter is
rejected. Certain authorities were cited by Mr. Mridul on this point which I do
not consider necessary to discuss.
Mr. Mridul repeatedly emphasised the fact that there
was no allegation of mismanagement of the Indian company. There are positive
facts to show that the company is doing very well. This contention, in my view,
is also misconceived. It is not the case of the petitioners that the company is
being mismanaged. The specific case is that, in the facts and circumstances of
this case, the Indian group is being oppressed by the Swedish group in
collusion with Mr. Shah. The question of mismanagement therefore is, in my
opinion, totally irrelevant.
In his written notes of arguments, Mr. Mridul has
included an elaborate discussion as to the meaning of the word
"nominee". Having regard to the admission of the petitioner that Mr.
Shah is a nominee of the Swedish group, I feel it unnecessary to deal with this
question any further.
Mr. Mridul has also included elaborate submissions on
the question as to whether there are any proceedings pending before the RBI. In
view of the stand taken from the Bar by Mr. Mridul that s. 19 of the FERA not
having any application to the present case and that the pending application
under s. 19(5) of the Act not being maintainable, I refrain from elaborating on
this part of the argument any further.
As noted earlier, Mr. Mukherjee emphatically
submitted that the resolutions with regard to the transfer of 9% shares of the
Swedish group in favour of Mr. M.T. Shah and the transfer of 2% shares held by
the late Mr. Daphtary in favour of Shah could not be held to be valid
resolutions inasmuch as there was no agenda with regard to those resolutions at
the relevant meeting. This contention of Mr. Mukherjee was sought to be
answerred by Mr. Mridul by the submission that under the law an item not on the
agenda can also be taken up. According to Mr. Mridul, the principle of law is
well settled that notice of a board meeting need, not unless strictly otherwise
provided, specify the nature of business to be transacted.
It was submitted by Mr. Mridul that the relevant
articles of association of the Indian company with regard to board meetings are
arts. 113 and 114. Those articles are in the following terms :
"113. The meetings of the board shall be held,
in accordance with the provisions of section 285 of the Act and notice of such
meetings shall be given to every director in accordance with the provisions of
section 286(1) of the Act provided notice of such meeting shall be sent to the
directors residing out of Calcutta by
registered air-mail post or by cable so as to Teach the addressee
thereof in the normal course at least twenty-one days before the date of the
meeting unless by prior consent accorded in writing or by a cable all the
directors agree to such meeting being held on shorter notice. Provided that
where an alternate director has been appointed, it shall be sufficient for the
purpose of this article to send a notice or to obtain the consent of such
alternate director only. Unless otherwise determined from time to time and at
any time by the consent of all the directors for the time being in India,
meeting of the board shall take place at the office.
114. A director may, at any time, and the secretary
shall, upon the request of a director made at any time, convene a meeting of
the board."
Section 286(1) of the Companies Act, 1956, which is
referred to in article 113 is in the following terms :
"Notice of every meeting of the board of
directors of a company shall be given in writing to every director for the time
being in India, and at his usual address in India to every other
director."
On the strength of the above section and the above
article, it was submitted by Mr. Mridul that neither the section nor the
articles require any specification of the agenda either expressly or by
necessary implication. According to Mr. Mridul, the above section and the above
articles should be contrasted with s. 172 of the Companies Act, 1956, and art.
69 of the articles which require specific mention of the agenda.
On the question whether a company can transact an
item of business at its board meeting in the absence of an agenda in that
behalf, reliance was placed by Mr. Mridul on an English decision in the case of
La Com-pagnie De Mayville v. Whitley [1896] 1 Ch D 788. At pages 796-7 of the
report, Lindley L.J. observed as follows :
"This case involves one question which is of
great importance to companies. The rest of the points are comparatively
trifling. The great point is whether, when a directors' meeting is to be held,
it is necessary to give a notice not only of the meeting, but of the business
to be transacted at the meeting. I am not prepared to say as a matter of law
that it is necessary. As a matter of prudence it is very often done, and it is
a very wise thing to do it; but it strikes me, as it struck Lord Tenterden in
Rex v. Pulsford, 8 B & C 350, that there is an immense difference between
meetings of shareholders or corporators and meetings of those whose business it
is to attend to the transaction of the affairs of the company or corporation.
It is not uncommon for directors conducting a company's business to meet on
stated days without any previotis notice being given either of the day or of
what they are going to do. Being paid for their services—as they generally are,
and as is thg case in this company—it is their duty to go when there is any business
to be done, and to attend to that business whatever it is , and I cannot now
say for the first time that as a matter of law the business conducted at a
directors' meeting is invalid if the directors have had no notice of the kind
of business which is to come before them. Such a rule would be extremely
embarrassing in the transaction of the business of companies."
Reference was made by Mr. Mirdul in this connection
to Palmer's Company Law, 22nd edition, Volume I, at pages 661-62, where the
following passage occurs :
"The articles usually provide that any one
director may summon a meeting directly or by requesting the secretary to do so.
Prima facie, due notice must be given convening a
meeting of direc tors, and in default the meeting is irregular; but this is not
always neces sary, for, by the articles, or by the determination of the
directors, meetings may be held at fixed times, in which case no notice of each
separate meet ing need be given. Where notice has to be given, it may be given
verbally unless the articles require it to be given in writing, and it must be
given a reasonable time before the meeting......
Notice of a board meeting need not, unless the
articles otherwise provide, specify the nature of the business to be
transacted."
Reference was also made to Buckley on the Companies
Acts, 12th edition, at page 886, where the following passage occurs :
"Every member of the board ought no doubt, in
the absence of special circumstances, to have sufficient notice of each
meeting, and a director cannot waive his right to notice. If such notice has
not been given, and a few of the directors purport to overrule the previous
decision of all without giving the rest an opportunity of attending, their act
will be void.
But notice of the business as distinguished from
notice of the meeting is not necessary. In the case, of special business, it
may be prudent and right to give notice of it, but it is not legally necessary
to do so."
Having regard to my findings on the other issues
involved in this application, I do not feel inclined to express any opinion on
this contention of Mr. Mridul.
Mr. Mukherjee did not dispute the contention of Mr.
Mridul that in order to succeed in an application under ss. 397 and 398 of the
Companies Act, 1956, the complaints must relate to the capacity of the
petitioners as shareholders of the company. He, however, submitted that the
fact that the petitioners may have other capacities such as that of petitioner
No. 5 as the sole selling agent will not affect the maintainability, of the
petition. Reliance was placed in this connection, on the welll-known English
decision in the case of H.R. Harmer Ltd., In re [1938] 3 All ER 689 ; [1956] 29
Comp Cas 305. Reference was made to a passage at pages 703 and 704 of the
report which is as follows (at p. 327 of 29 Comp Cas):
"Then the third submission of Mr. Harold Brown
was that what was done by the father was not oppressive of the rights of the
sons as members, but merely oppressive of their rights as directors. I cannot
accept this. It appears to me that the sons as members and not merely as
directors were oppressed by the singular conduct of the father. The oppression
must no doubt be oppression of members as such, but it does not follow that the
fact that the oppressed members are also directors is a disqualifying
circumstance when the question of relief under section 210 arises."
It may be noted that s. 210 of the English Act
corresponds to s. 397 of the Indian Act.
Reference was also made by Mr. Mukherjee to the
decision of Mallick J. in the case in Albert David Ltd., In re [1964] 68 CWN
163. Reference was placed to a passage at page 175 of the report which is as
follows :
"According to Mr. Mukherjee, a shareholder is given
the right to apply under sections 397 and 398, when his right as shareholder is
affected. If his right qua director is affected, that is, if he is improperly
removed from the board or prevented from being appointed as a director, this
infringement of a shareholder's right cannot be the foundation of an
application under sections 397 and 398 of the Act, I am unable to agree with
Mr. Mukherjee. The right to appoint a director is a very valuable right of a
shareholder and when this right is infringed, his right qua shareholder is also
affected. The shareholder in such a case is entitled to apply under section 397
of the Act, complaining that the affairs of the company are being conducted in
the manner oppressive to himself."
With regard to the contention of Mr. Mridul that the
acts of oppression must be continuous, Mr. Mukherjee referred to the well-known
decision in In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510; 68 CWN
118 (Cal). Reference was made to a passage at page 130 of the report which is
in the following terms (at p. 523 of 34 Comp Cas):
"In my view, the respondents' contention that in
order to attract section 397 of the Act, the oppressive act complained of must
be wrongful conduct which continues over a period of time, is not tenable. The
wrongful act complained of in this case is a single act of raid, but its
effect, as I see it, is continuous and persistent oppression of the petitioners
by the Prosad group. The claim of the Prosad group to have held an
extraordinary general meeting, to have authorised issue and allotment of new
shares, to have altered the character and composition of the board,
unmistakably indicate its aim and object. The law, in my view, does not
contemplate that a petitioner who is otherwise entitled to relief under this
section must be able to show that there has been a continuous course of
oppressive conduct over a period of time before he can obtain relief under this
section."
Reference was also made to the decision of the Court
of Appeal in the abovementioned case which is the case of Ramashankar Prosad v.
Sindri Iron Foundry P. Ltd., AIR 1966 Cal 512. Reference was made to paragraph
55, p. 529, of the report wherein the following passage occurs :
"While it is true that the oppression was not of
long duration having at best commenced only a few weeks before the matter was
brought into court, there can be no doubt that its effect was continuous and
would have persisted but for the intervention of the court. The cases of Harmer
[1958] 3 All ER 689; [1959] 29 Comp Cas 305 and Scottish Co-operative Society
Ltd. [1959] AC 324, afford instances where the oppression had been going on for
some time but in my opinion it is not necessary that the petitioner who comes
to court for redress under s. 397 should have submitted himself to oppression
over a period before he can invoke the powers of the court. If the oppression
is of short duration but is of such a lasting character that redress is
impossible by calling board meetings or general meetings of the company, a case
for intervention under section 397 is made out."
On the strength of the above declarations, it was
submitted by Mr. Mukherjee that our courts have held if there is a single act
which gives rise to a chain reaction, that would be sufficient for invoking the
jurisdiction of this court. The present case, according to Mr. Mukherjee, is of
such a type.
Dealing with Mr. Mridul's submission as to an
alternative remedy, Mr. Mukherjee pointed out that, according to Mr. Mridul,
three alternative remedies were available to the present petitioner. The first
is a suit for injunction. The second is an approach to the Reserve Bank under
the FERA. The third is a rectification application under s. 155 of the Act.
As a proposition of law, Mr. Mukherjee submitted that
the proceedings under ss. 397 and 398 being a remedy alternative to winding up,
the court is not called upon to find out whether there is an alternative to an
alternative. In any event it was submitted that a wrongdoer cannot complain
that the person wronged might have chosen another remedy. Reference was made in
this connection to the above-mentioned decision of H.R. Harmer Ltd., In re
[1958] 3 All ER 689 at p. 704; [1959] 29 Comp Cas 305 at p. 327, wherein the
following passage occurs :
"Fourthly, counsel for the father said that the
acts complained of might have been restrained by injunction in so far as they
were acts done without the authority of the board. As to this, I do not think a
wrongdoer in this field can well complain that the person wronged might have chosen
another remedy."
On the question of filing a suit, Mr. Mukherjee
pointed out that such a suit cannot be a minority action for injunction; this
is because of the fact that 2% shares still stand in the name of the late A.C.
Daphtary. The two groups are equally balanced having 40% shares each. In other
words, the Indian group cannot be called a minority. Further, the complaints
relate to oppression or acts prejudicial to the public interest. In the
circumstances, a petition under ss. 397 and 398 is the proper remedy.
With regard to the alternative remedy of approaching
the Reserve Bank, it was pointed out with reference to the correspondence with
the Reserve Bank which has been noted above that the Reserve Bank has
unequivocally decided in favour of dilution of foreign equity participation to
the tune of 9% of the shares of the Indian company. Further, it was the
admitted case of the parties that s. 19(5) of the FERA has no application in
this case. In any event, the court had restrained the respondents from pursuing
the intended application under s. 19(5) of the FERA. In the circumstances, it
was submitted, there was no question of approaching the Reserve Bank any
further.
It was finally submitted that this is a case of
complete deadlock as the two groups have equal shareholding. The partnership
principle fully applies to the facts of the instant case. On this aspect of the
matter Mr. Mridul relied on the decision of the English Court of Appeal in
Westbourne Galleries Ltd., In re [1971] 1 All ER 561 ; [1971] 2 WLR 618. Mr.
Mukherjee pointed out that this case has been overruled by the House of Lords
in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 ; [1973] AC 360.
According to Mr. Mukherjee, the principles of this case have been applied and
accepted by our Supreme Court to the extent that where, before being
incorporated, there was a partnership or where the shares are held more or less
equally, the partnership principle will apply.
On the amplitude of the court's power to give relief
in an application under ss. 397 and 398 of the Act, strong reliance was placed
on a recent decision of a Division Bench of this court in the case of Debi
Jhora Tea Co. Ltd. v. Barendra Krishna Bhowmick [1980] 50 Comp Cas 771. At pp.
782-83 the following passage occurs :
"It should be borne in mind that when a court
passes an order under ss. 397, 398 and 402 as has been done in the instant
case, there could be no limitation on the court's power while acting under the
sections. Instead of winding up a company, the court under the abovementioned
sections has been vested with ample power to continue the corporate existence
of a company by passing such orders as it thinks fit in order to achieve the
objective by removing any member or members of a company or to prevent the company's
affairs from being conducted in a manner prejudicial to the public interest.
The court under s. 398 read with s. 402 of the Act has the power to supplant
the entire corporate management. Under the aforesaid sections, the court can
give appropriate directions which are contrary to the provisions of the
articles of the company or the provisions of the Companies Act.
In the instant case, the court directed that the
share register of the company would be in the custody of the special officer
and also directed that the proxies should be filed at the residence of the
special officer. The board of the company under the chairmanship of the special
officer settled the notice of the adjourned general meeting at its meeting on
May 17, 1978. The board decided that the proxies should be filed at the
residence of the special officer, fresh nominations were to be filed with the
special officer at his residence and, as such, by sending the said notice dated
May 17, 1978, settled by the special officer, the company and the special
officer were merely complying with the directions of the court for convening
the adjourned general meeting. The meeting held on July 17, 1978, cannot be
said to be illegal, in our view."
At pages 784-85 of the report, the following passage
occurs :
"The order dated June 7, 1978, as already
stated, does not appear to us to have done away with all the previous
directions of the court for conducting the adjourned annual general meeting or
the filing of the proxies or nominations. It merely extended the time to file
nominations for election to the office of directors. Under sections 397 and 398
read with section 402, power has been conferred upon the court 'to make such
orders' as it thinks fit. The power conferred upon the court by the abovementioned
sections is very wide and object or objects sought to be achieved by the
exercise of such power have been stated in sections 397 and 398. As we read
sub-clauses (a) and (g) of section 402 of the Act, we have no doubt in our mind
that the intention of the Legislature under the abovementioned sections was to
confer wide and ample powers upon the court for the regulation of the
conducting of a company's affairs and to provide for any other matter which the
court thinks just and equitable to provide for in the interest of the corporate
body and the general public....
By reason of what has been stated hereinabove, it
appears to us that the court had power to make the order in regard, to
convening and holding of the meeting, filing of proxies or nominations or any
other matter for the purpose of conducting the affairs of a company which might
be contrary to the provisions of the articles of the company or the Companies
Act, by virtue of the provisions of sections 397 and 398 read with section 402
of the said Act."
On the question of the wide amplitude of the court's
power' in granting relief in a petition under ss. 397 and 398 of the Act in
exercise of powers under s. 402 thereof, reference was made by Mr. Mukherjee to
the Supreme Court "decision in the well-known case of Cosmosteels Pvt.
Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312. At p. 318 of the report, itis
as follows :
"The scheme of ss. 397 and 402 appears to
constitute a code by itself for granting relief to oppressed minority
shareholders and for granting appropriate relief, a power of widest amplitude,
inter alia, lifting the ban on a company purchasing its shares under court's
direction, is conferred on the court. When the court exercises this power by
directing a purchase of its shares by the company, it would necessarily involve
reduction of the capital of the company. Is such power of the court subject to
a resolution to be adopted by the members of the company which, when passed
with statutory majority, has to be submitted to court for confirmation ? No
canon of construction would permit such an interpretation in which the
statutory power of the court for its exercise depends upon the vote of the
members of the company. This would inevitably be the situation if reduction of
share capital can only be brought about by resorting to the procedure
prescribed in ss. 100 to 104. Additionally, it would cause inordinate delay and
the very purpose of granting relief against oppression would stand
self-defeated. Viewed from a slightly different angle, it would be impossible
to carry out the directions given under s. 402 for reduction of share capital
if the procedure under ss. 100 to 104 is required to be followed. Under ss. 100
to 104, the company has to first adopt a special resolution for reduction of
share capital if its articles so permit. After such a resolution is adopted
which, of necessity, must be passed by majority, and it being a special
resolution, by a statutory majority, it will have to be submitted for
confirmation to the court. Now, when minority shareholders complain of
oppression by majority and seek relief against oppression from the court under
ss. 397 and 398 and the court, in a petition of this nature, considers it fair
and just to direct the company to purchase the shares of the minority shareholders
to relieve oppression, if the procedure prescribed by ss. 100 to 104 is
required to be followed, the resolution will have to be first adopted by the
members of the company ; but that would be well nigh impossible because the
very majority against whom relief is sought would be able to veto it at the
threshold and the power conferred on the court would be frustrated. That could
never have been the intention of the Legislature. Therefore, it is not
conceivable that when a direction for purchase of shares is given by the court
under s. 402 and consequent reduction in share capital is to be effected, the
procedure prescribed for reduction of share capital in ss. 100 to 104 should be
required to be followed in order to make the direction effective."
