[1954]
24 Comp Cas 1 (SC)
In the Supreme Court of India
v.
Bombay Life Assurance Co. Ltd.
Mehr
Chand Mahajan, Vivian Bose and Jagannadhadas JJ.
civil
appeal nos. 52 to 54 of 1950
May 19, 1963
G.S. Pathak (H.J. Umrigar and P.N. Mehta, with him)
instructed by S.P. Varma, for the appellants
M.C. Setalvad, Attorney-General for India (J.B. Dadachanji, with him) instructed by Rajinder Narain, for the respondents.
Mahajan J. —These appeals, though they arise
out of two different suits, No. 336 of 1945 and No. 786 of 1948, can be
disposed of by a common judgment, as both these suits were instituted in effect
to obtain the same relief.
In July, 1944, a struggle commenced between the group
of Sir Padampat Singhania and the group of Shri Meneklal Prem Chand for control
of the management of the Bombay Life Assurance Co. Ltd. and there was a race
for the acquisition of the shares of the company between the two groups. Sir
Padampat, the appellant in Civil Appeal No. 54 of 1950, and respondent in the
cross appeal No. 53 of 1950, on the 25th July, 1944, purchased through Shri
P.N. Gupta, his Bombay agent, 667 shares of the company, 484 out of which
belonged to Mr. Reddy, the appellant in C.A. No. 53 of 1950 and respondent in
Civil Appeal No. 54 of 1950. This deal was made on his behalf by a firm of
share and stock brokers Bhaidas Gulabdas. The shares were sold at the rate of
Rs. 300 per share. On the 29th July Gupta executed a receipt in favour of Bhaidas
Gulabdas acknowledging the receipt of these shares, while Bhaidas Gulabdas as
constituted attorneys of Mr. Reddy executed five blank transfer forms in
respect of the 484 shares sold by them— four for 100 shares each, and one for
84 shares. It is alleged that these transfer forms were ultimately filled in
the name of Sir Padampat Singhania. Sir Padampat, however, made no application
to the company for registration of his name in the register of shareholders
till the 11th April, 1945. On an application being made, the company declined
to register the shares in his name and intimated to him their refusal to do so
on the 8th May, 1945.
On the 8th January, 1945, the company, in order to
combat the move of Sir Padampat to acquire control of its management, made an
application under rule 94-A of the Defence of India Rules for sanction for the
issue of further capital. The sanction was granted and the company was
authorised within a time limit of six months to increase its capital by a sum
of Rs. 4,59,600 by issuing 4,596 shares; otherwise the sanction was to lapse.
On the 21st February, 1945, the directors of the company passed a resolution
increasing the capital of the company by issuing these 4,596 shares of Rs. 100
each at a premium of Rs. 75 per share. On the existing shares only Rs. 25 per
share had been called up. The company therefore decided that the new shares
should be offered to the existing shareholders in the proportion of four shares
to every five shares held by the shareholders. Reddy, as a shareholder of 534
shares (including 484 shares sold by him on 25th July but yet not registered in
the transferee's name), thus became entitled to 427 new shares and one
fractional certificate. Out of the 427 new shares offered to him he was
entitled to 40 sharss in his own right which appertained to 50 unsold shares
which he still held in the company. The other 384 shares appertained to the
shares that he had sold. The company issued a circular letter to every
shareholder giving the details of the offer made and along with it sent two
forms, A and B. Form A being the application form for allotment of new shares,
the shareholder had to subscribe his name to it and return it to the company
for allotment of the shares offered accompanied by a cheque for the amount that
had to be paid for obtaining the shares. Form B was a renunciation form. In
case a shareholder did not want all or any of the shares offered to be allotted
to him, he was allowed to renounce his right in favour of some other person.
On the 21st February, 1945, Reddy returned to the
company form A duly filled in, requesting the company for allotment of 40
shares out of the new issue, which appertained to the 50 shares he still held
in the company. In respect of the balance of 384 shares offered to him and which
appertained to the 484 shares sold by him he said nothing. The renunciation
form was retained by him. On the 23rd February, 1945, Messrs. J.L. Mehta and
N.K. Bhartiya purporting to act on behalf of the purchasers of 484 shares wrote
to Reddy asking him to forward to them the company's circular letter along with
forms A and B as and when received by him, after appending to them his
signatures, to enable them to apply for these shares either in Mr. Reddy's name
or in the name of the transferees. He was told that he was to hold the shares
offered when acquired as a trustee for them. On the 28th February, 1945,
Messrs. Craigie Blunt & Caroe, a firm of solicitors, also acting on behalf
of the purchasers, wrote to Mr. Reddy a letter to a similar effect. This was
prefaced with the remark that the offer of fresh shares by the company was
illegal. Without prejudice to that contention, Mr. Reddy was called upon to
apply for the newly offered shares and obtain them on their behalf or to send
them the application form (A) and the renunciation form (B) and the fractional
certificate to enable them to obtain the new shares offered which appertained
to the 484 shares sold by him. The relevant part of this letter reads thus: —
"We are
instructed by our clients, the parties to whom you sold these shares, Mr. J.L.
Mehta, Sir Padampat Singhania, Lala Kailashpat Singhnnia, Mr. N.K. Bhartiya and
others to call upon you to apply for the additional shares and
fractional certificates now issued to which you have become entitled, and to
let us know when you have done so. When allotted to you, you will hold these
shares on their behalf and please then hand them to the Hindustan Commercial
Bank Ltd., Appollo Street, Fort, Bombay, who will pay you the sum of Rs. 100
for every share allotted to you, which should be accompanied by blank transfer
form signed by you as the transferor and the form of renunciation unsigned.
They will also pay you the proportionate sum on any fractional certificate to
which you are entitled on handing over the same to the bank in blank unsigned
on or before the 7th March, 1945.
If you prefer to do so, please send the form of
application 'A' duly signed by you as well as the renunciation form 'B' as also
the fractional certificate and the relevant application attached thereto
unsigned in blank to our client, Mr. N.K. Bhartiya at Second Floor, Rahimtoola
House, Homji Street, Fort, Bombay, so as to reach him before the 7th March,
1945, and he will then forward the application to the company on your behalf
along with the necessary remittance.
Our clients
agree to indemnify you against any and every liability which you will incur by
applying for the partly paid shares.
We are instructed to point out that you are a trustee
for our clients by virtue of the fact that you have sold your shares in this
company to them pending our clients' name being entered on the register in
respect of the shares which you have sold to them and that you are bound to
comply with our clients' request."
The
Hindustan Commercial Bank Ltd. also wrote a letter to Mr. Reddy on the 1st of
March 1945, which reads thus: —
"With reference to a circular dated the 28th
February, 1945, issued by Messrs. Craigie Blunt and Caroe on behalf of their clients
Mr. J.L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhania, Mr. N.K.
Bhartiya and others, we have instructions to pay you in respect of all shares
of the above named company in the new issue that you deliver to us at Rs. 100
per share, when such shares are allotted to you in exchange for the allotment
letters or share scrips with a duly signed transfer deed. We have also
instructions to pay you at Rs. 20 per fractional certificate delivered to us on
or before the 7th March, 1945. Please
note that we shall to the same if the shares and/or fractional certificates are
delivered to us in terms of the circular mentioned above. You may send these to
us through any bank and the exchange commission will also be paid by us."
These letters
indicate that the persons named therein with some undisclosed persons were the
purchasers of the shares sold by Reddy and they were the equitable owners of
the shares, in spite of the original bargain having been made by Sir Padampat.
It was not disclosed in these letters that the persons named therein were mere
nominees or benamidars of Sir Padampat. One fact however is beyond dispute that
the names of these persons were not entered in the blank transfer forms in the
column of transferee, and eventually it was the name of Sir Padampat alone that
was entered therein.
Mr. Reddy
replied to all these communications received by him on the 3rd March, 1945, in
the following terms: —
"With
reference to all these communications, I have to state that nearly eight months
have elapsed since I sold the shares and the shares are not as yet transferred
to the names of the purchasers. I have no objection to give the renunciation
forms, duly signed in favour of the real and true purchasers.
As regards
the requisition made by you in paras 4 and 5 of the circular letter of 28th
February, 1945,1 fail to understand as to how I am under an obligation to
comply with it. I am ready and willing to sign renunciation form in favour of
the true purchasers, on my being satisfied that those who are described as the
purchasers of my shares are the real and true purchasers of those shares by
their producing the transfer forms given by me duly executed by them along with
the share certificates."
Whatever else
may be said about the attitude of Reddy, he was certainly entitled to know the
name of the person or persons who were the real purchasers of the shares sold,
because he could only respect and comply with the requisition made by those
persons and those persons alone and by none else. Not satisfied with this reply
and in view of the fact that the last date for making the application for the
issue of additional shares was to expire on the 10th March, Sir Padampat
instituted suit No. 336 of 1945 on the 8th March, 1945, on the Original Side of
the Bombay High Court, inter alia, for the following reliefs against Mr. Reddy
as the sole defendant. The company was not impleaded in this suit.
"1. That the defendant may
be ordered to send and deliver to the plaintiff the application form A annexed
to the circular letter for the number of additional shares allotable to him, as
also the fractional certificates and the application relating thereto (unsigned
and in blank) upon the plaintiff paying to him such sum as this
Honourable Court may direct and/or upon the plaintiff giving such indemnity as
this Hon'ble Court may deem proper;
2. That the defendant may be ordered upon receiving the certificates
of the new shares to hand over the same as also the fractional certificates to
the plaintiff together with transfer forms in blank duly signed by him."