This authority was very strongly relied upon by Mr.
Mukherjee as showing the widest amplitude of powers the court has under s. 402
of the Act. It was submitted that in exercise of that power, the court could if
necessary override certain statutory provisions of the Companies Act as has
been done in the above case.
On the question of the application of the partnership
principle in an application for winding-up of a company under the just and
equitable clause, Mr. S.B. Mukherjee relied on a decision of the Supreme Court
in the case of Hind Overseas (P.) Ltd.
v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91. Although that
case related to the winding-up of a company, Mr. Mukherjee referred to s. 397,
which, inter alia, provides that the court must be of the opinion that the
facts in s. 397 application would justify the making of a winding-up order on
the ground that it was just and equitable that a company should be wound up.
In that case, it was held that in a case where the
shareholding is more or less equal and there is a case of complete deadlock in
the company on account of probity in the management of the company and there is
no hope or possibility of smooth and efficient continuance of the company as a
commercial concern, there may arise a case for winding-up on the just and
equitable ground. In a given case, the principles of dissolution of partnership
may apply squarely if the apparent structure of the company is not the real
structure and on piercing the veil, it is found that in reality it is a partnership.
Mr. Mukherjee submitted that the principle enunciated
by the Supreme Court squarely applies to the facts of the present case. Here
there is a complete deadlock because of the Indian group and the Swedish group
holding 49% shares each in the Indian company. Further, on piercing the veil,
it should be held by this court that in reality it is a partnership between the
Swedish group and the Indian group or the "Singh group".
In my view, this contention of Mr. Mukherjee is sound
and should be accepted. In my view, this is indisputably a case of complete
deadlock; further, in reality, it is a partnership between the Swedish group on
the one hand and the Singh group on the other.
I have recorded the submissions of both the petitioners
and the contesting respondents both on facts and on law somewhat elaborately. I
shall now record my decision on the various points somewhat briefly. I am of
the opinion that the transfer of 9% shares of the Swedish group in favour of
Mr. M.T. Shah is in clear contravention of art. 34 and the other connected
article of the Indian company. I accept the contention of Mr. S.B. Mukherjee
with regard to the interpretation of these articles. I am of the opinion that
art. 34 contains a "pre-emptive" provision. In other words, these 9%
shares could not be transferred to Mr. Shah unless they were offered to the
existing shareholders other than the Swedish group. I accept the contention of
Mr. Mukherjee based on the well-known decision of the Supreme Court in Needle
Industries' case, [1981] 51 Comp Case 743, that there is no question of
offering these shares to the Swedish group in view of the provisions of the
FERA. In my view, under the relevant articles noted above, the only way it
could be offered to Mr. Shah was if it could be shown on the facts that the
existing shareholders other than the Swedish group had consented to such a
transfer which would mean that they have waived their pre-emptive right under
the articles. In my view, such consent or waiver cannot be established in the
facts of the present case. I accept the contention of Mr. Mukherjee that this
consent must be given by each individual shareholder and cannot be inferred by
the presence of any shareholder as representing a "group" at a board
meeting or even by his implied assent. To put it concretly, even assuming that
the presence of Mr. B. Singh or of the nominees of the Indian group could be
construed as an implied assent to the transfer of the 9% shares of the Swedish
group in favour of Mr. Shah, such implied assent would not amount to a
compliance with the abovementioned articles with regard to the transfer. I
accept the submission of Mr. Mukherjee that such consent, as mentioned above,
would have to be the individual act of each shareholder and cannot be spelt out
in a representative manner. It would follow that I reject the somewhat
elaborate submission of Mr. Mridul on this aspect of the case.
With regard to the question whether a mere illegality
or an action of the company contrary to the articles would by itself warrant
the interference of the court under ss. 397 and 398, I am of the opinion that
this legal proposition which was not disputed does not stand in the way of the
petitioners obtaining relief in the present case. From the facts and
circumstances of the instant case which have been elaborately set out
hereinbefore, I am of the view that the Swedish group with the help of its
nominee, Mr. M.T. Shah, is determined to oust the Indian group from the
management of the Indian company. To avoid prolixity, I refrain from giving
reasons for my conclusion which will appear from what has been stated
hereinabove.
I am further of the opinion, in the light of the
facts and circumstances stated hereinabove, that there was a deliberate attempt
by the Swedish group to circumvent the provisions of the FERA with regard to
the dilution of foreign equity participation. I am of the opinion this is not a
mere technical breach of the law on this question. I am of the view that these
provisions of the FERA are intended to provide for effective Indian control of
these types of companies. As such, I am of the opinion that this is very much a
matter of public interest as it involves the implementation of a national
policy through appropriate legislative measures.
With regard to the attempt to transfer the 2% shares
of the Indian company which were and still are registered, in the name of the
late Mr. Daphtary in favour of Mr. M.T. Shah, I am of the view that this is as
much in contravention of art. 34 and other connected articles of the company as
the attempted transfer of 9% shares of the company in favour, of M.T. Shah. In
other words, the transfer of these 2% shares is vitiated by the same
infirmities as the transfer of the 9% shares mentioned in an earlier part of
this judgment.
I accept the submission of Mr. Mukherjee that the
question of alternative remedy does not arise in this case. I accept the
submission that there is no pending proceedings before the RBI and, as such,
the question of the RBI being a competent authority to decide the issues
involved in this application does not arise. I also accept the submission of
Mr. Mukherjee that there is no question of a minority action by way of
injunction in the facts of the present case.
I further hold that the provisions of the Indian
Succession Act, 1925, viz., ss. 149, 213, 327 and 333, which were sought to be
relied upon by Mr. Mridul, have no manner of application to the question of the
transfer of 2% shares in favour of M.T. Shah.
I am further of the view that the attempts by the
nominees of the Swedish group to rake up S.R. Batliboi and Co.'s report,
although at an earlier board meeting it was decided not to take any steps
pursuant to the report for the present, is nothing but an attempt on behalf of
the Swedish group and its nominees to find a ground for termination of the sole
selling agency in favour of petitioner No. 5. I hold that the petitioners were
justified in being apprehensive that attempts would be made to terminate the
sole selling agency agreement which is otherwise valid up to May, 1983. It
would follow that I am of the view that the petitioners are entitled to relief
on this account also.
It should be evident from what I have stated
hereinabove that the petitioners, in my view, have made out a case of
oppression within the meaning of s. 397 and are entitled to appropriate relief.
In the result, this application succeeds. The
resolution passed at the board meeting
of respondent No. 1 held on August 25, 1981, purporting to transmit the
812 shares of the late A.C. Daphtary in favour of Mrs. Leila Daphtary is
declared void and illegal and the same is directed to be delivered up
cancelled. The resolution passed at the board meeting of respondent No. 1 held
on August 25, 1981, purporting to sanction disinvestment, by respondent No. 2,
of 9% shares held by it in favour of respondent No. 3 is declared void, illegal
and not binding on the company and its shareholders and is directed to be
delivered up cancelled. Respondent No. 2 is directed to transfer the shares to
the extent of 9% of the paid-up capital of respondent No. 2 oat of the shares
registered in the name of respondent No. 2 to the existing shareholders of the
Indian company other than the Swedish group in accordance with art. 34 of the
articles of association of the Indian company and other connected articles at
the rate of Rs. 150 per share. Such sale is to be completed within a period of
10 weeks from date. Respondent No. 1 is directed to deal with the 2% shares as
registered in the name of late Mr. A.C. Daphtary in the manner laid down in the
relevant articles of association of the Indian company.
In the event of the executor to the will of the late
Mr. Daphtary or his legatee under the will intending to sell the 2% shares,
they are directed to comply with the relevant articles of association of the
Indian company and the observations made in this judgment with regard thereto.
Respondent No. 1 is directed to take all necessary
steps to obtain the sanction of the RBI, if necessary, for the purpose of the
remittance of the purchase price of the 9% shares. In default of transfer of 9%
shares by respondent No. 2 as aforesaid, respondent No. 2 would be restrained
from exercising any voting right or any other rights in respect of the
above-mentioned 9% shares till the transfer of these shares.
Until a new board of directors is elected at the
extraordinary general meeting of respondent No. 1 to be held as directed
hereinafter, respondent No. 1 is directed to be managed by a committee of
management consisting of Mr. Bhubaneshwar Singh and Mr. K.N. Jalan as the
representatives of the Singh group of shareholders and Mr. C.K. Thanawala and
Mr. M.T. Shah as the representatives of the Swedish group of shareholders. Dr.
Monotosh Mukharji is appointed chairman of the committee of management. Dr.
Monotosh Mukharji would be entitled to a remuneration of 150 G. Ms. per month
which is to be paid out of the assets of the respondents.
The chairman of the committee of management is
directed to convene an extraordinary general meeting of the shareholders of
respondent No. 1 within a period of twelve weeks from the date for the purpose
of electing a new board of directors. After the election of the board of
directors, the chairman and the members of the committee of management will
stand discharged and they will hand over the charge of the management, books,
papers and documents of respondent No. 1 to the new board of directors. The
notice dated September 25, 1981, convening the 16th annual general meeting of
respondent No. 1 is hereby cancelled. The new board of directors will take
steps for convening and holding the annual general meeting in accordance with
law.
The executives of the company including the chief executive
are directed not to make any financial commitment in so far as the workers of
the Pune and Varanasi factories are concerned save in the matter of bonus and
for the payment of existing remuneration to the workers without an order from
the committee of management.
There will be an order in terms of prayer(n) of the
petition. There will also be an injunction restraining the present board of
directors from functioning until the committee of management is appointed.
After the election of the new board, the existing board shall stand superseded.
Respondent No. 1 and its existing shareholders are
directed not to take any steps for the purpose of implementing the operative
part of my judgment and order for a period of two weeks after the reopening and
there will be a stay of the operation of my order with regard to the committee
of management for the same period in regard to the transfer of shares.
I make it clear that the injunction on the
executives, mentioned above, will continue.
The contesting respondents are directed to pay the
costs of this application to the petitioners.
All parties to act on a signed copy of the operative
part of the order.
[1986] 60 COMP. CAS. 735 (
HIGH COURT OF
v.
Tara Chand Saraogi
DIPAK KUMAR SEN AND SUHAS CHANDRA SEN JJ.
A.F.O.D. NO. 55 OF 1983
JULY 19, 1984
S. B.
Mukherjee and J. K. Mitra for the Appellant.
JUDGMENT
Suhas Chandra Sen J.—This is an appeal from a
judgment dated August 17, 1982. The facts of this case are a little unusual. A
suit was filed by Smt. Sheila Devi Chamaria against Bajranglal Khemka,
Tarachand Saraogi, Ram Kumar Sakseria, Sundarlal Nahata, Suganchand Saraogi,
Champalal Jain, Smt. Gomti Sethani, Smt. Sabitri Dhandhania, Bijoy Kumar
Dhandhania and East India Film Co. Pvt. Ltd., a company incorporated under the
Companies Act, for declaration that the plaintiff was the owner of 900 equity
shares of East India Film Co. Pvt. Ltd. and for a decree directing
rectification of the share register of the company by inserting the plaintiff's
name in respect of those shares. After the suit was instituted, a written
statement was filed on behalf of the defendants. It appears that there were
protracted litigation between the parties in other proceedings. But ultimately
when this suit came up for hearing, the defendants chose not to contest the
suit. The propounders of the will of Motilal Chamaria, defendants Nos. 1 and 2,
were dead at the time the suit was taken up for hearing. The advocate-on-record
on behalf of defendants Nos. 3, 4, 5 and 6 stated in court that he had no
instructions in the matter and took leave to retire from the suit. Nobody
appeared on behalf of defendants Nos. 7, 9 and 10. Mr. P. L. Kedia appeared on
behalf of defendant No. 8 and submitted that he had no instructions in the
matter.
Under these circumstances, the case was taken up for
hearing without any contest. Evidence was given in this case by the plaintiff
and also by one Indrajit Raikhy, an employee of Swastika Construction Firm. It
has been stated in the plaint by the plaintiff that she married Motilal
Chamaria on April 5, 1953, according to Hindu rites. Motilal was the beneficial
owner of the entire issued share capital of East India Film Company Private
Limited. Out of 900 shares issued by the company, 875 shares were held by
Motilal in his own name : 10 shares each stood in the names of Harilal Banerjee
and Tarachand Saraogi and 5 shares stood in the name of Champa Lal Jain. It is
the case of the plaintiff that Harilal Banerjee, Tarachand Saraogi and
Champalal Jain were mere benamidars of Motilal. It is the further case of the
plaintiff that Motilal made a gift of the said 900 shares to the plaintiff. The
share certificates were handed over to the plaintiff along with a blank
transfer form duly signed by Motilal. It was agreed between Motilal and the
company that the shares would be transferred to the name of the plaintiff in
the books of the company after the death of Motilal ; but the entire dividend
had to be paid to the plaintiff and the dividend was accordingly paid to the
plaintiff on the 900 shares even during the lifetime of Motilal. This
arrangement was confirmed by a writing on or about January 8, 1961, and that
writing is set out in annexure "A" to the plaint. Motilal Chamaria died
intestate on June 22, 1967. The plaintiff's case is that after the death of
Motilal, the company has not rectified the share register by inserting the name
of the plaintiff as the holder of the said 900 shares nor has the company
returned the share scrips to the plaintiff. The plaintiff prayed for
declaration that she was the owner of the said 900 equity shares of the
defendant company as well as a direction for rectification of the share
register.
The plaintiff stated in her deposition that Motilal
during his lifetime held 875 shares in the company in his own name; but the
other 25 shares which stood in the name of his employees also belonged to him.
The consideration money for the shares was paid by Motilal and the benamidars
did not get any dividend at all. The plaintiff also stated that at the
beginning of January, 1961, Motilal handed over the share scrips to the
plaintiff as well as the transfer deeds in the presence of Sushil Kumar
Haldar and Mr. Raikhy. Motilal told the plaintiff
that she was the actual owner of the shares. She also stated that the document
dated January 8, 1961, was executed pursuant to the gift that was made and she
enjoyed the dividends from the shares from that date onwards.
Mr. Raikhy in his evidence has corroborated the
evidence given by the plaintiff and he has specifically stated that he was
present at the time the shares were gifted to the plaintiff. He also stated
that 900 share scrips along with blank transfer deeds duly signed by Motilal
were handed over to the plaintiff.
The learned trial judge held :
1. There was no evidence that any application was made to the company for transfer of the shares or that the company refused to transfer the shares ;
2. The plaintiff failed to prove that the share scrips were in fact in her possession or that she had taken any steps for transfer of the shares ;
3. The document dated January 8, 1961, only indicated that Motilal Chamaria undertook to give the plaintiff the entire amount of dividends and there was a mere direction that those shares would be transferred to her as one of his heirs after his death.
We are of the view that the appellant is entitled to
succeed in this case. The plaintiff has amply proved that the said 900 shares
were handed over to her along with a duly attested blank transfer form by her
husband Motilal in January, 1961. She has stated that all the dividends on 900
shares thereafter were paid to her. The gift was complete as soon as the share
scrips along with the transfer deed were given to the plaintiff although the
transfer was not recorded in the books of the company. There cannot be any
doubt that the ownership of the shares passed to the appellant when the shares
were handed over to her along with the blank transfer form duly signed by
Motilal. It was held by the Supreme Court in the case of Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakar [1975] 45
Comp Cas 43 (SC) that the donation of the right to get share
certificates made out in the name of the donee became irrevocable by
registration as well as by delivery. It was further observed by the Supreme
Court at page 52 :
"The donation of such a right, as a form of
property, was shown to be complete so that nothing was left to be done so far
as the vesting of such a right in the donee is concerned. The actual transfers
in the registers of the companies concerned were to constitute mere
enforcements of this right. They were necessary to enable the donee to exercise
the rights of the shareholder. The mere fact that such transfers had to be
recorded in accordance with the company law did not detract from the
completeness of what was donated."
In the light of the observation made by the Supreme
Court, it must be held that the gift of the shares was complete as soon as the
shares were handed over to the plaintiff along with the blank transfer form
duly signed by Motilal. The non-recording of the transfer in the books of the
company did not invalidate the gift in any way. Although the plaintiff would
not be regarded as a shareholder by the company until the transfer was recorded
in the books of the company, none the less, in the eye of law, it was the
plaintiff who was the owner of the shares and the gift was completed by the
delivery of the share certificates along with the blank transfer form duly
signed by the transferor. The plaintiff has acquired a complete legal right to
have the shares registered in her name. The deed of gift dated January 8, 1961,
recites;
"That out of natural love and affection for my
wife, Smt. Sheila Devi, whom I married on April 5, 1953, I undertake to give to
her the entire amount of dividend which will be declared by the East India Film
Company (P) Ltd., 68, Cotton Street, Calcutta, from year to year henceforward,
i.e., from January 1, 1961, in respect of all shares owned by me in my name and
in benami names of others in cash irrespective of income-tax deductions. That
after my death the shares mentioned above should be transferred in her name as
one of my heirs, irrespective of any future disposition of my properties by
me."
In my judgment, the deed of gift does not go, in any
way, against the case made out by the plaintiff. It supports the contention of
the plaintiff that she used to get the entire amount of the dividend declared
by the company. The direction for transferring the shares in the name of the
plaintiff does not militate against the case made out by the plaintiff. The
shares were handed over to the plaintiff along with blank transfer forms duly
signed by Motilal. The shares were not registered in the name of the plaintiff
during the lifetime of Motilal. The actual registration of the transfer had to
be effected after the death of Motilal.
Assuming that there is any conflict between the gift
that was made and the deed that was executed on January 8, 1961, that conflict
must be resolved in favour of ,the plaintiff. If the plaintiff's case is true,
and it must be taken to be true in the absence of any dispute raised by
anybody, the shares along with the transfer deed signed by Motilal were handed
over to the plaintiff. Motilal did all that he could do to make the gift
complete. The only step that was left out was registration of the transfer. It
has to be remembered that what a company registers under section 108 is "a
transfer of shares". In other words, the transfer must precede
registration. It may have been the wish of Motilal that the transfer will not
be registered in the name of the plaintiff during his lifetime, but that will
not prevent the transfer from being valid and effective.
The learned trial judge placed reliance on the case
of Amarendra Krishna Dutt v. Monimnnjary Debi, AIR 1921 Cal 148. But the
correctness of that decision was doubted by the Supreme Court in the case of
Vasudev Ramchandra Shelat v. Pranlal
Jayanand Thakar [1975] 45 Comp Cas 43 (SC). The Supreme Court observed
that the Calcutta High Court's view was "in conflict with the law declared
in the cases cited by the appellant which we approve."
The point of time at which the plaintiff lodged the
share certificates with the company is quite immaterial. The plaintiff has
proved that Motilal was the owner of all the shares ; 875 shares were held in
his name and the other shares were held in the names of his benamidars. It has
been proved that the shares were transferred to the plaintiff by handing over
the scrips to her along with blank transfer form duly signed by the transferor.
There is no reason why the company shall not register the transfer of shares.
The company which is a party to this proceeding has not contested this suit.
Nobody on behalf of the defendants has contested the claim of the plaintiff. In
these circumstances, there is no reason to deny the claim of the petitioner for
registration of the shares in the books of the company in her name.
In view of the above, the appeal is allowed. The
judgment and decree passed on August 17, 1982, is set aside.
There will be a decree declaring that the plaintiff
is the owner of the 900 equity shares of East India Film Co. P. Ltd. described
in the plaint.
There will also be a decree directing rectification
of the share register and/or register of members of East India Film Co. P. Ltd.
by inserting the name of the plaintiff and/or her nominee in respect of the
said shares.
There will also be a mandatory injunction directing
East India Film Co. P. Ltd. to deliver to the plaintiff the shares scrips
and/or certificates in respect of the said 900 shares after rectification of
the share register. In default, East India Film Co. P. Ltd. is directed to
issue duplicate share scrips in respect of the aforesaid 905 shares of the
company to the plaintiff in accordance with law.
There will be no order as to costs.
Dipak Kumar Sen J.—I agree.
Karnataka High Court
companies
act
[2002]
36 scl 353 (kar.)
v.
Union Theatres (P.) Ltd.
H.
Rangavittalachar, J.
R.S.A.
No. 319 of 1985
March 19,
2001
Section 82 of the Companies Act, 1956, read
with Order 21 of Code of Civil Procedure, 1908 - Shares - Nature of - In an auction
sale held in execution of court decree, appellant purchased shares of
respondent-company and applied to company for transferring said shares to his
name - Company refused to do so on ground that articles of association
prohibited transfer of shares from shareholders to non-shareholders - A suit
filed by appellant was decreed in his favour and it was held that articles of
association had no application to court auction sales - Whether an already
existing restriction on right to transfer continues to exist even after court
sale and a court does not stand on a higher pedestal than a private sale in
this regard - Held, yes - Whether in instant case, when shares in question were
sold, they were already subject to limitation and restriction of articles of
association and court sale did not have effect of removing said restriction
and, therefore, company was well within its rights to refuse to transfer and
register - Held, yes
The appellant had purchased the shares held by
‘B’ in the respondent-company, in an auction sale which was held in execution
of a court decree. The appellant applied to the company for transferring the
share of ‘B’ to his name and accordingly, register in the company’s registers.
The company refused to do so on the ground that in its articles of association,
there was a prohibition on transfer of shares from shareholders to
non-shareholders. A suit was filed by the appellant and the trial judge decreed
the suit by holding that restrictions in the articles of association regarding
transfer of shares had no application to court auction sales and the company,
therefore, was bound to transfer. However, the appellate judge reversed the
judgment and decree.
On second appeal :
Held
Shares and movable property and the manner of
transfer is provided under section 82. In execution of decrees by the sale in
respect of shares of companies, rules 79 and 80 of Order 21 of the CPC are
relevant.
By a reading of the above two orders, it is
manifest that the delivery of the shares sold, is made by first prohibiting the
judgment-debtor and the company from transferring the share to any other person
and if the judgment-debtor does not co-operate in transferring the share to the
auction purchaser by signing any documents required by law, then under rule 80,
the judge or any officer appointed by him may execute such documents, which
when done, will have the effect as if the judgment-debtor executed the
documents.
What ‘property’ passes under these rules, is
only the right, title and interest of judgment-debtor and these rules do not
have the effect of either enlarging the right of the judgment-debtor or
removing any restriction he was subject to, in the matter of transfer of his
title to the property. In other words, if there is already a restriction on the
right to transfer, such restriction continues to exist even after the court sale and a court sale does
not stand on a higher pedestal than a private sale in this regard; if the
judgment-debtor has a restricted right to property, the auction purchaser in
the court sale will not get a higher right than the judgment-debtor.
In the facts of the instant case, when the
share of B was sold, it was already subject to the limitation and restriction
of the articles of association and the court sale did not have the effect of
removing the said restriction and, therefore, the company was well within its
rights to refuse to transfer and register.
Soma Veerappa v. Muthurasappa Chettiar AIR
1973
H. Kantharaju, T. Papanna and K. Nageshwarappa for the
Appellant. Jayaram and Jayaram for the Respondent.
Rangavittalachar J. - This is a plaintiff’s second appeal. The
plaintiff herein filed a suit for mandatory injunction directing the
defendant-company. Union Theatres (P.) Ltd. to transfer the share held by the
late A. Bheemappa Naik into their names and effect necessary changes in the
registers of the company.
2. The
facts leading to the filing of the suit are, Vijaya Bank had filed a suit
against Asiatic Films Corpn. in O.S. No. 43 of 1961 for recovery of certain
money. The said suit came to be decreed. Execution proceedings were initiated
by the bank against one Bheemappa Naik, the shareholder of Asiatic Film’s
Corpn. by bringing to sale his share of the value of Rs. 5,000. In the court’s
sale, the appellant/plaintiffs were the auction purchasers, i.e., jointly
purchased the shares for Rs. 6,000. A ‘sale certificate’ was issued completing
the transfer. Later they applied to the defendant-company for transferring the
share of Bheemappa Naik to their name and accordingly register in the company
registers. Since respondents/defendants refused to do so relying on article 7
of their articles of association, they filed the present suit.
3. The
suit was contested. The respondent/defendant contended that by clause 7 of the
articles of association, there is a prohibition on transfer of shares from
shareholders to non-shareholders. Since the plaintiffs were not shareholders of
the defendant-company, the share of Bheemappa Naik cannot be transferred,
therefore it prayed for dismissal of the suit.
4. The
learned trial judge after trial decreed the suit. By relying on the decision of
the Calcutta High Court in Mahadeo Lal Agarwala v. New Darjeeling Union Tea Co.
Ltd. AIR 1952 Cal. 58, be held that restrictions in the articles of association
regarding transfer of shares have no application to court auction sales and the
company therefore was bound to transfer.
Aggrieved by the said judgment and decree, the
respondents/defendant appealed to the Civil Judge, Chitradurga. The learned
appellate judge has reversed the judgment and decree of the munsiff and
consequently dismissed the suit. He has held that there is a restriction in the
articles of association, regarding the transfer of shares. Merely because a
share is sold in court auction, it has no effect of effacing the said restriction.
It is this judgment and decree of
the appellate court that is under challenge.
5. This second
appeal was admitted to consider the following substantial question of law as
arising for consideration :
“Whether, the lower appellate court is right,
in law, in holding that article 7(1) of the articles of association at exhibit
D-1 prohibited transfer of shares to any persons other than the shareholders
and, therefore, the plaintiffs, who were not the shareholders, could not be
recognised as the shareholders of the respondent-company (private limited),
though they had purchased the suit share in court auction?”
Heard Shri Kantharaj—The learned counsel
appearing for the appellant and Sri Pradyumna—The learned counsel appearing for
the respondent.
6. The
facts stated above are not in dispute. It is also not in dispute that the
appellants are the auction purchasers of the share of Bheemappa Naik nor is it
in dispute that the appellants are not shareholders of the defendant-company
Union Theatres Ltd.
7. The
defendant-company was incorporated under the Mysore Companies Act No. 18 of
1938, with the object stated in the memorandum of association. The articles of
association provide various clauses in the matter of business of the company.
Article 7 which is relevant for the present purpose reads as under :
“Article 7.—No transfer of shares shall be
made to any person other than the shareholder (member) of the company. Such
transfers of shares are to be made only among the existing members of the
company. No transfer of any share shall be made or registered without the
previous sanction of the directors who may without assigning any reason decline
to give any such sanction. A fee not exceeding five rupees may be charged for
each transfer approved by the directors and shall be paid before registration
thereof. When a member wishes to transfer his shares he shall intimate the same
to the company in writing along with the instrument of transfer accompanied by
the share certificate. And on receipt of such notice the company shall cause
the matter notified in writing to all the members of the company and shall call
for a tender for the same, giving a month’s time. And on receipts of the
tenders the board shall meet and decide and notify the name of the highest
bidder who shall be the transferor of this said shares. And on completion of
the formalities of such transfer the transfer will be entered in the books of
the company. The transfer notices shall not be revocable except with the
sanction of the directors.
The directors may suspend the registration of
transfers during the fourteen days immediately preceding the ordinary general
meeting in each year. The directors may decline to recognise any instrument of
transfer unless the same is accompanied by the certificate of the shares to
which it relates, and such other evidence as the directors may reasonably require
to show the right of the transferor to make the transfer.
If the directors refuse to register the
transfer of any shares, they shall, within two months from the date of which
the transfer was lodged with the company, send to the transferee and the transferor
a notice of the refusal.”
By a reading of article 7(1) extracted above,
it is manifest that the transfer of shares is permitted only among the
shareholders of the company inter se. Impliedly, there is a prohibition for
transfer of shares from one shareholder to a non-shareholder.
But Sri Kantharaj—The learned counsel
appearing for the appellant relying on the decision of the Madras High Court in
Soma Veerappa v. Muthurasappa Chettiar AIR 1973 Mad. 386, and that of the
Calcutta High Court in Mahadeo Lal Agarwala’s case (supra), contended that such
restrictions apply only when shares are sold by private sales, but will not
apply to shares sold by court auction, as the case on hand, and in such an
event the company has no option but to transfer and register.
8. In
answer to the said contention, Sri Pradyuman contended relying on the decision
of the Nagpur High Court in Abdul Rashid Hafizdin Hohammad v. Commissioner of
Sales Tax AIR 1956 Nag. 25, and that of the Bombay High Court in Manilal
Brijalal v. Gordhan Spg. and Mfg. Co. AIR 1916 Bom. 147, that merely because a
share is sold in court auction that does not make any difference for
application of the prohibition contained in article 7(1).
9. In my view, the appeal deserves
to be dismissed for the following reasons :
Shares are movable property and the manner of
transfer is provided under section 82 of the Companies Act, 1956.
“82. Nature of shares - The shares or other
interest of any member in a company shall be movable property, transferable in
the manner provided by the articles of the company.”
10. In execution of decrees by the sale of
movable property, different procedures are provided under order 21 of the Civil
Procedure Code. In respect of shares of companies order 21, rules 79 and 80 are
the relevant rules which read as under :
“Order 21, rule 79(1)(2) and (3). Delivery of
movable property, debts and shares.—(1) Where the property sold is movable
property of which actual seizure has been made, it shall be delivered to the
purchaser.
(2) Where the property sold is movable
property in the possession of some person other than the judgment-debtor, the
delivery thereof to the purchaser shall be made by giving notice to the person
in possession prohibiting him from delivering possession of the property to any
person except the purchaser.
(3) Where the property sold is a debt not
secured by a negotiable instrument, or is a share in a corporation, the
delivery thereof shall be made by a written order of the court prohibiting the
creditor from receiving the debt or any interest thereon, and the debtor from
making payment thereof to any person except the purchaser, or prohibiting the
person in whose name the share may be standing from making any transfer of the
share to any person except the purchaser, or receiving payment of any dividend
or interest thereon, and the manager, secretary or other proper officer of the
corporation from permitting any such transfer or making any such payment to any
person except the purchaser.
Rule 80. Transfer of negotiable instruments
and shares.—(1) Where the execution of a document or the endorsement of the
party in whose name a negotiable instrument or a share in a corporation is
standing is required to transfer such negotiable instrument or share, the judge
or such officer as he may appoint in this behalf may execute such document or
make such endorsement as may be necessary, and such execution or endorsement
shall have the same effect as an execution or endorsement by the party.
(2) Such execution or endorsement may be in
the following form, namely :—
A.B. by C.D.; Judge of the court of (or as the
case may be), in a suit by E.F. against A.B.
(3) Until the transfer of such negotiable
instrument or share, the court may, by order, appoint some person to receive
any interest or dividend due thereon and to sign a receipt for the same; and
any receipt so signed shall be as valid and effectual for all purposes as if
the same had been signed by the party himself.”
By a reading of the above two orders, it is
manifest that the delivery of the shares sold, is made by first prohibiting the
judgment-debtor and the company from transferring the share to any other person
and if the judgment-debtor does not co-operate in transferring the share to the
auction purchaser by signing any documents required by law, then under rule 80,
the judge or any officer appointed by him may execute such documents, which
when done, will have the effect as if the judgment-debtor executed the
documents.
What ‘property’ passes under these rules, is only
the right, title and interest of judgment-debtor and these rules do not have
the effect of either enlarging the right of the judgment-debtor or removing any
restriction he was subject to, in the matter of transfer of his title to the
property. In other words, if there was already a restriction on the right to
transfer, such restriction continues to exist even after the court sale and a
court sale does not stand on a higher pedestal than a private sale in this
regard; if the judgment-debtor has a restricted right to property, the auction
purchaser in the court sale will not get a higher right than the
judgment-debtor; this is also the view of the Bombay and Nagpur High Courts.
Before the Bombay High Court, a similar
question came up in Manilal Brijalal’s case (supra). The facts in the said case
are, ‘certain shares of the shareholder of Garden Co. were sold in a court
auction in execution of a decree. The auction purchaser of the shares applied
to the company to transfer and register his name in the company’s registers.
The directors refused to transfer and register. The auction purchaser
approached the District Judge for relief which was rejected. On appeal to the
Bombay High Court, Batchelor Actg. CJ and Shah J., by separate and concurring
judgments dismissed the appeal. Batchelor Actg. C.J. held :
“A court sale does not stand on a better
footing than a private sale. Where the sale is made by a private individual or
by a court, the thing sold and transferred from the seller to the buyer is
merely the property in the share plus a limited and not an absolute right to
have the transfer registered.”
Shah J. held :
“That an auction purchaser of a share
purchases the property subject to the same limitation to which the original
owner would sell privately. The intervention of the court and the compulsory
character of sale cannot prejudice the rights of the company and cannot alter
the position of the purchaser in any way on this point. There is nothing in the
provisions of the Indian Companies Act and the Code of Civil Procedure to
support the argument that the company is deprived of its usual powers and
relieved of its corresponding obligations to deal with a transfer application
when the transfer is sought in virtue of a court sale.”
11. In Balwant Transport Co. Ltd. v. Y.H.
Deshpande AIR 1956 Nag. 20, also a similar question had come up. The facts
being the share of one of the shareholders of the appellant’s/BTC Co. was sold
in court auction in execution of a money decree and it was purchased by the
respondent/Deshpande. Deshpande applied to the company for entering his name in
the register of shareholders. The company rejected the application relying on
the discretion clause to refuse registration. Deshpande approached the District
Judge who directed the company to transfer and register.