On the 7th December, 1945, the plaint was amended and
an alternative relief for a decree for Rs. 7,29,600 by way of damages was
included therein.
It was averred in the plaint that upon the sale by
the defendant of 484shares the plaintiff became the beneficial owner of those
shares and the defendant became a trustee for him of all rights and benefits
whatsoever appertaining or accruing to the said shares, that one of such rights
was the right and opportunity to apply for shares forming part of the new
issue, that the defendant was bound to do all lawful acts in relation to and
for the purpose of securing the said benefits for the plaintiff and which the
plaintiff might call upon him to do, on terms of the plaintiff indemnifying him
against all the consequences thereof, and that the plaintiff was ready and
willing to do the same. It was further alleged that unless the plaintiff's
rights were safeguarded by the 10th March, 1945, which was the last day for
making application for the shares, he will be irretrievably prejudiced. An
application was made for the appointment of a receiver of the application form
and letter of renunciation and of the rights of Reddy in the new issue of
shares.
On the same day Bhagwati J. made an order under Order
XL, rule 1, of the Civil Procedure Code, appointing the court receiver, interim
receiver of the application form and letter of renunciation and of the rights,
if any, of the defendant in the 384 shares of the Bombay Life Assurance Co.
Ltd. The receiver was given power to exercise all the rights of the defendant
in' respect of the said shares on the plaintiff giving the usual undertakings.
On the 10th March, 1945, the receiver made a request to the company for the
allotment to him of 384 shares of the new issue appertaining to the 484 shares
standing in Reddy's name in the company register and sold by him on the 25th
July, 1944. This application was accompanied by a remittance of Rs. 38,400
payable on these shares according to the resolution of the board. The company
was requested to register the name of the receiver in the register of members
in respect of these shares. On the 30th April, 1945, the company intimated to
the receiver that his application for allotment of shares was considered by the
board of directors in a meeting held on the 21st April, 1945, and it was
resolved to reject the same because Reddy had accepted the company's offer only
to the extent of 40 share* and the offer regarding the balance had lapsed.
The result was that the company refused to register
the name of the receiver in respect of the new shares on the 30th April, 1945,
and it also refused Sir Padampat's application for registering his name as
transferee in respect of the 484 shares of Reddy purchased by him which might have
entitled him to retain the new shares in his own name. Sir Padampat having thus
failed in getting the newly issued shares registered in the name of the
receiver had no alternative left but to fight out the suit already instituted
against Reddy. He also had another suit instituted to obtain practically the
same reliefs which were claimed in his own suit, by the receiver against the
company with the leave of the court, namely, suit No. 786 of 1948. This suit
was filed on the 8th March, 1948, after the lapse of about three years of the
company's rejection of the receiver's application. It was explained in para. 14
of the plaint that the suit had not been filed earlier as the validity of the
issue of the new shares was being challenged in suit No. 347 of 1945. The
prayer in this suit was that the defendant company be ordered to allot to the
plaintiff 384 shares mentioned in the application and to put his name on the
share register of the company for the said shares.
Both the suits were heard by Bhagwati J., who
delivered one judgment in both of them and substantially granted the reliefs
claimed in both the suits. It was held by the learned Judge that the 484 shares
which Reddy had sold through Bhaidas Gulabdas had been purchased by Sir
Padampat, that as trustee of these shares he as vendor was also a trustee of
all property rights annexed to the shares and that it was the duty of Reddy,
when called upon to do so by Sir Padampat on proper safeguard and indemnity for
payment, to transfer to Sir Padampat all the benefits which he derived by the
issue of the new shares by virtue of his being their legal owner. It was
further held that a proper requisition had been made by the beneficial owner on
the trustee to obtain for him these shares and that the trustee defaulted in
his duty in not complying with that requisition and that the company was also
in error in refusing the application of the court receiver for registration of
his name as a shareholder in respect of the new shares on the ground that Reddy
having applied for 40 shares, his right to obtain the remaining shares had
lapsed. It was argued on behalf of the company that the sanction given by the
Examiner of Capital Issues having lapsed, no relief could be given against the
company and it could not be ordered to allot shares to the plaintiff as there
was no available capital which could be issued. Bhagwati J., however took the
view that the plaintiff could not be deprived
of his rights by reason of this circumstance. In the result he ordered the
company to comply with the order and allot within three months 384 shares to
the plaintiff after obtaining a fresh sanction for the same from the authority
concerned. Before concluding the learned Judge said that issues 10 and 11 had
not been argued before him and the contentions raised therein seem to have been
abandoned and that even otherwise there was no merit in them. Against this
common judgment in both the suits, Reddy and the company preferred separate
appeals. The appeal Bench of the High Court allowed the company's appeal and
dismissed the receiver's suit on the finding that the court receiver was not
entitled to the allotment of the new shares in his own name as such. Civil
Appeal No. 52 of 1950 has been preferred against this decision. In suit No. 366
of 1945 Reddy's appeal was allowed to the extent that the plaintiff was held
disentitled by the reason of lapse of the sanction to reliefs (a) and (b)
granted to him by Bhagwati J. It was however held that he was a trustee of Sir
Padampat in respect of the shares of the new issue and he having failed to
apply for the new shares was liable to him in damages and the fact that he made
an application in respect of 40 shares did not disentitle him to make another
application in respect of the 384 shares. It was also held that a proper
requisition had been made by the beneficiary upon the trustee to carry out the
trust and he had defaulted in complying with requisition. The suit was
accordingly remanded to the trial Judge for assessing damages.
The principal
questions involved in the appeals are:
(a) Whether on the facts and
circumstances of this case Reddy was under a legal obligation as a trustee to
apply for and obtain on behalf of Sir Padampat 384 new shares which appertained
to the sharei sold by Reddy to Singhania;
(b) whether the requisition made on
Reddy by Messrs. Craigie Blunt & Caroe by their letter dated 3rd March,
1945, was sufficient in law to call upon him to apply for shares of the new
issue and whether Reddy committed default as a trustee in not complying with
this requisition;
(c) whether the conduct of Sir Padampat
in not lodging 484 shares for transfer to his name till April, 1945,
disentitled him to the reliefs claimed by him;
(d) whether the receiver was not
entitled to make the requisition and was not the proper person to apply for the
new shares in his own name, and whether the company was under no obligation to
allot to him the shares;
(e) whether
the plaintiff was entitled to reliefs (a) and (b) of the plaint in the altered
situation of the company.
It has been held in the courts below that Sir
Padampat became on the 28th July, 1944, the sole beneficial owner of 484 shares
sold by Reddy, the legal title to which was vested in him. That having been
found, the relation of trustee and cestui que trust was thereby established
between them. All that is necessary to establish such a relationship is to
prove that the legal title was in the plaintiff and the equitable title in the
defendant. The fact that such a relationship qua the 484 shares sold by Reddy existed
between the parties to the suit was not disputed by the learned
Attorney-General appearing for Reddy, but he contested the view of the High
Court that the cestui que trust could not on any principle of equity or law
call upon the trustee to bear his burdens and ask him to obtain on his behalf
new shares of the company or make further investments in its capital which
would involve in its train new obligations and fresh burdens.
As observed by Lord Lindley in Hardoon v. Belilios,
the plainest principles of justice require that the cestui que trust who gets
all the benefit of the property should bear its burden unless he can show some
good reason why his trustee should bear them himself. Mr. Pathak did not
contest the proposition that Singhania had any right as a beneficial owner of
484 shares to throw on Reddy any of the burdens incidental to the ownership of
those shares. He conceded that Reddy as a trustee had a right to be indemnified
by his cestui que trust against calls. The proposition is well recognised and
the liability is enforced on the principles applicable to the equitable
ownership of property.
Once it is established that Reddy was a trustee of
the 484 shares sold by him, he as holder of those shares must also be held to
be a trustee of all the property rights annexed to the shares. It was conceded
that he was not only the trustee of the corpus but also the trustee of the
income and of the dividends that he may receive and that he was bound to pay
them over to the beneficiary. In E.D. Sasson & Co. Ltd. v. Patch Pratt J.
held that under Section 94 of the Indian Trusts Act a transferor holds the
shares for the benefit of the transferee to the extent necessary to satisfy its
demands and that as the transferee holds the whole beneficial interest and the
transferor has none, the transferor must comply with all reasonable directions
that the transferee may give and that in this situation if he becomes a trustee
of dividends he is also a trustee of the right to vote because the right to
vote is a right to property annexed to the shares and as such the beneficiary
has a right to control the exercise by the trustee of the right to vote. The
learned Attorney-General did not combat the view expressed by Pratt J. but he objected to any further extension of
the rule therein laid down. The question that needs our decision is bare of
authority. The English law can furnish no guidance for its solution as there is
no provision corresponding to Section 105C in the English Companies Act. In
India this is the first known occasion when a situation like this has arisen
between a transferor and transferee of shares on a stock exchange transaction.
The proposition therefore that has been canvassed in this case has to be
decided on first impressions and on general principles of equity.
Section 105C,
the enactment of which has conferred certain rights and privileges on a
shareholder which he did not possess before its enactment, is in these terms:
"Where the
directors decide to increase the capital of the company by the issue of further
shares such shares shall be offered to the members in proportion to the
existing shares held by each member and such offer shall be made by notice
specifying the number of shares to which the member is entitled and limiting a
time within which the offer if not accepted, will be deemed to be declined; and
after the expiration of such time, or on receipt of an intimation from the
member to whom such notice is given that he declines to accept the shares
offered, the directors may dispose of the same in such manner as they think
most beneficial to the company."