On appeal to the Nagpur High Court, the
Division Bench of the Court through Hidayatulla J., as he then was for the
Bench on the scope of order 21, rule 79(3) and order 21, rule 80 has held :
“All that is sold in a court auction is the
right, title and interest of the judgment-debtor. Under order 21, rule 79(3)
the court is empowered to prohibit the shareholder from making any transfer of
his share and under rule 80, the court is empowered to execute a document for
and on behalf of judgment-debtor, and has the effect of execution by a party.
On exercise of the power of the court under these two sub-rules the auction
purchaser will not automatically become the member of the company and even
after that the purchaser has to do something more, viz., apply to the company
for transfer, registration and it is at that point of time the company is
guided by its articles of association and may accept or reject.”
12. The learned Judge has also concurred with the
view of Acting Chief Justice Batchelor of the Bombay High Court in Manilal
Brijalal’s case (supra) that “at a court sale the purchaser does not purchase
over and above his share, the absolute right of forcing the directors to
register his name”. The reasons are unassailable.
In the facts of this case, when the share of
Bheemappa Naik was sold, it was already subject to the limitation and
restriction of article 7 of the articles of association and the court sale did
not have the effect of removing the said restriction and, therefore, the
company was well within its rights to refuse to transfer and register.
13. Now to refer to the arguments of Sri
Kantharaj that the Madras and the Calcutta High Courts have taken different
view, it has to be stated that the contention is not correct. The decisions in
Soma Veerappa’s case (supra) and Mahadeo Lal Agarwala’s case (supra) referred
to by the learned counsel in this regard in no way has differed from the Bombay
and Nagpur High Courts as will be presently shown by me.
14. In Soma Veerappa’s case (supra), the court has held that—
“.....the transfer of interest in the shares
from the transferor to the transferee is independent of the requirement of its
registration for purposes of Companies Act and that as between the transferor
and the transferee, the transfer would be valid even though the transferee may
not be able to have the shares transferred registered in his name......” (p.
387)
On the nature of right passing in
a court sale under order 21, rule 79, it was held that—
“...what passes to the purchaser of shares at
a court sale is the beneficial interest in the shares sold, and that interest
passes even though the company has discretion to recognised the purchaser as a
shareholder or not.....” (p. 387)
but the court never held that the judgment-debtor’s
right gets enlarged in a court auction and the company is bound to transfer and
register the name of the auction purchaser even though there is a restriction
of transfer of share. The court recognised the power of the company in this
regard.
15. In
Mahadeo Lal Agarwala’s case (supra) that was a case where one of the articles
of association of a company, viz., article 25 provided that “it is only where
the transferor and transferee by a letter jointly signed addressed to the
company to mutuate the name of transferee in the company’s register, the share
can be mutuated” : Relying on this article, it was contended that in a court
auction sale certificate where the Presiding Judge signs the letter for and on
behalf of the transferor, article 25 is not complied with, inasmuch as the
transferor has not personally signed the letter. It was held, ‘such a
restriction of article 25 will not apply to a court sale’; and rightly so,
because order 21, rule 80, provides for such a procedure. This is not the same
thing as to say that ‘the company is bound to transfer and register the share
sold by court auction’ or the judgment-debtor’s right gets enlarged.
16. The learned trial judge has failed to notice
this distinction while he came to the conclusion that the restrictions of
article 7 of the articles of association of the company have no application in
cases where shares are sold by court auction and equally was in error in
holding that the Calcutta High Court in Mahadeo Lal Agarwala’s case (supra) has
taken such a view and thereby decreeing the suit and the appellate court was
therefore justified in reversing this decree.
17. Appeal dismissed. No costs.
[1942] 12 Comp Cas 180 (MAD.)
v.
P.N. Krishna Pattar
Leach, C.J.
and Happell, J.
Letters Patent
Appeal No. 5 of 1941
April 2, 1942
K.
Kuttikrishna Menon for the Appellant.
C.S. Swaminathan for the Respondent.
The
question raised in this appeal is whether there can be a valid pledge of shares
by the deposit of the share certificate when it is not accompanied by an
instrument of transfer. The appellant instituted a suit in the Court of the
District Munsif of Palghat to recover what was due on a promissory note
executed by one Subramania Pattar in favour of one Ramakrishna Pattar, the
instrument having been endorsed to appellant. When the appellant demanded the
amount due under the promissory note, the maker deposited with him as security
for payment a share certificate in respect of shares held by him in the Parli Tile
Works, Limited. The certificate was not accompanied by a deed transferring the
shares to the appellant, but he claims that notwithstanding this there was a
valid pledge of the shares. The suit was contested by the fourth defendant, who
is the first respondent in this appeal. On a date subsequent to the deposit of
the share certificate with the appellant the first respondent attached the
shares by a prohibitory order issued under Order 21, Rule 46, of the Code of
Civil Procedure He denied that a valid pledge of the shares was created in
favour of the appellant and maintained that he himself had obtained title to
the shares by reason of the attachment and subsequent sale.
The District Munsif held that a valid pledge had not been created but on appeal the Subordinate Judge of South Malabar reversed the District Munsif's decision. In his opinion, a valid pledge had been created by the deposit of the share certificate. The first respondent appealed to this Court. The appeal was heard by Venkataramana Rao, J., who agreed with the District Munsif and accordingly allowed the appeal. This appeal is from the judgment of Venkataramana Rao, J., under clause 15 of the Letters Patent.
In the opinion of Venkataramana Rao, J.,
'shares' are not ‘goods' within the meaning of Section 172 of the Indian
Contract Act and there can be no vaid security unless the scrip is accompanied
by an instrument of transfer. When a share certificate is handed over by way of
security to another with a deed of transfer duly executed the transaction
constitutes more than a pledge, because there is a transfer of the holder's
right in the property, subject of course to the right of redemption. We shall
return to meaning of the 'pledge' in a moment. The learned Judge recognised
that according to the English law the mere deposit of a share certificate by
way of security is treated as an equitable mortgage, but in his opinion that
did not help the appellant, because the deposit had not been made in the City
of
Now let us see what is implied by the expression 'pledge'. In Halliday v. Holgate, Willes, J., placed a pledge between a simple lien and a mortgage. He pointed out that in the case of a lien there is no transfer of interest, but in the case of a mortgage the property passes. In the case of a pledge a deposit of goods is made security for a debt and the right to the property vests in the pledgee so far as it is necessary to secure the debt. Section 148 of the Indian Contract Act defines bailment as the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Section 172 defines a pledge as the bailment of goods as security for the payment of a debt or the performance of an obligation. Section 176 provides that, if the pawnor makes default in payment of the debt, or performance of the contract at the stipulated time, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as collateral security ; or he may sell them, on giving the pawnor reasonable notice of the sale. Therefore under Indian law as under English law a pledge is created by the delivery of goods as security.
In
When the Sale of Goods Act was placed on the statute book Section 178 of the Contract Act was amended. Before the amendment the section read as follows :
"A person who is in possession of any goods, or of any bill of lading, dock-warrant, warehouse-keeper's certificate, wharfinger's certificate, or warrant or order for delivery, or any other document of title to goods, may make a valid pledge of such goods or documents : Provided that the pawnee acts in good faith, and under circumstances which are not such as to raise a reasonable presumption that the pawnor is acting improperly ;
Provided
also that such goods or documents have not been obtained from their lawful
owner, or from any person in lawful custody of them, by means of an offence or
fraud."
As a result of the amendment the expressions "mercantile agent" and "documents of title" are given the meaning assigned to them in the Sale of Goods Act. Section 1(4) of that Act says:
" 'Document of title to goods' includes a bill of lading, dock-warrant, warehouse-keeper's certificate, wharfinger's certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented."
The Court has not been asked to say that a share certificate comes within this definition, and we will assume that it does not.
In Lalit v. Haridas, the Calcutta High Court held that share certificates are neither goods nor documents of title within the meaning of Section 178 of the Contract Act, but this decision was given before the enactment of the Sale of Goods Act and, therefore, before the amendment of the Contract Act. On the other hand, the Bombay High Court, long before 1930, held that the term 'goods' used in Section 178 of the Contract Act includes shares in joint stock companies and consequently recognised that there could be a valid pledge of shares. See R.D. Sethna v. National Bank, Fazal v. Mangaldas and Jamshedji v. Maganlal. It seems to us that even before the passing of the Sale of Goods Act the Bombay opinion was preferable to the Calcutta opinion, but as the result of the passing of the Sale of Goods Act and the amendment of the Contract Act we consider that the Bombay opinion is not open to dispute. We can see no valid reason for giving the word 'goods' a different meaning in the Contract Act from the meaning which it has in the Sale of Goods Act.
We now come to the question whether a pledge of shares can be created by the mere deposit of the share certificate. A share is not a tangible thing. It is a share in the share capital of the company and is so defined in Section 2(16) of the Indian Companies Act. Consequently it is necessary for a company to issue to a shareholder a certificate showing the number of shares which he holds. As shares are goods and therefore pledgeable, they can only be pledged by the deposit of the share certificate. It appears to us that by including shares in the definition of goods in the Sale of Goods Act the Legislature must have associated shares with the share certificate which is marketable. Otherwise, it is difficult to see how shares can be goods and the subject of pledge, the essence of which is delivery. To say that there can only be a pledge of shares when the share certificate is accompanied by a deed of transfer is making the transaction something more than a pledge, as we have already pointed out. We think that when a person delivers a share certificate to another to be held by him as security, there is under the law of India a pledge which he can enforce, but unless the pledgee at the time of the deposit secures a deed of transfer which he can use in case of necessity or obtains one from his debtor at a later stage, he must have recourse to the Court when he wishes to enforce his security. There is nothing to prevent a pledgee suing on the debt and asking the Court to sell the goods for him. If the goods happen to be shares, the Court can confer a full title on the buyer by following the procedure laid down in Order 21, Rule 80, of the Code of Civil Procedure.
For these reasons we hold that the decision of the Subordinate Judge was correct and consequently we allow the appeal with costs of the hearing before Venkataramana Rao, J., and in this Court.
[1979] 49 COMP. CAS. 662 (MAD.)
v.
A. R. Krishnamurthy
RAMAPRASADA RAO
AND RATNAVEL PANDIAN, JJ.
Appeal Nos. 141 of 1973 and 51 of 1975
APRIL 7, 1977
T. Raghavan
for the Appellant.
Habibullah
Badsha, A.S. Chandrasekar, N.V. Balasubramaniam, T. Dulipsingh, P. Narasimhan
and S.K. Ramamurthy for the Respondents.
JUDGMENT
Ramaprasada Rao, J.—The second plaintiff in
O.S. No. 7000 of 1969 is the appellant in A. S. No. 141 of 1973, The 6th
defendant in O.S. No. 658 of 1970, who is the 9th defendant in O. S. No. 7000
of 1969, is the appellant in A. S. No. 51 of 1975. Original Suit No. 7000 of 1969,
on the file of the
The late Raja of Ramnad held 5,000 shares in the
third defendant-company. Under Ex. B-1, the late Raja borrowed a sum of Rs.
25,000 on the pledge of such shares as above and the pledge is evidenced by a
letter Ex. B-2, which bears the same date as the promissory note, Ex. B-1,
namely, January 25, 1960. Under Ex. B-3, the said loan was renewed. On the same
security, the Raja further borrowed a sum of Rs. 10,000 under Ex. B-4, and
under Ex. B-5, the shares were received as security for the additional
borrowings also. It is common ground that on the date when the shares were pledged
with the intention of creating a security for the borrowings made, the blank
transfer forms exhibited as Ex. B-31 (Ex. A-15) were handed over by the Raja to
defendants 1 and 2. As the Raja failed to repay the amounts borrowed, there was
a notice of demand for payment by the creditors. Apparently finding that he
could not pay off the debts, the Raja bargained with the plaintiff to sell the
shares to the 1st plaintiff for a sum of Rs. 50,000 with a direction to the
first plaintiff to discharge the debts due to defendants 1 and 2 out of the
said sale consideration and pay the balance thereof to him. The transaction of
sale is evidenced by a series of letters. Under Ex. A-16, the Raja confirms the
sale of the 5,000 shares in favour of the first plaintiff whose legal
representatives are the 2nd and 3rd plaintiffs and who are brought on record
after his demise. The Raja admits receipt of the consideration of Rs. 50,000 in
the following manner:
(a) Rs. 12,398 by cheque on the Indian Bank Ltd., Thyagarayanagar;
(b) The balance of Rs. 37,602 to be paid to defendants 1 and 2 in full and complete discharge of the amounts due to them under the loans set out above and towards which they were holding the 5,000 shares in the third defendant-company as security.
Not only does the Raja say that he has sold the
shares to the first plaintiff in Ex. A-16, he would also confirm that he has
addressed a letter to defendants 1 and 2 to receive a sum of Rs. 37,602 and
expressly authorised the first plaintiff to receive back from defendants 1 and
2 the share certificates and the blank transfer forms. On the same day, Ex. A-1
dated December 19, 1966, is written by the Raja to his creditors who had a
pledge over the shares. He acknowledges therein the borrowing and the deposit
of the shares in Sri Krishna Tiles & Potteries (
In the above
circumstances, the first plaintiff came to court seeking for three distinct
reliefs. Firstly, for a declaration that he has title over the shares and they
belong to him and for a direction to defendants 1 and 2 to accept the sum due
and payable to them as and towards the pledge of the shares by the Raja and
hand over the related documents such as the share certificates, blank transfer
form, etc., and, thirdly, for a direction as against the 3rd defendant to
register the shares in the books of the company. As the Raja died in March,
1967, before the filing of the suit, defendants 4 to 20 were impleaded in the
suit as his legal representatives.
In the
written statement filed by defendants 1 and 2, they would admit that the 5,000
shares were handed over to them by the late Raja as security for the sums
advanced by them and that they hold the shares as pledgees. They would seek for
a dismissal of the suit and would say that the title to the shares had passed
on to defendants 4 to 20 only. The third defendant's case is that the
plaintiffs can seek a relief against the company only if a valid transfer form
signed by the registered owner and the transferee is submitted to the company
and that even in such a situation the directors of the company have a
discretion either to receive or refuse the same and, therefore, resisted the
relief for mandatory injunction sought for by the plaintiffs. Some of the legal
representatives of the Raja support the plaintiffs and some others remained ex
parte.
As already
stated, O.S. No. 658 of 1970 is by the creditors, namely, by defendants 1 and 2
for the enforcement of the pledge for which possibly there could be no defence
at all as would be seen hereafter.
The following
issues were framed:
(1) Whether
the plaintiffs are the owners of the 5,000 shares in question?
(2) Whether the defendants 1 and 2 are
not bound to deliver the share certificates to the plaintiffs after receiving a
sum of Rs. 37,747.21?
(3) Whether the 3rd defendant-company is
not bound to effect the transfer of the said shares from the name of late Raja
of Ramand to the name of the plaintiffs?
(4) Whether
the defendants 1 and 2 are liable to pay to the plaintiffs the costs of the
suit?
(5) To
what reliefs are the parties entitled to?
Issues in
O.S. No. 658 of 1970:
(1) Is the 18th defendant the absolute
owner of the 5,000 equity shares in Sri Krishna Tiles and Potteries (Madras) Private
Ltd., and was the title to those shares legally and validly transferred to him?
(2) Is the 18th defendant entitled to
redeem the 5,000 shares in question by making a payment to the plaintiffs?
(3) Is not the 18th defendant bound to
pay the interest on the amounts due by the late Raja of Ramnad in respect of
the suit promissory notes?
The learned
trial judge was of the view that the plaintiffs cannot be said to be the owners
of the 5,000 shares in question and, therefore, they are not entitled to redeem
the pledge in favour of defendants 1 and 2 and that the right of redemption
still remains with the legal representatives of the Raja. He found that in the
course of the correspondence and in the light of the events that transpired,
the plaintiffs did tender the principal amount due to defendants 1 and 2 as and
under the pledge of the shares and that such tender was on December 19, 1976.
Ultimately, he was of the view that there has been no transmission of the
shares in any manner in favour of the first plaintiff or his legal
representatives, the second and third plaintiffs and dismissed O.S. No. 7000 of
1969. But while granting a decree in O.S. No. 658 of 1970, he granted the
prayer by the plaintiffs therein without adverting to his earlier finding that
defendants 1 and 2 are not entitled to interest on the principal amount on and
after December 19, 1966, when they refused to receive the amount, though
tendered by the first plaintiff.