This section
limits the power of the directors to dispose of the further issue of capital in
any manner that they may think most beneficial to the company. They are under a
mandate to offer these shares in the first instance to the members in
proportion to the existing shares held by them. In other words, a member
becomes entitled under the provisions of this section by reason of his being
the holder of a certain number of shares in the company, to obtain shares in
the further issue of capital as of right.
This is not a
fruit of stock ownership, in the nature of a profit, nor does it amount to a
division of any part of the assets of the company. It is not an organic product
of the original stock like the young of animals or the fruit of trees, but, as
described by the Supreme Court of America in Miles v. Safe Deposit Trust Co.,
this right to subscribe to new stock is but a right to participate in
preference to strangers and on equal terms with other existing shareholders in
the privilege of contributing new capital called for by the corporation—an
equity that inheres in stock ownership under such circumstances as a quality inseparable
from the capital interest represented by the old stock. The exercise of the
privilege depends on the option of the shareholder. If he likes, he can invest
further money and purchase a proportionate share of the new issue of
capital. He is of course not obliged to do so. He has also the right to assign
the offer made to him in four of any other person but in that event the
directors have the option to allot or not to allot the shares to the person in
whose favour the shareholder renounces the shares offered to him. The offer, of
course, creates fresh rights but it also brings in its train liabilities and
obligations. It confers the right on a shareholder to purchase shares in the
new issue of capital in proportion to his existing shareholding, but in order
to obtain that right he has to fulfil certain obligations and he has to incur
certain liabilities. In the first instance, if he decides to invest his money
in the further capital issued, he has to make an application to the company for
the allotment of shares so offered and with his application he has to remit to
the company the amount of the application money. That having been done, if the
shares offered are only partly paid up, as they were in this case, he incurs on
allotment the further liability of meeting any future calls on these shares.
Can it be said in this situation that a transferor of a certain number of
shares, being the legal owner of those shares and the beneficial interest of
which vests in the cestui que trust, is liable for all the payments and
obligations attaching to the new issue of shares and is bound to act in both
respects for the benefit of the cestui que trust; in other words, that he is
under a duty, when so instructed by his beneficiary, to make an application for
the new issue of shares offered under the provisions of Section 105-C and
obtain them in his name by making the necessary payments and by incurring the
consequential obligations. Plainly put, the question may be posed thus: whether
the obligation of a transferor of a certain number of shares as a trustee
extends also in respect of the right to acquire further shares issued by the
company on behalf of his cestui que trust by putting himself on the register of
shareholders in respect of the new shares regarding which he may have to incur
fresh liabilities and obligations which were not existing at the time when he
made the transfer.
Mr. Pathak contended that as the right to obtain new
shares was inseparable from the ownership of the old stock, the transferor of
the old stock held the option to buy new stock in like manner as he held the
original stock, and if qua the old stock he was a trustee for the beneficial
owner, in the like manner he was a trustee also of the right or the option to
buy new shares and was bound to exercise it for the benefit of the cestui que
trust and according to his directions, and was bound to obtain new shares in
his own name for the ceslui que trust. Reliance was placed for this proposition
on certain observations of Buckley J. in Biss v. Biss. In that case, a lessor
granted a lease for seven years of a house in which the lessee carried on a
profitable business. On expiration of the term of the lease, the lessor refused
to renew the lease, but allowed the lessee to remain as a tenant from year to
year on increased rent. During the tenure of the lease, the lessee died leaving
a widow and 3 children, one being an infant. The widow and a son each applied
to the lessor for a new lease for the benefit of the estate, which the lessor
refused to grant. Having determined the yearly tenancy by notices the lessor
granted to the son personally a new lease for 3 years. In an action already
instituted by the children against the administratrix, namely, the widow, she
applied to have the new lease treated as being taken by the son for the benefit
of the estate. Buckley J. held that the son was a trustee of the new lease for
the benefit of the estate. The Court of Appeal reversed this decision and held
that the right of renewal had been determined by the lessor long before the son
intervened, and that the new lease could not be regarded as an accretion to the
estate and the son was entitled to retain the lease and that he had not abused
his position in any way. This case therefore is no authority for the proposition
before us, and the Court of Appeal did not say anything on the point. Buckley
J. however in the course of his judgment observed as follows: —
"It is, of course, very familiar law that if a
trustee obtains a renewal of a lease of property vested in him as trustee,
whether by virtue of a right of renewal or not, he must hold the new lease for
the benefit of his cestui que trust. The leading authority upon that is Keech
v. Sanford. The principle is that the trustee owes it to his cestui que trust
to obtain a renewal, if he can do so, on beneficial terms, and that the court
will not allow him to obtain a renewal upon beneficial terms for himself when
his duty is to get it for his cestui que trust."
Reliance was also placed on certain observations of
Neville J. in Jones v. Evans. That was a case where the capital of a company
was divided into 10,000 shares of £ 10 each, of which 3,728 only had been
issued and were fully paid up. The company was very prosperous and the market
value of the shares was £ 30 each. The reserve fund of the company exceeded £
50,000. The directors proposed a scheme for distribution of the reserve fund
representing accumulated undivided profits amongst the shareholders, so that
every shareholder was to get a bonus of one new fully paid up share of £ 10 for
every existing share held by him. Accordingly resolutions were passed by the
company empowering the directors to declare a bonus dividend out of the reserve
fund and sanctioning the distribution of a bonus dividend of £ 10 per share out
of the reserve fund and authorising the further issue of 3,728 shares of £ 10
each out of the unissued capital of the company to be allotted pro rata amongst the existing shareholders and directing
that such new shares be paid up in full forthwith. The directors sent a
circular letter to every shareholder with a warrant for the bonus dividend on
his shares, informing him of an allotment to him of his proportion of the new
shares and giving him an option to accept or refuse the allotment, and stating
that if he accepted the allotment he was to indorse and return the dividend
warrant to the company to be applied in payment of the new shares. Trustees of
a testator's will held 200 shares of the company, and on receipt of the
circular letter accepted their allotment of 200 new shares, indorsed and
returned their bonus dividend warrant for £ 2,000, and afterwards sold the new
shares at a profit. The question then arose whether, as between the tenants for
life and remainderman under the will, the bonus dividend was capital or income.
It was held, on the evidence, that the company intended to capitalize the
reserve fund and not to distribute it as a bonus dividend, and therefore the
whole of the bonus dividend was capital of the testator's estate. In the
concluding portion of his judgment, Neville J. said as follows: —
" . . .
. . . when I say that the option vested in each shareholder, either to take the
dividend and keep it, or to return it and get the greater benefit which the
company offered if he did, I do not think that is true in the case of trustees;
because it seems to me that, if by taking £ 10 in cash, when they were offered
by the company a share worth £ 20 if they would return it, it would be a wilful
default on their part it they refused and took less, and consequently their
cestui que trust would be entitled to insist upon the trustees taking the
greatest benefit which the company offered. Therefore, in the case of trustees
it seems to me that, although as between the company and them there may be a right
to elect, between them and their cestui que trust there is no such right, and
they must take the dividend in what I will call the capitalized form."
On the basis
of these authorities, Mr. Pathak contended that his client a6 a beneficiary was
entitled to the fullest benefit conferred on the old shares by reason of the
new offer and that he was entitled to compel the trustee to act in a manner
which would enable him to obtain the benefit.
In our
opinion the observations made in these cases cited above must be limited to the
facts of those cases. We are here dealing with a trustee with peculiar duties
and peculiar liabilities, and it is a fallacy to suppose that every trustee has
the same duties and liabilities. In none of the cases cited by Mr. Pathak was there
any question of the trustees incurring any personal pecuniary liability. In the
case of Biss v. Biss, the question was of obtaining the benefit of
renewal of a lease, and the trustee had to incur no fresh liability for
obtaining it. On the other hand, a prosperous business was being conducted in
those premises and the renewal of the lease was obviously for the benefit of
the lessee and carried with it no new or onerous obligations. In Jones v.
Evans, the trustee had to incur no liability of any kind whatsoever. The only
question there was whether he should exercise the option of receiving the
dividend or of converting the bonus into the shape of capital. It is part of
the general law of trust that a trustee must act in a manner most beneficial to
the cestui que trust and he can retain no benefit to himself from the corpus of
the trust estate or from anything that accrues to that estate subsequently.
None of these cases deal with a situation like the one that has arisen in the
present case. If the newly offered shares were fully paid up and no liability
was attached to them, there is no question that the trustee would have been
bound to obtain them for the benefit of the cestui que trust. The cases
referred to therefore go only so far and no further. We see no principle of
equity or of general law which obliges a trustee to buy new shares in his own
name for the benefit of the cestui que trust and when in so doing he has to
bear a heavier pecuniary burden than he undertook to bear as constructive
trustee by reason of the sale of his shares in favour of the cestui que trust
and which relationship was contemplated to last only till the time when the
shares sold could not be registered in the name of the transferee. Of course,
if the trustee of his own volition chose to obtain the new shares which
appertain to the shares already sold by him, on principles of equity it could
not be denied that the cestui que trust would have been entitled to call upon
the trustee to hand over those shares to him on receipt of the amount spent by
the trustee; but if the trustee of his own volition is not prepared to obtain
those shares in his own name, it is difficult to see on what principle of law
or equity he can be forced to make an application for obtaining those shares in
his own name, and then pass them over to the cestui que trust after obtaining
the amount spent by him or after being otherwise fully indemnified in respect
of the payments made or to be made, or liabilities incurred or to be incurred
in future. It is difficult to conceive any principle of equity which obliges a
person in the position of a constructive trustee in respect of X number of
shares to also become a constructive trustee in respect of an additional, say,
Y number of shares and thus become a trustee of X plus Y shares. Such a burden
is not a necessary consequence or an incident of the original transaction of
purchase and sale of shares or of the legal relationship of trustee and cestui
que trust thus created. That relationship arises by reason of the circumstance
that till the name of the transferee is brought on the register of shareholders
in order to bring about a fair dealing between the transferor and the
transferee equity clothes the transferor with the status of a constructive
trustee and this obliges him to transfer all the benefits of property rights
annexed to the sold shares of the cestui que trust. That principle of equity
cannot be extended to cases where the transferee has not taken active steps to
get his name registered as a member on the register of the company with due
diligence and in the meantime certain other privileges or opportunities arise
for purchase of new shares in consequence of the ownership of the shares
already acquired. The trustee can very well say to any request made by the
cestui que trust for the acquisition of new shares that he is not prepared to
put his name on the register of members for any additional shares, particularly
when the acquisition of those shares involves him in further liabilities. In
our judgment therefore neither on principle nor on authority can it be held
that Mr. Reddy could be forced to acquire in his own name 384 shares which
appertain to the 484 shares sold by him to Sir Padampat. All that Sir Padampat
could call upon Reddy to do was to sign the renunciation form in his favour of
the shares offered out of the new issue appertaining to the old shares and
after having obtained the renunciation form, to make an application in his own
name for the purchase of those shares. This view can be sustained on the
intelligible principle that the transferor as a constructive trustee in respect
of the shares sold by him cannot retain any benefit himself of the new issue
which is annexed to the shares sold by him and if any benefit arises out of
that offer made under Section 105-C, that benefit must go to the beneficiary,
but more than that the beneficiary is not entitled to call upon the trustee to
do.
Mr. Pathak reiterated the argument that had been
accepted by the High Court that if the only duty of Reddy was to transfer the
offer made to him under Section 105-C to Sir Padampat after signing the
renunciation, then in that case Sir Padampat could not get the full advantage
of that offer because in that event the directors were not bound to allot the
shares to the person in whose favour they have been renounced by the
shareholder, while on an application made by the shareholder they were bound to
allot him the shares offered. That disadvantage is certainly there but it has
to be borne in mind that the relationship of constructive trustee and cestui
que trust created on principles of equity cannot be extended ad infinitum in
respect of all future acquisitions of rights annexed to the shares sold which
acquisitions may involve not only rights but liabilities and obligations which
the constructive trustee may not be prepared to undertake, and in this
situation the ceslui que trust may not be able to get all the benefits of the
fresh incident annexed to the ownership of the shares that h« had purchased. He
himself may be blamable for the loss that he may have thus to suffer by his not
having made an application in time for getting himself registered on the
register of members and for not having taken proper steps in law for getting
his transfer recognised by the company if the request made by him has already
been refused by the company. The equitable principle on the basis of which the
legal relationship between the transferor and the transferee arises cannot be
worked in a manner so as to prejudice the position of the constructive trustee
and make him an accounting party in respect of all privileges or fresh offers
that may be annexed to the shares sold for all time to come.
Mr. Pathak urged that his client was prepared not
only to pay the application money and the allotment money to the trustee but
was further prepared to indemnify him against any future calls on those shares.
It has to be remembered that even the original 484 shares sold by Reddy to Sir
Padampat were partly paid up shares and Reddy was liable to pay the amount of
any call made on those shares, subject to being indemnified when the time arose
by Sir Padampat for the amount paid on those shares. If Mr. Pathak's contention
is accepted, then Reddy will also become further liable for future calls on the
new 384 shares. He would be entitled only to claim indemnity when an occasion
arose. It is well settled that a trustee is not entitled to claim indemnity
till he suffers an injury for which he has to be indemnified. But the fact
remains that the liability to pay calls is for the time being his liability and
not that of the cestui que trust. Once his name is entered on the register of
shareholders, a mere right to claim indemnity may, in a case like the present,
when the time to claim it arises, prove to be merely illusory. The shares may
go down in value, the company may go in liquidation, or the financial position
of the equitable owner of the shares may deteriorate. In all these situations,
the right of the trustee to be indemnified in respect of fresh liabilities
accruing on the shares would be as already stated, merely chimerical, and the
trustee would have to incur in those situations personal pecuniary liability on
account of the shares. Therefore, the contention that the trustee is bound to
buy the new shares in his own name for the benefit of the cestui que trust is
not well founded, because it involves in its train pecuniary liabilities which
the trustee may have to incur personally and which he is not bound to undertake
under any system of law for the benefit of the cestui que trust. We thus hold
that Sir Padampat was not entitled to call upon Reddy to make an application in
his own name for the acquisition of the newly issued shares by investing his
own money in the first instance and then recovering it from Sir Padampat or by
signing the application form and sending it to Sir Padampat for acquiring the
shares in his name. All that he was entitled to was to call upon him to send
him the renunciation form. This Reddy was prepared to do and offered to do so provided
the names of all the persons in whose favour renunciation had to be made were
disclosed to him. Admittedly this was never done and Sir Padampat could not
gain his object by merely having the renunciation form, because the directors
of the company in the circumstances of this case would never have granted his
application, if made in his own name on the basis of the renunciation form
signed by Reddy. Sir Padampat's or the receiver's suit therefore in this view
of the case could not have been decreed.
On the view expressed above, both the suits must
fail. If Sir Padampat had no right to call upon the trustee to buy the newly
offered shares in his own name for his benefit, a fortiori, the receiver
appointed by the court had also no such right, and on this short ground the
claim put forward in both the suits has to be negatived.
We are further of the opinion that even if it was
held that Reddy was under a duty to sign the application form and the
renunciation form and send them over to Sir Padampat to enable the latter to
obtain the newly offered shares in Reddy's name, the requisition that was made
on his behalf directing the trustee to purchase these shares and to exercise
the option was ineffective and inadequate. On the basis of that requisition, it
was not possible for the trustee to carry out the mandate of the cestui que
trust, and, that being so, on this ground also, the plaintiff was disentitled
to relief in the two suits.
The first requisition made by Messrs. J.L. Mehta and
N.K. Bhartiya on the 23rd February, 1945, was made on their own behalf only and
not on behalf of Sir Padampat. It called upon Mr. Reddy to forward the circular
letter with his signatures on the forms annexed to the letter, to enable them
to apply for the newly offered shares either in his name or in their or such
other names as might be decided upon by them. This requisition was not
considered adequate by the High Court and was left out of consideration. Mr.
Pathak also did not place much reliance upon it. Both the courts below and Mr.
Pathak however placed reliance on the requisition made on the 28th February,
1945, in the letter of Messrs. Craigie, Blunt & Caroe cited in the earlier
part of this judgment. In that letter, it was stated as follows: —
"We are instructed by our clients, the parties
to whom you sold these shares, Mr. J.L. Mehta, Sir Padampat Singhania, Lala
kailashpat Singhania, Mr. N.K. Bhartiya and others to call upon you to apply
for the additional shares and fractional certificates now issued . . . .
."
This requisition therefore purports to have been made
on behalf of 4 disclosed beneficiaries and some other undisclosed cestitis que
trust. It was not asserted in this letter that the real purchaser of the shares
was Sir Padampat Singhania and the other persons mentioned therein were merely
his agents or benamidars. Moreover, it did not disclose the names of all the
beneficiaries. Legitimately, therefore, in his letter of the 3rd March, 1945,
Mr. Reddy said that he was ready and willing to sign the renunciation form in
favour of the true purchasers, on his being satisfied that those who are
described as the purchasers of his shares are the real and true purchasers by
perusing the transfer forms duly executed by them along with the share
certificates. It is difficult to understand how a requisition made on the
trustee by some disclosed and other undisclosed beneficiaries could be regarded
as a proper direction to him, which he could be called upon to obey. This
requisition was therefore faulty in this respect, and the trustee could not be
said to have defaulted in his duty in not carrying out such a requisition.
Again, the indemnity offered in the requisition is merely illusory, because in
the letter the extent of the liability of each beneficiary, whether known or
unknown, is not mentioned, and the trustee could not ascertain from its
contents the name of each and every person liable for his claim for indemnity
as and when the occasion for it arose, or its extent. A mere bald statement in
the following words "Our clients agree to indemnify you against each and
every liability that you incur by applying for these partly paid up
shares" was in our opinion wholly inadequate. The matter may have been
different if along with this requisition a bank guarantee safeguarding the trustee
in regard to his future liabilities had been sent to him as well as a cheque
for the money required to be paid at the time of making the application. We are
also of the opinion that in view of the allegations made in the plaint and in
view of the fact that all the share transfer forms were subsequently signed by
Sir Padampat Singhania alone, this requisition cannot be said to have been made
on behalf of the plaintiff and on the basis of it he cannot be heard to say
that he made a proper requisition on the trustee which the latter failed to
carry out and was therefore liable to him in damages for not carrying out his
directions. It is significant that no mention is made in the plaint as to how
the names of the persons contained in the letter of the 28th February came to
be mentioned therein, and how the requisition was made on their behalf when
they had never signed the blank transfer forms.