Mr. Raghavan,
learned counsel for the appellant in A.S. No. 141 of 1973, while stating that
the shares in a company could be the subject-matter of a pledge and that sale
of such pledged shares could be effected under the practice and the accepted
norm in such situations would contend that the lower court was wrong in having held
that the plaintiffs did not acquire any right in the shares. He would also
contend that the plaintiffs did acquire a right to get into the register of the
company on the foot of the completed transaction of sale entered into between
them and the late Raja. Reliance is rightly placed upon Exs. A-16, A-15, A-1
and A-2 to show that there was such a completed transaction and that by reason
of the correspondence already referred to, the right to get themselves
transferred as owners of the shares in the books of the third defendant company
has become absolute and that in consequence defendants 1 and 2 are liable to
accept the principal amount due to them under the pledge and hand over the
instruments of debt duly cancelled as also the share certificates and the blank
transfer forms to enable the plaintiffs to further their rights and obtain a
substitution of their names to that of the Raja in the books of the third
defendant-company. But in all fairness, Mr. Raghavan would say that in this
suit, he cannot secure the relief of a mandatory injunction as against the
third defendant-company to amend the registers by substituting their
(plaintiffs') names as he has not even approached them with the share
certificates, the blank transfer forms and such other instruments and orders
under the company law as are necessary in the eye of law which would prompt an
incorporated company to consider such applications for transfer and act legally
thereon. Contending contra, Mr. Dulipsingh appearing for some of the legal
representatives of the Raja, to wit, respondents 8 and 9 would say that there
was no valid transfer or transmission of the shares or any right annexed
thereto in favour of the plaintiffs at any time and after referring to the
provisions of the Companies Act and the Sale of Goods Act, he would vehemently
contend that there is in praesenti no light in the plaintiffs to seek for a
declaration that they have secured a right over the shares, whatever may be the
quality of such right and for a mandatory injunction directing defendants 1 and
2 to receive the principal amount from them and hand over the share
certificates as also blank forms of transfer to enable them to further their
rights in the share certificates. The other legal representatives of the Raja
are not opposing the plaintiffs' right to obtain the declaration as prayed for
before us.
Though at one stage, defendants 1 and 2 would take up
the position that they had title to the shares, yet at a later stage they
expressly gave it up and in fact asserted their right over the shares only as
pledgees and claimed that the said shares were held by them as security for the
repayment of monies due by the Raja of Ramnad. This being the factual position,
it is easy to conceive that defendants 1 and 2 always admitted the title of the
Raja over the stock and shares and never disputed it. It is in such a
conspectus of admitted facts that the contention of Mr. Dulipsingh that as no
delivery of the stock was possible since they were in the possession of a third
party, there was no sale at all under the common law has to be considered. He
refers to s. 36(3) of the Sale of Goods Act (hereinafter referred to as
"the Act") which reads:
"Where the goods at the lime of sale are in the possession
of a third person, there is no delivery by seller to buyer unless and until
such third person acknowledges to the buyer that he holds the goods on his
behalf."
It is said that there was no delivery of the shares
as there was no acknowledgment by defendants 1 and 2 to the effect that they
were holding the shares on behalf of the plaintiffs after the Raja has written
Ex. A-16, etc. In order to appreciate the contention, the correct legal
position has to be understood.
Under the Sale of Goods Act "goods" means
"every kind of movable property other than actionable claims and money;
and includes stock and shares, etc." This inclusive definition in s. 2(7)
of the Act is a clear departure from the definition of "goods" in the
English Act. The definition in the Indian Act is wider, for, the word
"goods" in the English Act does not expressly include "stock and
shares" which means they would not
be goods according to the English Act. The exhaustive definition of
"goods" in the Indian Act makes it clear that even stock and shares
can be treated as "goods" and dealt with as such. The next question
which arises for consideration is what is possession.
Apart from
the well-known concept that a person is said to possess goods when he is in de
facto possession or physical control thereof, we have other theories which are
accepted in the law merchant as equable to possession in the eye of law. Such
possession may be legal possession or a right to have legal possession. The
accepted canon of law is that possession follows title. This understanding of
the expression "possession" would stand in the forefront, if there is
any ambiguity in a given case as to the person who could be said to be in
possession of the goods. If, therefore, the title in the goods is traceable to a
particular person, then possession would follow such title. In the instant
case, as already stated by us, the accepted case of defendants 1 and 2 is that
the shares belonged to the Raja and that they were in possession of the same as
pledgees. Possession sometimes is interpreted and understood as an indivisible
right and law imports a rule by which legal possession is always with the
person who has title to the goods. This by itself is sufficient to hold that
the legal possession or the right to possess or to have legal possession was
with the Raja at or about the time when the Raja bargained for the sale of the
shares with the plaintiffs.
The so called
doctrine of double possession referred to in s. 36(3) of the Act has to be
understood in the pale of normal general principles relating to possession.
Merely because physical possession is with a third party, it would not
automatically follow that the person who is entitled to legal possession could
be deprived of his right to deal with such goods until he secures the
co-operation of that third person by securing an acknowledgment or attornment
to the buyer that he holds the goods on his (the buyer's) behalf. When once a
person who has a right to possess the goods or has the right to have legal
possession of such goods, asserts and manifests his intention to deal with such
goods as owner thereof, then the other person to whom he sells such goods in
assertion of such possession and who is specifically authorised to obtain
possession of the goods, should be deemed in the eye of law, to be in
possession of the goods, though physical possession of the same may be with a
third party.
In order to
appreciate the above conclusion, it would also be necessary to bear in mind the
definition of documents of title to goods in s. 2(4) of the Sale of Goods Act.
The Legislature adopted a broader definition of "documents of title"
unlike that in the English Act and has carved out an exception to the
intendment of the rule in the earlier part of s. 36(3) of the Act. The proviso
to s. 36(3) of the Act says that "nothing in the section shall
affect the operation of the issue or transfer of any documents of title to the
goods". "The document of title to goods" has been defined in s.
2(4) of the Act thus:
" 'document of title to goods', includes a bill
of lading, dock-warrant, warehouse keeper's certificate, war finger's
certificate, railway receipt, warrant or order for the delivery of goods and
any other document used in the ordinary course of business as proof of the
possession or control of goods, or authorising or purporting to authorise,
either by endorsement or by delivery, the possessor of the document to transfer
or receive goods thereby represented."
This is an inclusive definition. It includes any
document used in the ordinary course of business as proof of the possession or
control of goods or purporting to authorise, either by endorsement or by
delivery the possessor of the document to receive the goods thereby
represented.
We have already seen that "goods" include
"stock and shares". Therefore, if shares could be transferred by
issuing a document whereby the seller purports to assert his title to the goods
and authorises the buyer to receive such goods represented thereby,—may be from
a third party,—yet it would operate as a valid delivery of such goods
notwithstanding the non-co-operation of the person in physical possession of
the goods by refusing to attorn or acknowledge to the buyer that he holds the
goods on his behalf. We are unable, therefore, to agree with the contention of
Mr. Dulipsingh that in the instant case, there could be no delivery of the
goods at all because the shares were in the possession of a third party. As
each case has to be decided on its relative merits, it appears to us that by
reason of the issuance of the blank transfer forms, which is one of the
accredited methods under the law merchant by which shares could be transferred
by one to the other, by the mere fact that such goods or shares were in the
possession of the defendants 1 and 2 at the time of their sale by the Raja to
the plaintiffs there could be no delivery at all, is not an acceptable
proposition. As pointed out by Sri Fredrick Pollock, "delivery" means
"a voluntary dispossession in favour of another". In all cases, "the
essence of delivery is that the delivery by some apt and manifest act puts the
deliverance in the same position of control over the thing either directly or
through a custodian, which he himself holds immediately before the Act".
In the instant case, the manner in which the Raja held legal possession of the
goods was through defendants 1 and 2. The present attitude of defendants 1 and
2 is that it was the Raja who owned the goods or the shares. Therefore, they
were in qualified possession of the stock for the purpose of enforcing their
security. But the right to possess the shares had been always with the Raja.
Exs. A-16, A-1 and A-2 confirm the position. The Raja aptly and manifestly
exhibited his intention to put the plaintiffs in possession of the shares. This
would mean that there was a voluntary dispossession of the goods by the Raja in
favour of the plaintiff and under s. 2(2) of the Indian Sale of Goods Act,
there has been delivery by a voluntary transfer of possession of goods by the
Raja to the plaintiff. This reasonably leads to the conclusion that there was a
delivery of the goods and the possession of the same passed in the eye of law
to the plaintiffs.
Alternatively respondents Nos. 8 and 11 would rely
upon certain other provisions of the Sale of Goods Act and of the Transfer of
Property Act to sustain their contention. Laying an accent upon the duties of
the seller in the course of performance of the contract of sale, it is
suggested that the primary duty of the seller under s. 31 of the Sale of Goods
Act is to deliver the goods and as it cannot be said that there was such
delivery as is contemplated under the abovesaid section, the sale is
incomplete. We have, to some extent, touched upon the importance of a blank
transfer in the case of sale of shares which is included in the definition of
"goods" under the Sale of Goods Act. It is not disputed by Mr.
Dulipsingh that a blank transfer form is one of the accepted modes used for the
purpose of sale of shares. When confronted with this difficulty, he would refer
to s. 82 of the Companies Act which provides that the shares in a company shall
be movable property transferable in the manner provided by the articles of
association of the company. In so far as the articles of association of the
company before us in question is concerned, there is nothing which prohibits
the issuance of a blank transfer form contemporaneous with the sale of shares
so as to make such a sale normally complete not only in accordance with law,
but in accordance with the articles of association of the company. Realising
again this difficulty s. 130 of the Transfer of Property Act is invoked. No
doubt under s. 130 of the Transfer of Property Act, the transfer of an
actionable claim shall be effected only by the execution of an instrument in
writing signed by the transferor and shall be complete and effectual upon the
execution of such instrument. But it should not be forgotten that s. 137 of the
Transfer of Property Act makes it clear that the other provisions in Chap. VIII
commencing from ss. 130 to 136 do not apply to stocks, shares, or debentures or
instruments which are for the time being by law or custom negotiable or
mercantile documents of title to goods. In Kunhunni Elaya Nayar v. Krishna
Pattar [1942] 12 Comp Cas 180; ILR 1943 Mad 115; AIR 1943 Mad 74, the
well-known practice of shares being the subject-matter of a valid pledge by a
mere deposit of a share certificate unaccompanied by deed of transfer has been
recognised. The question, therefore, in the instant case, has to be considered
in the light of such accepted practice. If such shares could be pledged by its
owner without an instrument, then a method by which he could sell those pledged
shares could also be comprehended. Therefore, it becomes necessary to harmonise
all the legal provisions in the Companies Act, in the Transfer of Property Act
and the Sale of Goods Act and find a solution as to how best the title to get
into the register of shares of a company can be obtained, when such shares are
pledged with a third party, but sold by the owner.
In R. Subba Naidu v. CGT [1969] 73 ITR 794 (Mad), the
question arose whether there was a completed gift of the shares by the father
to the daughter which operated with full force between the assessee and his
daughter, notwithstanding that vis-a-vis the company, he continued to be the
holder of the shares in the absence of registration of the transfer in the
company's book. One of us, who was a party to the above Division Bench
decision, whilst attempting to harmonise the provisions of the Transfer of
Property Act and the Companies Act, observed that the transfer of the interest
in the shares from the transferor to the transferee is independent of the
requirement of its registration for the purposes of the Companies Act, as,
without an anterior transfer, there can be no question of applying for
registration of it. In all such matters, the guiding principle is whether the
transferor, as donor or as seller, has done everything in his power to divest
himself of title to his shares. So long as the substance of the transaction is
demonstrative and clear and is not susceptible to any ambiguity, then the form
or method (unless otherwise provided by any statute) by which the gift or
transfer was made ought not to loom very large, in so far as common law is concerned,
for a court to conclude about the validity of the transfer of the title or
property in the shares to the donee or the purchaser, if the divestiture of
title is complete. The only fact that certain formalities have to be gone into
under the provisions of the Companies Act so as to vest a further marketable
title in such shares in the purchaser would not be a bar (sic) to conclude that
there has not been a valid transfer of title under the normal law of the State
by the holder of the shares to the purchaser of-such shares. The principle in
[1969] 73 ITR 794 (R. Subba Naidu v. CGT) referred to above, has been approved
by the Supreme Court in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thaker
[1975] 45 Comp Cas 43; AIR 1974 SC 1728. The Supreme Court in the above case
approved of the well-known dicta of the Privy Council in what is commonly known
as Bharucha's case, AIR 1926 PC 38 (M.
P. Bharucha v. W. Sarabhai & Co.). The following passage from the
speech of the House of Lords was approved by the Supreme Court (45 Comp Cas 43,
50) (also AIR 1926 PC 38, 40):
"But, further, there seems to their Lordships a
good deal of confusion arising from the prominence given to the fact that the
full property in shares in a company is only in the registered holder. That is
quite true. It is true that what Bharucha had was not the perfected right of
property, which he would have had if he had been the registered holder of the
shares which he was selling. The company is entitled to deal with the
shareholder who is on the register, and only a person who is on the register is
in the full sense of the word owner of the share. But the title to get on the
register consists in the possession of a certificate, together with a transfer
signed by the registered holder. This is what Bharucha had. He had the
certificates and the blank transfers, signed by the registered holders. It
would be an upset of all stock exchange transactions if it were suggested that
a broker who sold shares by general description did not implement his bargain
by supplying the buyer with certificates and blank transfers, signed by the
registered holders of the shares described. Bharucha sold what he had got. He
could sell no more. He sold what in England would have been choses in action
and he delivered choses in action. But in India, by the terms of the Indian
Contract Act, these choses in action are goods. By the definition of goods as
every kind of movable property it is clear that not only registered shares, but
also this class of choses in action, are goods. Hence equitable considerations
not applicable to goods do not apply to shares in India."
Further, the Supreme Court observed that a
distinction ought to be made between the title to get on the register and the
full property in the shares in a company. They approved of the rule that one
could get a title to get on the register by mere delivery of the shares with a
required intention of the share certificate and blank form signed by the
transferor. The second phase of the doctrine set out above whereby the
purchaser acquires full property in the shares in the company applies only if
the transferee gets his name in the register of the company in the place of the
transferor. The principle, therefore, appears to be that such a division or
dichotomy of rights in shares is a well recognised one and the right, which the
transferee acquires by acquiring the title in the shares in the normal
mercantile form by delivery accompanied by a blank transfer form, vests in him
an enforceable right therein so long as there is nothing in the articles of
association which prevent such transactions. In the instant case, it is not
contended that there is any such article which prevented the Raja from
transferring the shares in the manner he did. But what is repeatedly urged is that
there is no instrument of transfer and the physical delivery of the shares has
not been effected. Here again we have pointed out, the delivery which is
thought of and referred to in such situations is such delivery as the goods are
capable of. In a case, where the shares are pledged, the only manner in which
delivery of such goods is possible, is constructive delivery. Such constructive
delivery can only be by the transferor unequivocally expressing an intention in
writing to the pledgees to hand over the shares to the purchaser after
receiving the monies due and payable to him and contemporaneously putting the
transferee or purchaser on notice of his having so expressed himself. This has
been done in this case, as is seen from Exs. A-16, A-1 and A-2. On a
consideration of the facts of this case and after giving our considerable
thought over the legal contentions raised, we are of the view that s. 36(3) of
the Sale of Goods Act would not bar the sale of shares which are the
subject-matter of a valid pledge by executing a blank transfer form accompanied
by a letter in writing addressed to the pledgee directing him to deliver
possession of the shares to the purchaser who is also at or about the same time
put on notice of such a direction to obtain delivery. It is in these peculiar
circumstances that the blank transfer form could be understood as a mercantile
document. It is also pertinent to observe that the other legal heirs of the
Raja are not taking up the stand taken by respondents Nos. 8 and 11.
The last contention of Mr. Dulipsingh is that until
the company recognised the transfer, the property in the shares cannot be said
to have passed to the purchaser. This is a matter between the appellant and the
company with which respondents Nos. 1 and 11 as legal representatives of the
Raja, are not concerned. We shall presently advert to this aspect while
considering the issue as between the plaintiffs and the company. But in so far
as respondents Nos. 8 and 11 are concerned, it is not open to them to urge that
the appellants are not entitled to get their names registered in the books of
the company. We shall advert to this aspect with reference to the specific
provisions under the Companies Act, namely, s. 108 of the said Act.
The only other point that remains for consideration
is whether the plaintiffs are debarred from seeking the declaration as to their
qualified right as above and whether their right to redeem the pledge from the
defendants 1 and 2 is in any way barred by the provisions of the Companies Act.
That the plaintiffs cannot compel the third defendant
to substitute their names and cause an amendment in the register of members by
reason of themselves having secured a right to enter into such a register is
practically conceded by Mr. Raghavan. The position is now made very clear by
the decision of the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan
[1977] 47 Comp Cas 185. Chief Justice, Ray, speaking for the Bench, held that
the provisions contained in s. 108 of the Companies Act are mandatory. Section
108 of the Companies Act deals with transfer of shares and says that such
transfer ought not to be registered except on compliance with the prescribed
guidelines and norms set in that section. It is unnecessary for us to consider
in detail the said section for the purpose of this case, as it is not even the
plaintiffs' case that there is evidence on record to show that they are
equipped with all such necessary data to compel the third defendant to register
the transfer. As the Supreme Court said the company shall not register until
the provisions in s. 108 of the Companies Act which are mandatory, are
satisfied. As s. 108 of the Companies Act contains rules and norms which are
mandatory the plaintiffs who are yet to perform this part of their obligation,
cannot seek for the relief of a mandatory injunction to compel the third
defendant to register the shares. It is for them to seek such a relief after
fully complying with the prescriptions laid down in s. 108 of the Companies
Act. But this cannot be taken advantage of by respondents 8 and 11. Their
father has sold the shares in a manner known to law and common to the practice
prevailing and as pointed out by the Supreme Court in Vasudev v. Pranlal [1975J
45 Comp Cas 43; AIR 1973 SC 1728 and as pointed out by us earlier, the
plaintiffs undoubtedly obtained the title to get on the register, though there
is time enough for them to obtain a full property right in the shares after
complying with the mandatory provisions in the Companies Act.