It may also be observed that it was left to
the option of the trustee to pay from his own pocket the application money, and
then recover it from the bank. Such a demand could not be made on a trustee and
he could not be asked to invest his own money for the benefit of the cestui que
trust. The trustee was under no obligation to find a heavy sum of money and to
invest it on the purchase of new shares for the benefit of the cestui que
trust, and to recover the amount after having invested it in them. What the
letter of the solicitors in fact intended to convey to Reddy was: "Pay
yourself and obtain the shares, or else, sign a blank cheque and send it to us
and then we will see to what extent we are going to make you liable by putting
your name on the register of shareholders." The conclusion of the High
Court on this point has been stated in these terms: —
"Sir
Jamshedji relies on the attitude taken up by his client and has contended that
he took up the right attitude by enquiring as to who the real beneficiary was
and to be satisfied by the production of the relative transfer forms. Now, if
this had been the only attitude of Mr. Reddy much might have been said in his
favour. But unfortunately in this very letter Reddy clearly declined any
liability or obligation upon him to apply for these shares on behalf of his
beneficiary. Whether he knew that his purchaser was Sir Padampat or not, as the
learned Judge has held, or whether there is force in Sir Jamshedji's contention
that Messrs. Craigie, Blunt and Caroe referred to the purchasers as Sir
Padampat and others, the fact remains that Reddy did not accept his liability
as a trustee and then agreed to discharge that liability provided he was
satisfied as to who his purchaser was. He only wanted to be satisfied about his
purchaser in order to send to him the letter of renunciation. That was the only
question on which he wanted to be satisfied. In view of the attitude taken up
by Reddy the plaintiff had no other course open to him except to file the suit,
and, therefore, in our opinion the learned Judge was right when he came to the
conclusion that the plaintiff was entitled to the relief he had claimed."
We have not
been able to appreciate this line of thought. The attitude adopted by Reddy
could not cure the defects in the requisition alleged to have been made on
behalf of the plaintiff. If the directions given to the trustee were of an
inconclusive nature, and were in law ineffective, then the trustee could not be
mulcted in damages for not obeying them, even if his attitude was hot what it
should have been. The plaintiff is not entitled to damages, unless and until he
proves that he made a proper and effective demand on the trustee and this the
trustee failed to carry out. On this ground also, both the suits are bound to
fail.
Mr. Pathak
argued that the plaintiff was entitled to reliefs (a) and (b) both in his suit as
well as in the receiver's suit and that the receiver's suit was wrongly
dismissed by the High Court. We are unable to agree. In our opinion, the High
Court rightly held that the receiver appointed in the suit of Sir Padampat
could not acquire the newly issued shares in his name. That privilege was
conferred by Section 105-C only on a person whose name was on the register of
members. The receiver's name admittedly was not in the register and the company
was not bound to entertain that application. Mr. Pathak argued that that may be
so but the receiver was not making an application in his individual right but
he had been armed by the court with power to apply in the right of the
defendant Reddy. The fact however is that the receiver made the application in his
own name. Even if Mr. Pathak's contention is right the company was no party to
the suit filed by Sir Padampat against Reddy and that being so, no order could
be issued to the company in that suit to recognize the receiver as a
shareholder in place of Reddy. The matter might have been different if the
company was a party to the suit and was ordered by the court to register the
receiver's name in place of Reddy's for the 484 shares purchased by Sir
Padampat and was also ordered to issue new shares in the name of the receiver.
It is not necessary for us to offer any final opinion on the question whether
the court would have been within its right to direct his name to be included in
the register, even if the company was impleaded in the suit filed by, Sir Padampat
against Reddy. We are however quite clear that the company not having been
impleaded in that suit, it was not bound to issue the new shares in the name of
a person whose name was not already in the register of members even if he
represented a person whose name was already in the register. The High Court was
thus right in dismissing the receiver's suit. We are also of the opinion that
the appellate Bench of the High Court was also right when it declined to grant
reliefs (a) and (b) of the plaint to Sir Padampat. The sanction given to the
company to issue new capital had lapsed long before Bhagwati J. granted reliefs
(a) and (b) to the plaintiff. It was an extraordinary procedure in a civil suit
to direct a company which was no party to the original suit to obtain fresh
sanction for the issue of new shares and then allot them to the plaintiff. It
seems to have been overlooked that if sanction to issue new capital was somehow
obtained, that capital would also have to be distributed as directed by Section
105-C and could not be allotted by the directors in favour of any particular
shareholder. In the altered situation that arose after the institution of the
suit, if the plaintiff succeeded, the only relief that could be granted to him
was the relief of damages. We are however
unable to grant the relief to the plaintiff in view of our finding that Reddy
could not be compelled as constructive trustee to buy new shares in his own
name for the cestui que trust and further in view of our finding that even if
he could be compelled to acquire those shares in his own name for the cestui
que trust he could not be said to have defaulted in his duty in carrying out
the directions of the cestui que trust as in this case no proper and valid
requisition was made by the cestui que trust on the trustee for the acquisition
of those shares. The plaintiffs in the two suits are therefore not entitled to
any relief.
For the
reasons given above, we allow Reddy's appeal No. 63 of 1950 and dismiss the
cross appeal of Sir Padampat as well as the receiver's appeal No. 52 of 1950
and dismiss both the suits, but in the circumstances of this case we will make
no order as to costs in both the suits throughout.
[1989] 66 Comp. Cas.
684 (All.)
v.
Union of India
K.N. Seth and K.C. Agarwal JJ.
CIVIL MISC. WRIT PETITION NO. 9210 OF 1978
AND SPECIAL APPEAL NO. 30 OF 1979
December 18, 1981
R.K. Agrawal and Rajaram
Agrawal for the Appellant.
Vinod Swarup and Jagdish
Swarup for the Respondent.
K.N. Seth J.—By means of a petition under article 226 of the
Constitution (Civil Miscellaneous Writ Petition No. 9210 of 1978), the
petitioners have prayed for a writ of certiorari quashing the order dated May 5,
1978, passed by the Regional Director, Company Affairs, Kanpur, in exercise of
his power under section 108(1D) of the Companies Act, 1956, granting extension
of time for registration of shares of K.M. Sugar Mills Ltd. (hereinafter
referred to as "the company") in the names of respondents Nos. 4 and
5. A prayer has also been made for quashing the order of respondent No. 1
passed on the review application made by the petitioners. It has further been
prayed that the respondent-company be directed to restore the names of the
petitioners in the records of the respondent company as shareholders of 4,000
shares and to restrain respondents Nos. 4 and 5 from acting in any manner or
exercising any right as owners and holders of the aforesaid 4,000 shares. The
connected Special Appeal No. 30 of 1979 is directed against the order of the
learned company judge dated August 13, 1979, dismissing the application of the
petitioners under section 155 of the Companies Act for rectification of the
register of members of K.M. Sugar Mills Ltd.
The case set up by the
petitioners was that K.M. Sugar Mills Ltd. was incorporated on December 17,
1971, as a private limited company under the Companies Act, 1956. On September
13, 1974, it was converted into a public limited company with its registered
office at 11, Moti Bhawan, Collectorganj, Kanpur. The authorised capital of the
company is Rs. 25,00,000 consisting of eighteen thousand equity shares of Rs.
100 each and seven thousand 10 per cent cumulative redeemable preference shares
of Rs. 100 each. The paid up capital of the company is Rs. 23,00,000 comprising
eighteen thousands equity shares of Rs. 100 each and five thousand 10 per cent
cumulative redeemable preference shares of Rs. 100 each. The petitioners held
four thousand equity shares registered in their names. There were several other
companies, partnerships, agricultural farms and charitable trusts as
shareholders which were controlled by the petitioners and respondents Nos. 4
and 5 who were members of the same family. Serious disputes and differences
arose between the petitioners and respondents Nos. 4 and 5 which were referred
to one Sri M.L. Bajoria, a common relation of the parties (for arbitration).
Sri M.L. Bajoria chalked out a scheme for settlement of the family disputes.
However, differences again arose among the parties which were referred to Sri
R.P. Nevatia and Sri S.K. Rajgharia. It has been alleged that in connection
with the implementation of the family settlement, the petitioners delivered a
number of blank transfer deeds to respondents Nos. 4 and 5. It has, however,
been asserted that the petitioners never specifically executed any transfer
deed for transfer of the petitioners' shareholding in K.M. Sugar Mills Ltd., in
the names of respondents Nos. 4 and 5 and that the petitioners have reason to
believe that the blank transfer deeds and the gift deeds executed by them in
respect of other companies have been wrongfully utilised by the respondents for
the purpose of transfer of the disputed shares in the respondent company.
According to the petitioners, respondents Nos. 4 and 5 committed fraud and
wrongfully and illegally sought to deprive the petitioners of their shares in
the respondent company. It has further been averred that it was agreed between
the petitioners and the said respondents that until a sum of Rs. 30,00,000
together with agreed damages was paid to the petitioners, the petitioners would
continue to be members of the respondent company and their shareholding would
not be transferred in favour of respondents Nos. 4 and 5. The petitioners,
however, in June, 1978, learnt that respondents Nos. 4 and 5 had procured
orders from the Regional Director, Company Law Board, Kanpur, extending the
time for registration of 4,000 equity shares of the company in their names on
the basis of certain transfer deeds alleged to have been executed by the
petitioners in their favour between June, 1976, and October, 1976. Thereupon,
the petitioners made an application to the Company Law Board on June 6, 1978,
for reviewing the order of the Regional Director, dated May 5, 1978. The
Company Law Board dismissed the review application by an order dated August 5,
1978. On the basis of the order of the Regional Director, the names of the
petitioners in relation to the four thousand equity shares in dispute have been
deleted and the shares have been fraudulently registered in the names of
respondents Nos. 4 and 5.
The legality of the order
of the Regional Director has been challenged on the ground that he passed the
impugned orders without any notice to the petitioners and in violation of the
principles of natural justice and without applying his mind to the allegations
contained in the applications under section 108(1D) of the Companies Act. The
order of the Company Law Board has been assailed on the ground that the Board
has illegally refused to entertain the review application and gave no reasons
for refusing to interfere in the matter.