In the above circumstances, the plaintiffs could only
be entitled to a declaration that the second plaintiff is the owner of the
5,000 shares, the description of which is given in the plaint, in the Krishna
Tiles & Potteries (Madras) Private Ltd., the third defendant herein and
also for a direction as against defendants 1 and 2 to receive from the second
plaintiff, the sum of Rs. 37,747.21 and deliver over to him the share
certificates with the relevant transfer forms and other instruments duly
cancelled. The plaintiffs would not be entitled to a mandatory injunction
compelling the third defendant-company to effect the transfer of the said
shares and recognize the transmission as the plaintiffs have to still comply
with the mandatory provisions of s. 108 of the Companies Act. The appeal A.S.
No. 141 of 1973 is, therefore, allowed in part and there will be no order as to
costs.
As regards A.S. No. 51 of 1975, the lower court was
right in having decreed the suit. Practically there is no demur to it by any
party before us. The appellant, the 6th defendant, has come in appeal because
the learned trial judge has decreed the suit in full as prayed for. It is
rightly pointed out that the lower court did find in issue No. 3 in O.S. No.
658 of 1970 that the amount payable to defendants 1 and 2 was validly tendered.
After having so found on that issue and once the position that there was a
valid tender of the amount is not even disputed, it follows that the trial
court should have decreed the suit only for the principal amount and not as
prayed for. On this contention of Mr. Narasimhan, learned counsel for the
appellant in A.S. No. 51 of 1975, there could be no controversy at all. The
judgment of the trial court is, therefore, modified to this extent that there
shall be a decree in O.S. No. 658 of 1970 for a sum of Rs. 37,747.21 as against
defendants 1 to 17 in that suit.
In view
of our finding in A.S. No. 141 of 1973, it follows that defendants 1 and 2 are
only obliged to receive the amount from the plaintiffs and they cannot seek
enforcement of the pledge once over as against the heirs of Raja, namely,
defendants 1 to 17 in O.S. No. 658 of 1970. As the suits were heard together it
appears to us that the relief granted in favour of the plaintiffs in O.S. No.
7000 of 1969 (A.S No. 141 of 1973) would be sufficient for the disposal of
these two appeals. But in any event if the plaintiffs fail to redeem the pledge
as directed in A.S. No. 141 of 1973, then defendants 1 and 2 would be entitled
to a decree together with proportionate costs as against defendants 1 to 17 in
O.S. No. 658 of 1970. O.S. No. 658 of 1970 is dismissed as against the
defendants 18 to 20 in that suit but without costs. Each party to bear their
respective costs in these two appeals.
v.
Anil Ramchand Chhabria
S.S.
Nijjar, J.
Company
Appeal Lodg. Nos. 10 and 11 of 1999
Section 111A of the Companies Act, 1956 read with
section 28 of the Depositories Act, 1996 - Transfer of shares - Rectification
of register on transfer of shares - Whether section 111A has to be interpreted
in such a manner that it provides additional benefit to shareholders in public
companies which they already enjoyed and continue to enjoy under section 111 -
Held, yes - Whether absence of term ‘intimation of transmission’ in proviso to
section 111A(2) can be construed to mean that no remedy of appeal is available
to shares which are transmitted by operation of Law - Held, no - Whether
remedies of appeal and rectification are available to all kinds of shares held
in public company under proviso to section 111A(2) and section 111A(3) - Held,
yes - Whether remedy of rectification of register on transfer provided in
section 111A would be applicable to private companies - Held, no
Section 108 of the Companies Act, 1956 -
Transfer of shares - Transfer not to be registered except on production of
instrument of transfer - Whether section 108 is inapplicable to transfers where
transferee and transferor are entered as beneficial owners in records of
depository - Held, yes - Whether there is any conflict between powers of CLB
under sections 111A and 108 - Held, no
The respondent’s father, who was a shareholder
of the appellant, a public limited company, died intestate in August, 1987. The
respondent made a written request to the company for transmission of the
shares of the deceased to the joint names of the widow, son and daughter, the
legal heirs. The request was rejected on the ground that the deceased’s mother
was also a legal heir and the succession certificate had been obtained by
suppressing this material fact. The mother passed away in the meanwhile and the
respondent obtained a fresh succession certificate and requested for
transmission of shares. The company, thereupon, requested the respondent to
confirm that there was no legal proceeding pending with regard to the
succession certificate or in relation to the estate of the deceased. The respondent
informed the company that there were no Court orders restraining transmission
of the shares as mentioned in the fresh succession certificate belonging to the
deceased in his favour. The company again reiterated that the respondent was
silent on the confirmation as to whether any legal proceedings were pending in
any Court in relation to the issue of succession certificate in relation to the
assets of the deceased. Taking this uncalled delay in transmission of the
shares to be a deemed refusal, the respondent filed a petition before the CLB.
The company submitted that the petitions were
not maintainable under section 111A(2) as it dealt only with refusal to
register ‘transfer of shares’ and sub-section (2) did not deal with refusal to
register the ‘transmission of shares’ by operation of law. This right of appeal
would have been available under section 11(2). It was, however, submitted that
by virtue of sub-section (14) of section 111, it applied only to private
limited companies and deemed public companies under section 43A. It was
submitted that the remedy under section 111(2) would not be available to the
respondent as the appellants were a public limited company governed by
provisions of section 111A. It was submitted that the only remedy available to
the respondent was by way of civil suit.
The CLB, however, allowed the petitions and
directed the appellants to transmit the shares held by the deceased in the
name of the respondent as per his entitlement in terms of the revised
succession certificate. The CLB held that the right of appeal under section
111(2) had been retained in the proviso to section 111A(2), and the term
‘intimation of transfer’ occurring in proviso to section 111A(2) was ambiguous
and uncertain, and in order to give it a harmonious construction the term
‘intimation of transfer’ had to be read as ‘intimation of transmission’. Use of
the term ‘intimation of transfer’ in the proviso was held to be a ‘drafting
error’.
Held
Having come to the conclusion that the term
‘intimation of transfer’ in the proviso to section 111A(2) was a ‘drafting
error’, the CLB had provided a solution by substituting the term ‘intimation
of transfer’ with ‘intimation of transmission’. The Courts or the CLB have no
jurisdiction to ‘draft’ the provision. They have only to interpret the
provision. It is not the function of the Courts to legislate. The ‘drafting
error’ conclusion, therefore, had to be overruled. By giving this
interpretation, the CLB had ignored both the text as well as context of the
proviso. The text had been ignored in that the term ‘intimation of transfer’
had been substituted by ‘intimation of transmission’. Context of the proviso
had been ignored as the interpretation to the proviso had not been given in
co-relation to the other provisions of the Companies Act read with the
Depositories Act, 1996.
A perusal of section 111A(1), together with
section 111(14), makes it clear that section 111 is now limited in its
operation to private limited companies. But, at the same time, a perusal of section
111A(2) shows that no remedy of appeal has been provided to any kind of shares
held in public companies. A perusal of section 111A(3) would show that no
remedy of rectification is available if the register remains inaccurate by
contravening the provisions of the Companies Act. The remedy is only provided
for rectification if there is a contravention of any of the provisions of the
Securities and Exchange Board of India Act, 1992 or Regulations made thereunder
or the Sick Industrial Companies (Special Provisions) Act, 1985. Section
111A(2) completely fails to provide a remedy of appeal. Section 111A(3)
provides only a partial remedy of rectification. Thus, these provisions instead
of providing additional benefits, have actually taken away, either completely
or partly, the rights and remedies already available. Clearly, therefore,
sections 111A(2) and (3) are not in addition to the laws for the time being in
force but are in derogation thereof. This is not the intention of the
Parliament as expressed in section 28 of the Depositories Act. In order to
rectify the two provisions mentioned above, the Depositories Act was amended by
Depositories Related Laws (Amendment) Act, 1997. By this amendment a proviso
was added to section 111A(2) and section 111A(3) was substituted.
Unfortunately even this effort of the
Legislature leaves much to be desired. Even the new provisions do not expressly
provide that remedies under sections 111(2) and (4) are continued. From a perusal
of the proviso to section 111A(2) it becomes apparent that a provision of
appeal is provided in case a company refuses to transfer the shares within two
months of the receipt of the ‘instrument of transfer’ or the ‘intimation of
transfer’. On a literal interpretation this would mean that no remedy of appeal
is available in case of non-transmission of shares on the delivery of
intimation of transmission. It is this interpretation which led the CLB to
substitute the term ‘intimation of transfer’ with ‘intimation of transmission’.
The
approach adopted by the CLB was not correct. A careful and meaningful analysis
of these provisions would clearly demonstrate the intention of the Legislature
to give equal treatment to shares held in public companies. This intention can
be discerned from the amendment noticed above. There can be no disparity in
the treatment of shares based on the mode of transfer or transmission.
Therefore, the necessary provision was sought to be made in the proviso to
section 111A(2) and section 111A(3). Unfortunately it seemed that due to the
haste in which the Depositories Act, 1996 and the Amendment in 1997 were
enacted the intention of the Legislature was not reflected in the provisions.
In the absence of the provision for ‘intimation of transmission’ in the said
proviso it would appear that there is no appeal provided. But this would be in
conflict with section 28 of the Depositories Act which makes it clear that the
provisions of the Act shall be in addition to and not in derogation of any
other law for the time being in force relating to holding and transfer of
securities. Thus, the proviso has to be construed in such a manner that would
preserve the rights and remedies already available to the shareholders, in
public companies. The interpretation would have to be such that section 111A
provides additional benefit to the shareholders in public companies over that
which they already enjoyed and continue to enjoy under section 111. Only then
would the proviso give effect to the intention of the Legislature. The
interpretation cannot be such as to deny the right of appeal to shareholders
of a public company on the basis of the mode of transfer or transmission. At
the same time it should not leave the shares held in depositories without a
remedy of appeal. Substitution of the term ‘intimation of transfer’ with
‘intimation of transmission’ would remove the right of appeal given to shares
held by depositories. This was not the intention of the Parliament.
The CLB had
unnecessarily fallen into confusion over the term ‘intimation of
transfer’. As noticed earlier all shares held in depositories are to be
dematerialised. Transfers are to be effected electronically. Remedy of appeal
is provided if the transfer is not registered by the company (issuer) or depository
within two months of the receipt of ‘intimation of transfer’. It is in this
sense that the term ‘intimation of transfer’ has been used in the proviso.
Another justification given by the CLB for the
‘drafting error’ conclusion was that ‘without such a construction, the term,
“intimation of transfer” does not carry any meaning as, if one approaches the
CLB with a complaint that the company has refused to register the transfer on
delivery of intimation of transfer, the CLB cannot direct the company to
register the same as it would be contradictory to the mandatory provisions of
section 108'. This conclusion was not warranted from section 108, read with the
Depositories Act. Under the Depositories Act the transfers of shares are to be
effected under the provisions of the Depositories Act. Detailed provisions are
made about the ownership and transfer of shares by electronic means. Further
elaborate provisions are made under the SEBI (Depositories and Participants)
Regulations, 1996. To make this absolutely clear the Legislature has amended
section 108 and inserted sub-section (3) to section 108. A perusal of this
sub-section makes it abundantly clear that section 108 is not applicable to
transfers where the transferee and the transferor are entered as beneficial
owners in the records of a depository. Thus, for this reason it could not have
been held that the ‘intimation of transfer’ carries no meaning. It may be made
clear here that the shares which are not held by depository can only be
transferred under section 108. For these transfers an instrument of transfer is
required by the company. Ideally, since the proviso mentions both ‘instrument
of transfer’ and ‘intimation of transfer’, the term ‘intimation of transmission’
ought also to have been mentioned. This would have made the meaning explicit.
Absence of the term from the proviso, however, cannot be construed to mean that
no remedy of appeal is provided in case of non-registration of transmission of
shares. This construction of the proviso is to be avoided, as it would rob section
111A(7) and section 28 of the Depositories Act of any meaning and content. It
would not give effect to the intention of the Legislature to make law in
addition to and not in derogation of any law for the time being in force.
Better course would be to interpret the provisions in such a way that the term
‘intimation of transmission’ is included in the proviso by virtue of section 28
read with section 111A(7). This would harmonise the text of the proviso with
the context of the whole statute, i.e., Depositories Act. Viewed in this manner
it is to be seen that both the terms ‘instrument of transfer’ and ‘intimation
of transmission’ are mentioned in section 111(1) and section 111(2). By virtue
of section 111A(7), whilst exercising the powers under section 111A, the CLB is
to decide the appeal by applying the provisions of sections 111(5), (7), (9),
(10) and (12). Thus, the term ‘intimation of transmission’ is deemed to be
included in the proviso to section 111A(2) by necessary implication. This is
the only harmonious construction which can be put on proviso to section
111A(2) to give effect to the intention of the Legislature. The proviso cannot
be read in isolation. It has to be read in the manner indicated above. No
dichotomy or disharmony can be created in the rights and remedies of the shares
held in public companies: object of the Depositories Act (section 28) is to
make law in addition and not in derogation to the ‘law for the time being in
force’. Therefore, absence of the term ‘intimation of transmission’ in proviso
to section 111A(2) cannot be construed to mean that no remedy of appeal is
available to shares which are transmitted by operation of law. Therefore, it
is not necessary to substitute the term ‘intimation of transfer’ with the term ‘intimation
of transmission’.
By virtue of provisions of section 28 of the
Depositories Act it cannot be held that section 111A(3) is restricted to
rectification of the register only in transfer matters. This would mean that no
remedy of rectification is available in case of loss of shares, bad deliveries,
theft and forgery. This would be in derogation of the law for the time being in
force. Remedy provided in section 111A(3) is in addition to the remedy provided
in section 111(4). It was, therefore, to be held that the remedies of appeal
and rectification are available to all kinds of shares held in a public
company under the proviso to section 111A(2) and section 111A(3) read with
sub-section (7) of section 111A which would make applicable the provisions of
sections 111(1), (2) and (4) by virtue of section 111(5).
Therefore, it could not be held that by virtue
of section 111(14) the provisions of sub-sections (1), (2) and (4) of section 111
are not applicable to public companies. Sub-section (1) of section 111 makes it
incumbent on the company to serve a notice of refusal of transfer within two
months of the delivery of instrument of transfer or intimation of transmission.
This provision is now incorporated in proviso to section 111A(2). But an
additional benefit has been given to the shareholders in that no limit is
provided for filing the appeal against the refusal or neglect of the company or
the depository to transfer the shares.
Restriction contained in sub-section (14) of
section 111 would not apply to transfer and ownership of the shares of the
public company held in the form of share certificates. Construed in this
manner, the provision of sub-section (1) or section 111A would clearly mean
that the remedy of rectification of register on transfer provided in section
111A would not be applicable to private companies. For the private limited
companies, the remedies of appeal and rectification would remain under
sections 111(2), (3) and (4). When an application is made under section 111
with regard to a private company, the CLB will deal with the same under the
provisions of section 111. The limit of two months appeal as provided under
sub-section (3) of section 111 would still be applicable to the private
companies.
In view of the above it was held that the CLB
had wrongly come to the conclusion that there was a drafting error in proviso
to section 111A(2). It was also held that there is no conflict between the
powers of the CLB under section 111A and
section 108. The share transfers effected under the Depositories Act are not to
be registered under section 108. They are to be registered by virtue of the
provisions of the Depositories Act read with the regulations made thereunder or
SEBI.
For the reasons recorded above, it had to be
held that the conclusion arrived at by the CLB in the case of Shashi Prakash Khemka v. NEPC Micon Ltd.
[1997] 13 SCL 260 was also erroneous. The conclusion was, therefore, overruled
and it was held that the remedies under the proviso to sections 111A(2) and
111A(3) are available to transfer as well as transmission matters.
Since the CLB held that the appeals were
maintainable and the relief had been granted to the respondent, there was no
need to interfere with the direction given. The reasons for the ‘drafting
error’ conclusion were, however, overruled. Both the appeals were dismissed.
Shashi Prakash Khemka v. NEPC Micon Ltd.
[1997] 13 SCL 260 (CLB), and Reserve Bank of India v. Peerless General Finance
& Investment Co. Ltd. [1987] 61 Comp. Cas. 663 (SC).
Shashi Prakash Khemka v. NEPC Micon Ltd.
[1997] 13 SCL 260 (CLB) reversed.
V.R. Dhond, Virag V. Tulzapurkar and Rishabh for the Appellant. S.M.
Gorwadkar for the Respondent.
1. The
appellants are public limited companies registered under the Companies Act,
1956 (‘the Act’). Shares of the appellants are listed on the various stock
exchanges and the National Stock Exchange. One Mr. Ramchand Parsaram Chhabria
was a shareholder of the appellant companies. He died intestate at Pune on
11-8-1987 (‘the deceased’) leaving behind him his mother (i) Smt. Parvatibai
Parsaram Chhabria, his widow (ii) Smt. Leela Ramchand Chhabria, his son (iii)
Shri Anil R Chhabria, the respondent herein, and his daughter (iv) Smt. Rita
Prakash Makhija, as his heirs and legal representatives. Thus, the legal heirs
are entitled to 25 per cent share each of the estate of the deceased.
2. On
22-9-1987 the respondent made a written request to the appellant-company for
transmission of the shares of the deceased to the joint names of the widow, son
and the daughter. This application was signed by the three legal heirs. In this
application it was not mentioned that the fourth legal heir is the mother of
the deceased who was still living. Application was made for the transmission of
all (100 per cent) the shares of the deceased whereas they were entitled only
to transmission of 75 per cent of the shares. On the necessary application
being made, the respondent was granted the succession certificate on 31-1-1989
which was issued on 24-2-1989. In the application before the Civil Judge,
Senior Division, Pune, the interest of the mother was not disclosed. The mother
filed Misc. Application No. 526 of 1989 for revocation of the succession
certificate. She, however, died during the pendency of the application on
2-9-1989. She left behind a Will under which she appointed Shri Prahlad P
Chhabria, Shri Kisan P Chhabria, Shri Bhagwandas P Chhabria and Shri Narayan P
Chhabria as executors and trustees. These executors were brought on the record
of the proceedings on 31-10-1992. Thereafter the appeal was admitted on
9-10-1995. However, the ad interim order dated 18-8-1992 was vacated. The
appeal was ultimately numbered as First Appeal No. 762 of 1995. Application for
condonation of delay was also allowed on the same date. On the stay having
been vacated, Civil Judge, Pune, granted a fresh succession certificate on
20-3-1997. In the meantime various requests made by the respondent for
transmission of the shares were rejected by the appellants on the ground that
he was not the sole legal heir and that the succession certificate had been
obtained by suppressing materials facts from the Court. However, the respondent
by letter dated 14-4-1997 again forwarded a notarised copy of the fresh
succession certificate to the appellants and made the request for transfer of
the shares. In answer to this request, the appellants on 18-6-1997 requested
the respondent to confirm that there are no legal proceedings pending with
regard to the succession certificate or in relation to the estate of the
deceased. By letter dated 30-6-1997 the respondent informed the appellants that
there are no Court order restraining transmission of the shares as mentioned in
the fresh succession certificate dated 20-3-1997 belonging to the deceased in
his favour. Again on 22-7-1997 the company reiterated that the respondent is
silent on the confirmation as to whether any legal proceedings are pending in any
Court in relation to the issue of succession certificate in relation to the
assets of the deceased. Taking this uncalled delay in transmission of the
shares to be a deemed refusal, the respondent filed two company petitions. By
its order dated 14-9-1999 - [1999] 35 CL 213, the CLB has allowed the petitions
and directed the appellants to transmit the shares held by the deceased in the
name of the respondent as per his entitlement in terms of the succession
certificate dated 20-3-1997. It is against this common order that the two
appeals have been filed.
3. The
submissions made before the CLB have been reiterated by the learned counsel in
these two appeals. Mr. Dhond, the learned counsel appearing for the appellants,
submitted that the petitions as framed were not maintainable under section
111A. The petition would not be maintainable under section 111A(2) as it deals
only with refusal to register ‘transfer of shares’. Sub-section (2) does not
deal with refusal to register the ‘transmission of shares’ by operation of
law. This right of appeal would have been available under section 111(2) of the
Act. However, by virtue of sub-section (14) of section 111, it applies now only
to private limited companies and deemed public companies under section 43A of
the Act. The remedy under section 111(2) would not be available to the
respondent as the appellants are public limited companies governed by
provisions of section 111A. The learned counsel submits that only remedy open
to the respondent is by way of a civil suit. In support of this argument,
reliance is placed on the judgment of the CLB in the case of Shashi Prakash
Khemka v. NEPC Micon Ltd. [1997] 26 CLA 316/13 SCL 260. In this case it is held
by the CLB as follows :
“Fourth issue: This issue relates to the remedy
available to an investor of a public company, in view of our finding that he
cannot move the CLB either through an application under section 111(2) or an
appeal under section 111(4). Any right to move the CLB in respect of a public
company, could only be under the provisions of section 111A. As far as transfer
matters are concerned, now provision exists under the proviso to section
111A(2) as well as section 111A(3). However, the prayer for rectification in
respect of non-transfer matters cannot be made before the CLB as no
jurisdiction in these matters has been conferred on the CLB under that section.
Therefore, under the existing provisions, perhaps, the only remedy available,
as seems to us, is that one has to move the civil court. In this connection, we
may also beneficially refer to the decision of the Full Bench of the Delhi High
Court in Ammonia Supplies Corporation (P.) Ltd. v. Modern Plastic Containers
(P.) Ltd. [1994] 79 Comp. Cas. 163, in which it was held that matters contained
in section 111 could be agitated in a civil court.” (p. 326)
He further submits that sub-section (3) of
section 111A would also not be applicable as it deals with rectification of the
register of members after a wrong entry is made in the register. According to
the learned counsel remedy of rectification is restricted to transfer matters.
No rectification can be sought under this sub-section for transmission or other
matters, such as bad delivery, loss, theft or forgery. He submits that under
sub-section (3) the applications can only be made by a depository, company,
participant, investor or SEBI. The respondent being none of these would have
no locus standi to file a petition under section 111A(3). Although before the
CLB the matter with regard to delay and laches was also canvassed but the same
has not been seriously canvassed in this Court.
4. Mr.
Gorwadkar, the counsel appearing for the respondent, has also reiterated the
submissions which have been made before the CLB by the counsel for the
petitioner therein. According to the learned counsel, section 111A cannot be
read in isolation. It is to be read in conjunction with section 111. Section
111A, according to the counsel, deals with transferability of shares of a
public company which should be deemed to include transmission also. He further
submitted that a perusal of sub-section (5) of section 111 together with
sub-section (7) of section 111A makes it clear that transmission of shares by
operation of law is also governed by section 111A, provided the transmission relates
to shares in a public company. Sub-section (7) of section 111A provides that
provisions of sub-sections (5), (7), (10) and (12) of section 111 shall apply
to the proceedings before the CLB under section 111A as they apply to the
proceedings under section 111. Sub-section (5) of section 111 in turn provides
that CLB while dealing with an appeal preferred under sub-section (2) or an
application under sub-section (4) may pass certain orders. Sub-section (2) of
section 111 enables a party to approach the CLB on refusal or failure of a
company to register transfer or transmission of shares. Sub-section (4) of
section 111 provides the remedy of an application to the CLB for rectification
of the register of members. Thus, the inaction of the appellants in the present
case ought to be treated as a deemed refusal and the petition would be
maintainable under sub-section (2) of section 111A. The CLB has, however, not
considered the argument noticed above as it has interpreted the term
‘intimation of transfer’ occurring in the proviso to section 111A(2) to mean an
‘intimation of transmission’.
5. I have
considered the arguments put forward by the learned counsel. The CLB has not
considered the argument of the respondent to the effect that the provisions
contained in sub-sections (2) and (4) of section 111 would be applicable while
considering the petitions under section 111A. In such circumstances, normally
the Court would remand the matter to the CLB for a fresh decision. But, from
the facts narrated above, it can be seen that the deceased passed away 12 years
ago. Thus, the matter has been considerably delayed. This apart, even if the
matter is remanded to the CLB it would be an exercise in futility. If the
argument of the respondent which was not considered by the CLB is accepted on
remand, the present appeals would still have to be decided on merits. Even if
the submissions of the respondent is rejected, still the present appeal on the
present grievance would have to be decided on merits by this Court. Thus, in my
view, it would be in the interest of all concerned if the matter is finally
decided by this Court in the present proceedings.
6. The
CLB has held that the right of appeal under section 111(2) has been retained in
the proviso to section 111A(2). It has further held that the term ‘intimation
of transfer’ occurring in proviso to section 111A(2) is ambiguous and
uncertain. Therefore, in order to give it a harmonious construction the term
‘intimation of transfer’ has to be read as ‘intimation of transmission’. Use
of the term ‘intimation of transfer’ in the proviso is said to be a ‘drafting
error’. This conclusion is justified on the ground that the expression
‘intimation’ occurring in sections 111(1), (2) and section 111A(3) is always
followed by the expression ‘transmission’. Thus, the term ‘intimation of
transfer’ has to be substituted by the term ‘intimation of transmission’. It is
held that without such a construction the term ‘intimation of transfer’ does
not carry any meaning. This is further justified on the ground that if one
approaches the CLB with a complaint that the company has refused to register
the transfer on delivery of ‘intimation of transfer’, the CLB cannot direct the
company to register the same it could be contrary to the mandatory provisions
of section 108. It is also held that the observations of the CLB in Shashi
Prakash Khemka’s case (supra) were made when the issue relating to transmission
was not in issue before the CLB. The CLB further holds that the proviso to
section 111A(2) does not specify any time limit within which a petition against
refusal to register the transfer should be made. The limit of two months as
specified in that proviso is applicabile only to the company. It is also held
that provisions of the Limitation Act, 1963 are not applicable to the
proceeding before the CLB. It is only if time limit is prescribed in the Act
itself that the petition has to be filed within the stated time limit.
7. Whilst
interpreting the various provisions the CLB purports to be guided by the
principles laid down by the Supreme Court in the case of Reserve Bank of India
v. Peerless General Finance & Investment Co. Ltd. [1987] 61 Comp. Cas. 663.
The Supreme Court has observed as follows :
“Interpretation must depend on the text and the
context. They are the bases of interpretation. One may well say if the text is
the texture, context is what gives the colour. Neither can be ignored. Both are
important. That interpretation is best which makes the textual interpretation
match the contextual. A statute is best interpreted when we know why it was
enacted. With this knowledge, the statute must be read, first as a whole and
then section by section, clause by clause, phrase by phrase and word by word,
if a statute is looked at in the context of its enactment, with the glasses of
the statute-maker provided by such context, its scheme, the sections, clauses,
phrases and words may take colour and appear different than when the statute is
looked at without the glasses provided by the context. With those glasses, we
must look at the Act as a whole and discover what each section, each clause,
each phrase and each word is meant and designed to say as to fit into the
scheme of the entire Act. No part of a statute and no word of statute can be
construed in isolation. Statutes have to be construed so that every word has a
place and everything is in its place. It is by looking at the definition as a
whole in the setting of the entire Act and by reference to what preceded the
enactment and the reasons for it that the Court construed the expression ‘prize
chit’ in Srinivasa’s case [1981] 51 Comp. Cas. 464; [1981] 1 SCR 801 and we
find no reason to depart from the Court’s construction.” (p. 692)
8. I am
of the opinion that the CLB has completely ignored the above ratio of the
Supreme Court. Having come to the conclusion that the term “intimation of
transfer’ in the proviso to section 111A(2) is a ‘drafting error’, the CLB has
provided a solution by substituting the term ‘intimation of transfer’ with
‘intimation of transmission’. The Courts or the CLB have no jurisdiction to
‘draft’ the provision. They have only to interpret the provision. It is not the
function of the Courts to legislate. The ‘drafting error’ conclusion,
therefore, has to be overruled at this stage only. By giving this
interpretation, the CLB has ignored both the text as well as context of the
proviso. The text has been ignored in that the term ‘intimation of transfer’
has been substituted by ‘intimation of transmission’. Context of the proviso has
been ignored as the interpretation to the proviso has not been given in
co-relation to the other provisions of the Companies Act read with the
Depositories Act, 1996. By giving this interpretation, the CLB has merely
justified its earlier finding that the proviso to section 111A(2) deals with
appeals in the matter of ‘transmis-sion of shares’ also. Since the CLB had
come to the conclusion that the provision is vague, it ought not to have
applied the rule of literal interpretation. The function of the Court whilst
interpreting the statute is to avoid an interpretation which would produce an
absurd result. The underlying purpose of all the rules with regard to
interpretation of statutes is to ascertain, discover or decipher the intention
of the Legislature. The literal construction has in general but prima facie
preference. To arrive at the real meaning it is always necessary to get an
exact conception of the aim, scope and object of the whole Act. Thus, it is
necessary to keep in mind as to what was the law before the Act was passed?
What was the mischief or defect for which the law had not provided? What remedy
the Parliament has appointed and the reason of the remedy? If a literal
construction would not promote the object of an Act but would produce an absurd
result, the Court would avoid such a result if another construction of the
relevant provision was possible. This is precisely what has been laid down by
the Supreme Court in Peerless General Finance & Investment Co. Ltd.’s case
(supra). The CLB, therefore, ought to have analysed the text as well as the
context of the various provisions of the Companies Act read with the
Depositories Act. It should have found out the reasons for the enactment. For
this purpose the whole statute had to be read clause by clause, phrase by
phrase. Interpretation ought to have been such that every phrase has its place
within the section and be in affinity with the objects which promoted the
enactment. The CLB ought not to have ignored the argument based on section
111A(7). Then it would not have been necessary to describe the proviso as a
‘drafting error’.
9. Now
let us see as to what was the law before the enactment of the Depositories Act.
Section 111 of the Companies Act before the enactment of the Depositories Act
was as follows :
“Power to refuse registration and appeal
against refusal - (1) If a company refuses, whether in pursuance of any power
of the company under its articles or otherwise, to register the transfer of, or
the transmission by operation of law of the right to, any shares or interest of
a member in, or debentures of, the company, it shall, within two months from
the date on which the instrument of transfer, or the intimation of such
transmission, as the case may be, was delivered to the company, send notice of
the refusal to the transferee and the transferor or to the person giving
intimation of such transmission, as the case may be, giving reasons for such
refusal.
(2) The transferor or transferee, or the person who gave intimation of
the transmission by operation of law, as the case may be, may appeal to the
Company Law Board against any refusal of the company to register the transfer
or transmission, or against any failure on its part within the period referred
to in sub-section (1), either to register the transfer or transmission or to
send notice of its refusal to register the same.
(3) An appeal under sub-section (2) shall be made within two months of
the receipt of the notice of such refusal or, where no notice has been sent by
the company, within four months from the date on which the instrument of
transfer, or the intimation of transmission, as the case may be, was delivered
to the company.
(4) If—
(a) the name of any person—
(i) is without sufficient cause, entered
in the register of members of a company, or
(ii) after having been entered in the register, is, without
sufficient cause, omitted therefrom; or
(b) default is made, or unnecessary delay takes place, in entering in
the register the fact of any person having become or ceased to be, a member
including a refusal under sub-section (1),
the person aggrieved, or any member of the
company, or the company, may apply to the Company Law Board for rectification
of the register.
(5) The Company Law Board, while dealing with an appeal preferred under
sub-section (2) or an application made under sub-section (4) may, after hearing
the parties, either dismiss the appeal or reject the application, or by order—
(a) direct the transfer or transmission shall be registered by the
company and the company shall comply with such order within ten days of the
receipt of the order; or
(b) direct rectification of the register and also direct the
company to pay damages, if any, sustained by any party aggrieved.”
10. A perusal of these provisions shows that
section 111 was a very comprehensive section, dealing with rights, remedies and
jurisdiction. It was applicable both public and private limited companies.
Sub-section (1) casts a duty on the company if it refuses to register the
change of any rights in shares, within two months of receipt of ‘instrument of
transfer’ or ‘intimation of transmission’, to send notice of refusal to the
transferor, transferee or the persons sending the ‘intimation of transmission’.
The notice must given reasons for refusal. Section 111(2) enabled a transferor,
transferee, or person who gives ‘intimation of transmission’ by operation of
law to file appeal before the CLB. This is in case of refusal or failure of the
company in registering the change in rights/ownership of shares or the company
not sending the notice of refusal. The appeal had to be filed within two months
of the receipt of notice of refusal, or where no notice has been sent by the
company, within four months from the date on which the ‘instrument of transfer’
or ‘intimation of transmission’ was delivered to the company. The section
applies to transactions inter-vivos and transmission by succession or by
virtue of some other provision of law. Sub-section (4) provides for an application
for rectification of the register at the instance of a person aggrieved, member
of the company or the company. Rectification of the register of members can be
sought if without sufficient cause the name of any person is wrongly entered in
it or after having been duly entered, is wrongly omitted from it. Rectification
application can also be made if the company makes default, causes unnecessary
delay, in entering in the register the fact of any person having become or
ceased to be a member, including a refusal under sub-section (1). There is
neither any time limit within which the company has to rectify the register,
nor any limitation within which an application for rectification is to be made
to the CLB. This is in contrast to section 111(2) which provides a limitation
of two months for the company to register the transfer or transmission; and a
limitation of two months to file an appeal. Sub-section (5) deals with the
manner in which and what orders can be passed by the CLB when hearing an appeal
under sub-section (2) or an application under sub-section (4).