Section 108(1D) provides :
"Notwithstanding anything in sub-section (1A) or sub-section (1B) or sub-section (1C) where in the opinion of the Central Government it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub-sections by such further time as it may deem fit, whether such application is made before or after the expiry of the periods aforesaid ; and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638."
Respondents Nos. 4 and 5
made applications to the Regional Director, Department of Company Affairs,
Company Law Board, Kanpur, under section 108(1A)(b)(ii) for extension of the
period of validity in respect of the transfer deeds relating to 4,000 shares in
K.M. Sugar Mills Ltd. In the applications, it was claimed that the transfer
deeds were executed on or about June 30, 1975, and October 15, 1976, by the
writ petitioners who were the registered holders of the shares. It was alleged
that on receipt of the share scrips and the transfer deeds, they were handed
over to one Mr. M.C. Chaudhary who was the mill manager and also a director for
taking necessary steps for getting the shares registered in the names of the
transferees. Sri Chaudhary, due to pressure of work, forgot about the matter.
He fell seriously ill in December, 1976, and ultimately died on February 17,
1977. The documents were, in the first week of April, 1978, found in the residential
house of Sri Chaudhary when his family started shifting from the house provided
by the mill. It was further alleged that the transferors were not available for
fresh signatures and it was apprehended that they might refuse to sign fresh
transfer deeds owing to family disputes. Moreover, one of the transferors was
living in the U.S.A. The applicants prayed that since it was a case of genuine
hardship, the period of validity of the instrument of transfers be extended.
The Regional Director, Kanpur, by his order dated May 5, 1978, in exercise of
powers conferred by sub-section (1D) of section 108 read with Notification No.
GSR 2763, dated December 15, 1969, issued by
the Government of India, Ministry of Finance, Department of Company Affairs,
extended the period by one month from the date of the order for acceptance by
K.M. Sugar Mills Ltd., of the instrument of transfers relating to 4,000 equity
shares of the company as detailed in the order. It was specified in the order
that the extension of time does not affect the rights and liabilities of the
parties under the instrument of transfer in question.
Learned counsel for the
petitioners contended that before passing the impugned order, the Regional
Director did not afford any opportunity to the petitioners to contest the
applications and thereby acted in violation of the principles of natural
justice. It was further urged that the requirement of law regarding formation
of opinion of the authority concerned that it was necessary so to do to avoid
hardship clearly indicated that the authority concerned should afford an
opportunity before passing an order to the parties concerned. In support of the
plea that principles of natural justice were attracted to the proceedings
before the Regional Director, a large number of Supreme Court decisions were
placed before us wherein it has been laid down that principles of natural
justice are applicable not only to quasi-judicial orders but also to
administrative orders and that where an order is passed in breach of the
principles of natural justice, the order is a nullity. It is now a firmly
established rule of law that even in an administrative proceeding which
involves civil consequences, the doctrine of natural justice is applicable. De
Smith, in his book on Judicial Review of Administrative Action (Fourth
Edition), dealing with the scope of the audi alteram partem rule, has set out
one of the basic principles in the following words :
"Bodies whose
designation, composition and normal procedures do not evoke an image of
adjudication are also likely to be obliged to observe the rule if either (a)
the language in which their functions are conferred or the general context in
which they are exercisable is indicative of a duty to conduct a hearing or an
inquiry before coming to their decision ; or (b) they are empowered or required
to decide matters analogous to lites inter partes ; or (c) they are empowered
or required to determine disputable questions of law and fact or to exercise a
limited or 'judicial' discretion, and the effect of their decisions will,
unless successfully challenged have a substantially adverse impact on the
interests of an individual. Normally, an obligation to observe the rule arises
only in the course of arriving at a decision having binding effect, although
procedural obligations may also be imposed in other circumstances when
fair-play so requires."
We may now consider some of
the decisions of the Supreme Court brought to our notice. State of Orissa v.
Dr. Miss Binapani Dei, AIR 1967 SC 1269, the dispute related to the order of
the State Government regarding the retirement age of Dr. Miss Binapani Dei. The
order was passed without giving a reasonable opportunity of showing cause
against the action proposed to be taken in regard to her. In A.K. Kraipak v.
Union of India, AIR 1970 SC 150, the dispute related to selection of officers
serving in the Forest Department in the State of Jammu and Kashmir and the
recommendations made by the Selection Board were challenged on the ground of
its constitution. In Smt. Maneka Gandhi v. Union of India, AIR 1978 SC 597, the
dispute related to the impounding of Maneka Gandhi's passport. It was held that
the power conferred under section 10(3)(c) of the Passport Act, even if it be
held to be administrative in character, would attract the rules of natural
justice because it seriously interferes with the constitutional rights of the
holder of the passport to go abroad and entails adverse civil consequences. The
right to go abroad was held to be included in the expression "personal
liberty" in article 21 of the Constitution. In Mohinder Singh Gill v. The Chief Election Commissioner, New
Delhi, AIR 1978 SC 851, the dispute related to
election to Parliament. Dealing with the nature of electoral right and whether
it involved "civil consequences", it was observed that "civil
consequences" undoubtedly cover infraction of not merely property or
personal rights but of civil liberties, material deprivations and non-pecuniary
damages as well. In its comprehensive connotation, everything that affects a
citizen in his civil life inflicts civil consequences. The expression
"civil rights" as defined by Black (Law Dictionary, 4th Edn.), is
"such as belongs to every citizen of the State or country, or, in a wider
sense, to all its inhabitants, and are not connected with the organisation or
administration of government. They include the right to property, marriage
protection by the laws, freedom of contract, trial by jury, etc. As otherwise
defined, civil rights are rights appertaining to a person by virtue of his
citizenship in a State or community, rights capable of being enforced or
redressed in a civil action. Also a term applied to certain rights secured to
citizens of the United States by civil action. It was observed that "the
interest of a candidate at an election to Parliament regulated by the
Constitution and the laws come within this gravitational orbit. The most
valuable right in a democratic polity is the 'little man's' little pencil
marking, assenting or dissenting, called his vote. A democratic right, if
denied, inflicts civil consequences."
In
the case of Mohd. Rashid Ahmad v. State of U.P., AIR 1979 SC 592, the dispute related to non-absorption of Mohd. Rashid
Ahmad in the service of the Municipal Corporation, Kanpur. He was appointed as
officiating Executive Engineer and continued to function in the same capacity
on a purely temporary arrangement. The U.P. Public Service Commission
considered that he was not fit for appointment for the post of the Executive
Engineer. His services were ultimately terminated by the State Government
without affording him any opportunity. The order was quashed on the ground that
it was violative of the principles of natural justice.
In the case of S.L. Kapoor
v. Jagmohan, AIR 1981 SC 136, the Lieutenant Governor of Delhi, in exercise of
the powers conferred under section 238(1) of the Punjab Municipal Act, 1911,
superseded the New Delhi Municipal Committee. The order was challenged on the
ground that it had been passed without affording any opportunity to the members
of the Committee. Dealing with the nature of right of the Committee, the
Supreme Court observed (p. 142 para 9) :
"A committee as soon
as it is constituted, at once, assumes a certain office and status, is endowed
with certain rights and burdened with certain responsibilities, all of a nature
commanding respectful regard from the public. To be stripped of the office and
status, to be deprived of the rights, to be removed from the responsibilities,
in an unceremonious way as to suffer in public esteem, is certainly to visit
the Committee with civil consequences. In our opinion, the status and office
and the rights and responsibilities to which we have referred and the expectation
of the committee to serve its full term of office would certainly create
sufficient interest in the Municipal Committee and their loss, if superseded,
would entail civil consequences so as to justify an insistence upon the
observance of the principles of natural justice before an order of supersession
is passed."
The rule of audi alteram
partem was again considered by the Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. Union of India [1981] 51 Comp Cas 210 with regard to the taking over of an
undertaking without investigation under the provisions of the Industries
(Development and Regulation) Act. It was observed that this maxim has many
facets. Two of them are : (a) notice of the case to be met ; and (b)
opportunity to explain. In the words of Lord Loreburn, the duty to afford a
fair hearing is "a duty lying upon every one who decides something"
in the exercise of legal power.
The basic question for
consideration is whether these principles are attracted to the exercise of
power under section 108(1D) of the Companies Act. That provision comes into
play where, in the opinion of the authority concerned, it is necessary to
extend the period prescribed for presentation of the instrument of transfer in
order to avoid hardship in any case. If, in the opinion of the authority
concerned, non-extension of time would entail hardship to a party, it has been
conferred the power to extend the time for presentation of the instrument of
transfer for registration in the name of the transferee. The language of section
108(1D) does not indicate that the concerned authority, while dealing with the
matter of extension of time, is required to apply its mind to any other matter
except the matter of hardship to the applicant in case the period is not
extended. It is not competent for him to enter into the question relating to
the genuineness or validity of the instrument of transfer. That matter has to
be considered when the documents are lodged with the company for effecting
registration in favour of the transferee shown in the instrument of transfer.
No useful purpose could be served by giving the notice of the application for
extension of time to the transferor since the authority concerned would not be
in a position to decide the controversy, if any, raised by the transferor. In
such a situation, the principles of natural justice would not come into play
since the authority concerned is not required to do any adjudication over the
rival claims that may be put before him.
It was urged that the
statute requires that, before taking any action, the Central Government has to
form an opinion that it is necessary to extend the period for presentation of
the instrument of transfer to the company with a view to avoid hardship. In any
case, it implies that the other party to the instrument of transfer, namely,
the transferor, must be given an opportunity to contest it. We are not
satisfied that any such requirement is implicit in the language used in the
statute. The opinion has to be formed on the basis of material disclosed in the
application for extension of time. It is not necessary to hear the transferor
before forming an opinion as to whether it is necessary to extend the time in
order to avoid any hardship. The hardship required to be seen is hardship to
the transferee. This matter has been left to the discretion of the Company Law
Board to which the power of the Central Government has been delegated. That
discretionary power is to be exercised on the subjective opinion of the Board
and not on any objective satisfaction. The Board is not competent to enter into
any other matter except whether to extend the period or not. In such a
situation, there appears to be no scope for the application of the principle of
affording an opportunity to the other party to have its say in the matter.
In the case in hand, the applications for extension of time, which were
supported by affidavits, did contain material which could legitimately be taken
into consideration in forming the opinion that it would cause hardship to the
transferee if time was not extended. The opinion formed by the Board could not
be characterised as arbitrary or capricious. As noted earlier, while granting
the prayer for extension of time, the Board made it explicitly clear that the
order of extension of time does not affect the rights and liabilities of
parties under the instrument of transfer in question. Since no adjudication on
the rights of parties was made by the order granting extension of time, no
element of the principles of natural justice was attracted in the case.
The legality of the order
of the Central Government dated August 6, 1978, has been challenged on the
ground that it illegally refused to entertain the review petition. It was urged
that the order of the Regional Director was subject to the control of the
Company Law Board and consequently, the Company Law Board was competent to
review the order. Neither any provision of the Act nor any notification has
been brought to our notice which may indicate that the exercise of power by the
Regional Director was subject to the control of the Company Law Board.
Respondent No. 1 appears to be justified in taking the stand that under
sub-section (1D) of section 108 of the Companies Act, the power exercised by
the Regional Director is purely discretionary and no appeal or review is
provided in the Act. Apart from taking this stand, respondent No. 1 also took
the view that since the shares have already been registered in the names of the
transferees, it would not be possible to intervene in the matter. The view
taken by respondent No. 1 appears to be fully justified. Since the shares had
already been registered in the names of the transferees, no relief could be
granted to the petitioners. Even if it was held that the Regional Director
wrongly extended the time at that stage, under the Companies Act, the Central
Government had no say in the matter. The order dated August 5, 1978, must also
be held to be valid.
In support of the Special
Appeal No. 30 of 1979, which arises out of proceedings under section 155 of the
Companies Act, it was urged that the learned company judge committed an error
in refusing to decide the matter on merits on the ground that the case involved
complicated questions of title and highly disputed questions of fact. It was
further urged that extension of period for presenting the instrument of
transfer for registration was illegal and that the transfer deed and the gift
deeds were not executed in respect of the disputed shares. It was also
contended that the transfer was in violation of section 108A of the Companies
Act.
We have already upheld the
validity of the order of the Regional Director passed under section 108(1D) of
the Act. The question whether the transfer deeds related to the shares in
dispute can be gone into only if the dispute is decided on merits. As regards
the plea that the transfer was in violation of section 108A of the Act, it may
be noted that reference to this provision of the Act was made in paragraph S3
of the application under consideration. Reference to section 108A appears to have
been made only with a view to emphasize that extension of time should not have
been granted. Relevant particulars and details to establish that the transfer
was in violation of the provisions of section 108A of the Act have not been put
forward in the application. At the time of framing of the issues, the
applicants did not press any specific issue on this aspect of the case. The
order of the learned company judge does not indicate that this aspect of the
case was pressed for consideration during the course of arguments. Even in the
memorandum of appeal, no ground touching on the provisions of section 108A of
the Act has been taken. The appellants are, therefore, not entitled to raise
this question at the hearing of the appeal.
In the earlier part of the judgment,
we have given a summary of the case set up by the appellants. Their basic plea
undisputedly is that the instrument of transfer did not relate to the shares in
dispute and respondents Nos. 4 and 5 committed fraud and wrongfully and
illegally deprived the appellants of their shares in the respondent company.
The circumstances in which the contesting respondents came in possession of the
transfer deeds have been set out in detail. It cannot possibly be disputed that
in order to substantiate the allegations made by the appellants, a lot of oral
and documentary evidence will be required. The question is whether such a
matter should be decided under section 155 of the Companies Act or the
aggrieved party should have recourse to a competent civil court for
adjudication of his rights.
The nature and scope of
section 155 of the Act has been considered by various courts in India including
our own court. In the matter of Dhelakhant Tea Co. Ltd.'s case, AIR 1957 Cal
476, P.S. Mukharji J., took the view that where serious questions involving
disputed questions of fact arise, the matter should not be tried in a summary
procedure in an application for rectification of the share register under
section 155 of the Act because they are more appropriate subjects for trial in
a suit on evidence after a full discovery of documents and inspection.
In S. Bhagat Singh v. Piar
Bus Service Ltd. [1960] 30 Comp Cas 300 (Punj) AIR 1959 Punj 352, Tek Chand J.,
after referring to a number of decisions of the Calcutta, Patna and Madras High
Courts and the courts in England, observed (headnote at p. 304) :
"The object of enacting section 38 of the Indian Companies Act, of 1913, which is analogous to section 155 of the Companies Act of 1956, was to provide a summary remedy in non-controversial matters or in matters where a quick decision was necessary in order to obviate an irreparable injury to a party. This provision was not intended for settling controversies under several heads necessitating a regular investigation. When serious disputes are involved as in this case, the proper forum for their adjudication is a civil court."
In Jayashree Shantaram
Vankudre v. Rajkamal Kalamandir Private Ltd. [1960] 30 Comp Cas 141 (Bom), it
was laid down that where discovery and inspection are necessary and complicated
questions such as forgery and fabricated documents arise, the summary procedure
of trial by petition under section 155 should not be allowed.
In Rao Saheb Manilal
Gangaram Sindore v. Western India Theatres Ltd. [1963] 33 Comp Cas 826 (Bom),
Shah J. ruled that the provisions in section 155 of the Companies Act for a
procedure by way of an application is only a provision for a summary procedure
and that the court is not bound to give the relief under that section in that
proceeding if it finds that complicated questions of fact and law are involved
and it has got the power to direct the party concerned to a civil court and to
file a proper action for the purpose of securing the relief which he seeks in
the summary proceeding.
H.R. Khanna J., in Smt.
Somavati Devi Chand v. Krishna Sugar Mills Ltd., AIR 1966 Punj 44, following
the decision in Delakhant Tea Co. Ltd.'s case, AIR 1959 Cal 476, the judgment
of Tek Chand J. in the case of S. Bhagat Singh v. Piar Bus Service Ltd. [1960]
30 Comp Cas 300, and other cases, held that where complicated matters like
fraud, etc., are involved, they can only be adjudicated after recording
evidence and that it would not be proper to go into them in a summary
proceeding under section 155 of the Act.
Satish Chandra J., as he
then was, in Mahendra Kumar Jain v. Federal Chemical Works Ltd. [1969] 35 Comp
Cas 651 (All) also declined to interfere under section 155 of the Act since, in
that case, several disputed questions of fact arose which involved a detailed
and thorough investigation on conflicting oral testimony as well as documentary
evidence.
The Calcutta High Court, in
the case of Daddy S. Mazda v. K.R. Irani [1977] 47Comp Cas 39 (Cal), after
sitting out the disputes involved in the case, observed (page 53) :
"In our view, the
intensity, the depth and the sweep of the allegations are such that it is not
possible for the court to come to any conclusion about the truth of the
allegations except upon evidence which can be tested by cross-examination of
witnesses. There can be no doubt that the allegations relate to serious
disputed questions of fact and such disputes can be resolved only by oral
testimony tested by cross-examination and by no other means. To hold that
disputes such as those raised in the application can and ought to be resolved
on averments made in the affidavits would defeat the purpose and object of the
summary procedure prescribed by section 155 of the Act."
Learned counsel for the
appellants placed reliance on the decision of the Patna High Court in Basudev
Kataruka v. Dhanbad Automobiles Private Ltd. [1977] 47 Comp Cas 68 (Pat). In
that case, the question that arose for consideration was as to the allotment of
certain unissued equity shares, the ground of challenge being to the
restrictions under article 23 of the articles of association of the company. In
these circumstances, the court held that the question was not so complex that
it could not be decided in a summary proceeding under section 155 of the Act.
The ratio in that case is of no assistance to the appellants. The decision of
the Supreme Court in Indian
Chemical Products Ltd. v. Slate of Orissa [1966] 36 Comp Cas 592 (SC), is also of no assistance to the appellants. In
that case, the Maharaja of Mayurbhanj held 7,500 shares of a company and the
remaining 150 shares were held by others. As a consequence of the integration
of the State with the Dominion of India, these 7,500 shares of the company
vested in the Dominion. The Government of India delegated to the Government of
Orissa the power to administer the territories of the merged State. There was,
therefore, a transmission of the shares from the Maharaja to the State of
Orissa by operation of law. The State of Orissa also obtained a deed of
transfer signed by the Maharaja and lodged the same with the company for
rectification of the share register. The company refused to make the necessary
rectification and consequently an application was made under section 38 of the
Indian Companies Act, 1913. The matter went up to the Supreme Court. On these
facts, it was held that the right of refusal to register shares must be
reasonably exercised in good faith and the discretion of the directors is
liable to be controlled by the court. In this case, there was no dispute that a
transfer deed was executed by the registered shareholders in the name of the
transferee and there was also transmission of shares by operation of law. The
ratio of this case is also of no assistance to the appellants.
Learned counsel lastly
referred to the decision of the Gujarat High Court in Gulabrai Kalidas Naik v.