11. Transfers under the Act were governed only by
section 108. The relevant portion of section 108 before the enactment of the
Depositories Act is as under :
“Transfer not to be registered except on
production of instrument of transfer - (1) A company shall not register a
transfer of shares in, or debentures of the company, unless a proper instrument
of transfer duly stamped and executed by or on behalf of the transferor and by
or on behalf of the transferee and specifying the name, address and occupation,
if any, of the transferee, has been delivered to the company along with the
certificate relating to the shares or debentures, or if no such certificate is
in existence, along with the letter of allotment of the shares or
debentures :
Provided that** ** **
Provided further that nothing in this section
shall prejudice any power of the company to register as shareholder or debenture
holder any person to whom the right to any shares in, or debentures of, the
company has been transmitted by operation of law.”
From a perusal of the above, it becomes
apparent that there was a mandate given to the company not to register transfer
of shares unless a proper ‘instrument of transfer’ was delivered. In case of
transmission of shares by operation of law it was necessary to deliver the
‘intimation of transmission’. This then was how the law stood, before the
passing of the Depositories Act.
12. In the 1980s India as a nation had decided to
modernise, liberalise and open its economy. Thus, it was necessary that there
should be free transferability of stocks and shares. Paper based ownership and
transfer of shares was proving to be major drawback of the Indian stock market,
as it often resulted in delay in settlement and transfer of shares. It led to
bad delivery, theft, loss and forgery of shares. As a result the investor was
deprived of liquidity. Great deal of avoidable litigation due to forgery, theft
and bad delivery was pending in the Courts. Thus, to pave the way for smooth
and free transfer of shares it was necessary to make a law for depositories.
The depositories law was to provide for a legal basis for establishment of
depositories to conduct the task of maintenance of ownership records of
securities and effect changes in ownership records through book entry. The
securities held in depositories were to be dematerialised and fungible. But an
option was to be given to the investor to choose whether to hold the securities
in the form of share certificates or in a dematerialised form in a depository.
This option can be exercised at any time. The investor is free to go in and out
of a depository as it chooses and when it chooses. The urgency with which these
laws were enacted is evident from the fact that the Ordinance was promulgated
whilst the Parliament was not in session and had to be re-promulgated twice
before it was enacted into the Depositories Act, 1996. The Depositories Ordinance
was promulgated on 20-9-1995 and re-promulgated on 7-1-1996 and 27-3-1996. The
Depositories Act was enacted on 10-8-1996 with effect from 20-9-1995.
13. From a close scrutiny of the provisions of
the Depositories Act, it becomes clear that the Legislature intended to rectify
the defects in the old system of ownership and transfer of shares. It also
becomes manifest that the depositories related laws are to be in addition to
the laws which are in existence. Thus, the intention of the Legislature was to
preserve all the remedies which existed for the shares held in public
companies. This is evident from section 28 of the Depositories Act. This
section is as follows :
“Application of other laws not barred - The
provisions of this Act shall be in addition to, and not in derogation of, any
other law for the time being in force relating to the holding and transfer of
securities.”
A perusal of this section clearly shows that
the provisions of the Depositories Act are in addition to and not in derogation
of any other law for the time being in force relating to the holding and
transfer of securities. It has been noticed above that sections 108 and 111
dealt with transfer of shares and the remedies of appeal and rectification in
case of the refusal or delay in registration of the transfer. Section 111
applied to both private as well as public companies. However, by this
Depositories Act, sub-section (14) was added to section 111 of the Companies
Act which is as under :
“(14) In this section ‘company’ means a private
company and includes a private company which had become a public company by
virtue of section 43A of this Act.”
This section limited the operation of section
111 to private companies including private companies which had become public
companies by virtue of section 43A of the Act. Thus, this section is not
applicable to public companies. By enactment of this sub-section the remedy of
appeal and rectification provided to the shares held in public companies under
sections 111(2) and 111(4) has been omitted. Therefore, provision for the
continuance of the remedies under sections 111(2) and (4) had to be made in the
Depositories Act.
14. These
remedies were sought to be provided by adding section 111A. But mistakes seem to
have crept in at every stage of drafting the necessary provisions. This can be
seen by examining the original provisions of section 111A and the efforts made
by the Legislature to correct the mistakes. The relevant provisions of section
111A as originally drafted are as under :
“Rectification of register on transfer—(1) In
this section, unless the context otherwise requires, ‘company’ means a company
other than a company referred to in sub-section (14) of section 111 of this
Act.
(2) Subject to the provisions of this section, the shares or debentures
and any interest therein of a company shall be freely transferable.
(3) The Company Law Board may, on
an application made by a depository, company, participant or investor or the
Securities and Exchange Board of India, if the transfer of shares or debentures
is in contravention of any of the provisions of the Securities and Exchange
Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the
Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any
other law for the time being in force, within two months from the date of
transfer of any shares or debentures held by a depository or from the date on
which the instrument of transfer or the intimation of the transmission was
delivered to the company, as the case may be, after such inquiry as it thinks
fit, direct any depository or company to rectify its register or records.
** ** **
(7) The provisions of sub-sections (5), (7), (9), (10) and (12) of
section 111 shall, so far as may be, apply to the proceedings before the
Company Law Board under this section as they apply to the proceedings under
that section.”
A perusal of section 111A(1) together with
section 111(14) makes it clear that section 111 is now limited in its operation
to private limited companies. But at the same time a perusal of section 111A(2)
shows that no remedy of appeal has been provided to any kind of shares held in
public companies. A perusal of section 111A(3) would show that no remedy of
rectification is available if the register remains inaccurate by contravening
the provisions of the Companies Act. The remedy is only provided for
rectification if there is a contravention of any of the provisions of the
Securities and Exchange Board of India Act, 1992 or Regulations made thereunder
or the Sick Industrial Companies (Special Provisions) Act, 1985, Section
111A(2) completely fails to provide a remedy of appeal. Section 111A(3)
provides only a partial remedy of rectification. Thus, these provisions instead
of providing additional benefits, have actually taken away, either completely
or partly, the rights and remedies already available. Clearly, therefore,
sections 111A(2) and (3) are not in addition to the laws for the time being in
force but are in derogation thereof. This is not the intention of the
Parliament as expressed in section 28 of the Depositories Act. In order to
rectify the two provisions mentioned above, the Depositories Act was amended by
Depositories Related Laws (Amendment) Act, 1997. By this amendment a proviso
was added to section 111A(2) and section 111A(3) was substituted. The proviso
and the substituted section 111A(3) are as follows :
“Provided that if a company without sufficient
cause refuses to register transfer of shares within two months from the date on
which the instrument of transfer or the intimation of transfer, as the case may
be, is delivered to the company, the transferee may appeal to the Company Law
Board and it shall direct such company to register the transfer of shares.
(3) The Company Law Board may, on an
application made by a depository, company, participant or investor or the
Securities and Exchange Board of India, if the transfer of shares or debentures
is in contravention of any of the provisions of the Securities and Exchange
Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the
Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) or any
other law for the time being in force, within two months from the date of
transfer of any shares or debentures held by a depository or from the date on
which the instrument of transfer or the intimation of the transmission was
delivered to the company, as the case may be, after such inquiry as it thinks
fit, direct any depository or company to rectify its register or records.”
15. Unfortunately even this effort of the
Legislature leaves much to be desired. Even the new provisions do not expressly
provides that remedies under sections 111(2) and (4) are continued. From a
perusal of the proviso it becomes apparent that a provision of appeal is
provided in case a company refuses to transfer the shares within two months of
the receipt of the ‘instrument of transfer’ or the ‘intimation of transfer’. On
a literal interpretation this would mean that no remedy of appeal is available
in case of non-transmission of shares on the delivery of intimation of
transmission. It is this interpretation which led the CLB to substitute the
term ‘instrument of transfer’ with ‘instrument of transmission’. In my view, the
approach adopted by the CLB is not correct. A careful and meaningful analysis
of these provisions would clearly demonstrate the intention of the Legislature
to give equal treatment to shares held in public companies. This intention can
be discerned from the amendment noticed above. There can be no disparity in the
treatment of shares based on the mode of transfer or transmission. Therefore,
the necessary provision was sought to be made in the proviso to section
111A(2) and section 111A(3). Unfortunately it seems due to the haste in which
the Depositories Act, 1996 and the Amendment in 1997 were enacted the intention
of the Legislature was not reflected in the provisions. In the absence of the
provision for ‘intimation of transmission’ in the proviso it would appear that
there is no appeal provided. But this would be in conflict with section 28 of
the Depositories Act which makes it clear that the provisions of the Act shall
be in addition to and not in derogation of any other law for the time being in
force relating to holding and transfer of securities. Thus, the proviso has to
be construed in such a manner that would preserve the rights and remedies
already available to the shareholding, in public companies. The interpretation
would have to be such that section 111A provides additional benefit to the
shareholders in public companies which they already enjoyed and continue to
enjoy under section 111. Only then would be proviso give effect to the
intention of the Legislature. The interpretation cannot be such as to deny the
right of appeal to shareholders of a public company on the basis of the mode of
transfer or transmission. At the same time it should not leave the shares held
in depositories without a remedy of appeal. Substitution of the term ‘intimation
of transfer’ with ‘intimation of transmission’ would remove the right of
appeal given to shares held by depositories. This is not the intention of the
Parliament.
16. The CLB, in my view, has unnecessarily fallen
into confusion over the term ‘intimation of transfer’. As noticed earlier all
shares held in depositories are to be dematerialised and fungible. Transfers
are to be effected electronically. Remedy of appeal is provided if the transfer
is not registered by the company (issuer) or depository within two months of
the receipt of ‘intimation of transfer’. It is in this sense that the term
‘intimation of transfer’ has been used in the proviso.
17. Another justification given by the CLB for
the ‘drafting error’ conclusion is that “without such a construction, the term,
‘intimation of transfer’ does not carry any meaning as, if one approaches the
CLB with a complaint that the company has refused to register the transfer on
delivery of intimation of transfer, CLB cannot direct the company to register the
same as it would be contradictory to the mandatory provisions of section
108". This conclusion is not warranted from section 108 of the Companies
Act read with the Depositories Act. Under the Depositories Act the transfers of
shares are to be effected under the provisions of the Depositories Act.
Detailed provisions are made about the ownership and transfer of shares by
electronic means. Further elaborate provisions are made under the SEBI
(Depositories and Participants) Regulations, 1996. To make this absolutely
clear the Legislature has amended section 108 and inserted sub-section (3) to
section 108. Thus sub-section is as follows :
“(3) Nothing contained in this section shall
apply to transfer of security effected by the transferor and the transferee both
of whom are entered as beneficial owners in the records of a depository.”
A perusal of this sub-section makes it
abundantly clear that section 108 is not applicable to transfers where the transferee
and the transferor are entered as beneficial owners in the records of a
depository. Thus, for this reason it could not have been held that the
‘intimation of transfer’ carries no meaning. It may be made clear here that the
shares which are not held by depository can only be transferred under section
108. For these transfers an instrument of transfer is required by the company.
Ideally, since the proviso mentions both ‘instrument of transfer’ and
‘intimation of transfer’, the term ‘intimation of transmission’ ought also to
have been mentioned. This would have made the meaning explicit. Absence of the
term from the proviso, however, cannot be construed to mean that no remedy of
appeal is provided in case of non-registration of transmission of shares. This
construction of the proviso is to be avoided, as it would rob section 111A(7)
of the Companies Act and section 28 of the Depositories Act of any meaning and
content. It would not give effect to the intention of the Legislature to make
law in addition to and not in derogation of any law for the time being in
force. Better course would be to interpret the provisions in such a way that
the term ‘intimation of transmission’ is included in the proviso by virtue of
section 28 read with section 111A(7). This would harmonise the text of the
proviso with the context of the whole statute, i.e., Depositories Act. Viewed
in this manner, it is to be seen that both the terms ‘instrument of transfer’
and ‘intimation of transmission’ are mentioned in section 111(1) and section
111(2). By virtue of section 117A(7), whilst exercising the powers under
section 111A, the CLB is to decide the appeal by applying the provisions of
sections 111(5), (7), (9), (10) and (12). Thus, the term ‘intimation of
transmission’ is deemed to be included in the proviso to section 111A(2) by
necessary implication. This in my view is the only harmonious construction
which can be put on proviso to section 111A(2) to give effect to the intention
of the Legislature. The proviso cannot be read in isolation. It has to be read
in the manner indicated above. No dichotomy or disharmony can be created in the
rights and remedies of the shares held in public companies : object of the
Depositories Act (section 28) is to make law in addition and not in derogation
to the ‘law for the time being in force’. Therefore, I am of the considered
opinion that absence of the term ‘intimation of transmission’, in proviso to
section 111A(2) cannot be construed to mean that no remedy of appeal is
available to shares which are transmitted by operation of law. Therefore, it is
not necessary to substitute the term ‘intimation of transfer’ with the term
‘intimation of transmission’.
18. There is also the merit in the submission of
Mr. Dhond that the remedy of rectification is limited only to shares held in
depositories, or that it applies only in matters of transfer. As noticed above,
the original section 111A(3) was substituted by the present provisions. The
term ‘any law for the time being in force’ was inserted. This has now made
clear that the remedy of rectification is available to all shares whether held
in depositories or in the form of share certificates. The fact that this was
always the intention of the Parliament is apparent from the fact that even the
provision, as it was originally drafted, had made a provision for rectification
of register in relation to ‘instrument of transfer’ and ‘intimation of
transmission’, it was necessary to mention ‘instrument of transfer’ and
‘intimation of transmission’ as the shareholder has an option either to remain
within the depository or to change the mode of securities to share
certificates. At that stage it would be necessary to deliver either the
instrument of transfer or the intimation of transmission. By virtue of provisions
of section 28 of the Depositories Act it cannot be held that section 111A(3) is
restricted to rectification of the register only in transfer matters. This
would mean that no remedy of rectification is available in case of loss of
shares, bad deliveries, theft and forgery. This would be in derogation of the
law for the time being in force. Remedy provided in section 111A(3) is in
addition to the remedy provided in section 111(4). It is, therefore, held that
the remedies of appeal and rectification are available to all kinds of shares
held in a public company under the proviso to section 111A(2) and section
111A(3) read with sub-section (7) of section 111A which would make applicable
the provisions of sections 111(1), (2) and (4) by virtue of section 111(5).
19. Is section 111 only applicable to private
limited companies in view of sub-section (14)? As noticed earlier, the
provisions of the Depositories Act are in addition to and not in derogation of
the existing provisions of the law. Therefore, it cannot be held that by virtue
of section 111(14) the provisions of sub-sections (1), (2) and (4) of section
111 are not applicable to public companies. Sub-section (1) of section 111
makes it incumbent on the company to serve a notice of refusal of transfer within
two months of the delivery of instrument of transfer or intimation of
transmission. This provision is now incorporated in proviso to section 111A(2).
But an additional benefit has been given to the shareholders in that no limit
is provided for filing the appeal against the refusal or neglect of the company
or the depository to transfer the shares. For this reason section 111(3) has
not been incorporated in section 111A(7) which provides the manner in which the
applications are to be decided by the CLB under section 111A. Sub-section (14)
of section 111 cannot exclude the application of sub-sections (1), (2) and (4)
of section 111 to shares held in a public company as it would then be in
conflict with section 28 of the Depositories Act. Under this section, the law
made under the Depositories Act is in addition to and not in derogation of any
law which is/was in force at the time when the Depositories Act was enacted.
Therefore, restriction contained in sub-section (14) of section 111 would not
apply to transfer and ownership of the shares of the public company held in the
form of share certificates. Construed in this manner, the provision of
sub-section (1) or section 111A would clearly mean that the remedy of
rectification of register on transfer provided in section 111A would not be
applicable to private companies. For the private limited companies, the
remedies of appeal and rectification would remain under sections 111(2), (3)
and (4). When an application is made under section 111 with regard to a private
company, the CLB will deal with the same under the provisions of section 111.
The limit of two months appeal as provided under sub-section (3) of section 111
would still be applicable to the private companies.
20. In view of the above it is held that the CLB
has wrongly come to the conclusion that there is a drafting error in proviso to section 111A(2). It is also
held that there is no conflict between the powers of the CLB under section
111A and section 108. The share transfers effected under the Depositories Act
are not to be registered under section 108. They are to be registered by virtue
of the provisions of the Depositories Act read with the regulations made
thereunder or SEBI.
21. For the reasons recorded above, it has to be
held that the conclusion arrived at by the CLB in the case of Shashi Prakash
Khemka (supra) which has been reproduced in para 3 hereinabove is also
erroneous. The conclusion is, therefore, overruled and it is held that the
remedies under the proviso to sections 111A(2) and 111A(3) are available to
transfer as well as transmission matters.
22. Since the CLB has held that the appeals are maintainable and the relief has been granted to the respondent, there is no need to interfere with the direction given. The reasons for the ‘drafting error’ conclusion are, however, overruled as indicated above. Both the appeals are dismissed. No order as to costs.