Shri Lakshmidas Lallubhai Patel [1978] 48 Comp Cas 438. Certain observations in
that case do lend support to the contention raised by the appellants that even
complex and complicated questions of title can be appropriately examined in a
petition for rectification made under section 155 of the Act. The learned judge
further observed that (p. 456) :
"…a petition under section 155 cannot straightaway be disposed of by merely saying that as complex and complicated questions of title are raised, the matter ought to be decided by way of a suit and the party ought to be relegated to a suit. At best it can be said that the question is addressed to the discretion of the court and if the court exercises the discretion one way, namely, to undertake to hear the petition, its decision cannot be said to be one without jurisdiction."
On the facts of the case,
the learned judge found that the plea of forgery in the case was only an
incidental question which the court may have to investigate but it did not
raise any intricate or complex problem.
We may, in this connection,
also refer to the observation of the Supreme Court in Public Passenger Service Ltd. v. M.A.
Khadar [1966] 36 Comp Cas 1 (SC), to the effect
that where, by reason of its complexity or otherwise the matter can more
conveniently be decided in a suit, the court may refuse relief under section
155 in exercise of its discretionary jurisdiction and relegate the parties to a
suit.
In our view, the consensus
of judicial opinion appears to be that the jurisdiction under section 155 of
the Companies Act is of a summary nature and in a case where complicated and
complex questions of fact are involved, which can be properly decided on oral
evidence tested by cross-examination and on documentary evidence, the proper
course would be to relegate the aggrieved party to take recourse to a civil
suit. In any case, where a court of original jurisdiction declines to interfere
in exercise of its jurisdiction under section 155 of the Act on the ground that
the case involves seriously disputed questions of fact and adjudication of
questions like fraud, forgery, etc., the appellate court would not be justified
in interfering with the discretion exercised by the learned judge.
In the result, the writ petition as well as the special appeal fail and are dismissed with costs.
[1973] 43 COMP. CAS. 58 (CAL.)
HIGH COURT OF CALCUTTA
v.
Makkanlal Samaddar
B.C. MITRA AND AJAY K. BASU, JJ.
Appeal No. 35 of 1971 and C.P. No. 350 of 1969
JANUARY 28, 1972
JUDGMENT
B.C. Mitra, J.—This
appeal is directed against a judgment and order dated July 31, 1970. By that
order, the trial court granted the respondent’s prayer for rectification of the
share register of the appellant by entering therein the name of the respondent as the registered holder of certain
shares mentioned in annexure ‘A’ to the petition.
The.
respondent purchased a lot of 2,256 fully paid-up equity shares in the capital
of the appellant, the value of each share being Rs. 50. Thereafter, the
respondent applied for registration of the shares in his name. Upon application
by the respondent for registration of the transfer of the shares, the appellant
wrote to one of the transferors, enquiring about the genuineness of the
transfer of the shares in favour of the respondent, and also whether full
consideration for the transfer was paid. One of the transferors by his letter
dated July 5, 1969, informed the appellant that he had sold the shares to the
respondent on payment of full consideration, and also that he had no objection
to registration of the shares in the name of the respondent. A similar letter
was written by another transferor. By 3 letters dated June 2, 1969, June 18,
1969, and July 5, 1969, the appellant informed the respondent that, as the
transfer of the shares seemed to be questionable, the mutation applied for
could not be allowed in the facts and circumstances of the case. On his refusal
to register the transfer of the shares, the respondent made an application for
rectification of the share register under section 155 of the Companies Act,
1956 (hereinafter referred to as “the Act”). On this application the trial
court made the order appealed against.
The only
question involved in this appeal is whether the appellant’s refusal to register
the transfer in favour of the respondent was lawful. For the purpose of
ascertaining the extent and scope of the powers of the appellant in the matter
of registration of transfer of shares, it is necessary to refer to article 29
of the articles of association of the appellant. This article is as follows:
“29. (1) The board may, subject to the right to
appeal conferred by section 111, decline to register:
(a) The transfer of a share, not being fully
paid up share to a person whom they do not approve; or
(b) Any
transfer of shares, on which the company has a lien.
(2) The board
may also decline to recognise 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 accompained by
the certificate of shares to which it is related and such other evidence as the board may reasonably require to
show the right of the transferor to make the transfer;
(c) The
instrument of transfer is in respect of only one class of shares”.
The
appellant’s power to decline registration of the transfer must be derived from
one or other of the clauses mentioned above. It is not in dispute in this case that the shares are
fully paid up, nor is it in dispute that the company has no lien on the shares
which the respondent had acquired.
It is
necessary to refer to the provisions in a few sections of the Act. Section
108(1) of the Act provides that a company shall not register a transfer of
shares or debentures, 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 therein the name, address and occupation of the
transferee, has been delivered to the company along with the letter of
allotment of the shares or debentures. The next important section to be
referred to is section 111. By an amendment made in 1965 the words “or
otherwise” were added in sub-section (2) of that section. I set out below
sub-sections (1) and (2) of section 111 of the Act:
“(1) Nothing in sections 108, 109 and 110 shall
prejudice any power of the company under its articles to refuse 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.
(2) If a company refuses, whether in pursuance
of any power under its articles or otherwise, to register any such transfer or
transmission of right, it shall, within 2 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”.
Mr. S.
Mookerjee appearing for the appellant raised two points in support of this
appeal. The first point urged by him was that, although the articles did not
confer upon the company the power to refuse registration of fully paid-up
shares, such power could be exercised by virtue of amendment to sub-section (2)
of section 111 of the Act by addition of the words “or otherwise”. The second
point urged by him was that the respondent was intent upon ruining the company,
and for that reason he was a very undesirable person so far as the company was
concerned, and therefore the directors had rightly refused to register the
shares in his name.
In support of
the first point mentioned above, counsel for the appellant submitted that by
virtue of the amendment, the Indian law with regard to registration of shares
has become altogether different from the corresponding provision in the English
law. He argued that the words “or otherwise” in sub-section (2), introduced by
the amendment in 1965, clearly indicated that the legislature contemplated
giving to the company a power to refuse registration de hors the provisions in
the articles of the company. In support of this contention reliance was placed
on the report of the Companies Act Amendment Committee in which it is stated at
page 48 that provision should be made in sub-section (2) of section 111 for
cases where a company refuses to register a transfer, even though its
articles do not empower it to do so. He argued thru the power of the directors
to refuse registration should be inferred quite independently of the.
provisions in the articles of the company. In support of this contention
reliance was also placed on a decision of the Supreme Court in Harinagar Sugar
Mills Ltd. v. Shyam Sunder jhunjhunwala.
Reliance was placed on this decision for the proposition that refusal by the
directors to register shares must be on reasonable grounds and that such
refusal should not be based on capricious or oppressive grounds and should not
be mala fide. In that case, however, the articles conferred upon the directors
the absolute discretion, without giving any reasons, to refuse to transfer any
shares whether such shares were fully paid or not. It was held that normally
the court would presume, where the directors had refused to register transfer
of shares when they were invested with absolute discretion to refuse
registration, that the exercise of the power was bona fide. It seems to us that
this decision is of no assistance to the appellant, as the articles in that
case clearly provided for an absolute discretion to refuse registration. There
is no such provision in the articles of the company in this case. Reliance was
next placed on a decision of this court in Dhelakhat Tea Co. Ltd., In re, for
the proposition that in an application for rectification of share register, if
serious questions of fact were involved, there should not be a summary trial of
such disputed questions, and that the parties should be relegated to a suit.
But, in this case, there is no such disputed questions of fact, and as I see it
the only question is one of interpretation of section 111(2) of the Act.
Reliance was next placed on another decision of the Supreme Court in Bajaj Auto
Ltd. v. N.K. Firodia . In
that case also the articles of the company provided that the directors might at
their absolute discretion decline to register a transfer of shares. It was held
that the discretion did not mean a bare affirmation or negation of a proposal
but that it implied just and proper consideration of the proposal by the board.
It seems to me that this decision is also of no assistance to the appellant.
Reliance was next placed on a Bench decision of the Delhi High Court in Jalpaiguri Cinema Co. Ltd. v. Pramatha Nath Mukherjee
.
In construing the words “ or otherwise”, which were introduced by the Amending
Act of 1965 to sub-section (2) of section 111 of the Companies Act, it was held
that those words could not have the effect of enlarging the power to refuse
registration of transfer of shares as given by sub-section (1) and that
sub-section (2) could not be construed so as to confer power on a company, a
power to refuse registration of transfer, even though such power is not
conferred by the articles of the company.
It seems to
us that the first contention of the counsel for the appellant is without any
merit. The law, on the question of a right to transfer shares, is well settled,
and an application for registration of transfer of shares cannot be refused,
unless the articles empower the board of directors to do so. A member of a
company has an unfettered right to transfer the shares to another person,
unless this right is taken away by the articles; and a transferee under a valid
transfer has an absolute right to be registered unless the company has a power
to refuse to register (see Palmer’s Company Law, 21st edition, pages 331, 333).
I cannot accept Mr. Mookerjee’s contention that by addition of the words
“otherwise” to section 111(2) of the Act, an additional or new power was
created and conferred upon the company. To hold that, even though the articles
of a company do not provide for an absolute discretion to register a transfer,
yet such a power can be exercised by the board of the company, would have the
effect of introducing unlimited confusion. A purchaser who acquires the shares
of a company by relying upon the provisions in the articles may find himself
without any remedy if the board is recognised to have the power to refuse
registration, although the articles did not give it such power. The first
contention of counsel for the appellant fails and is accordingly rejected.
On the second
ground urged by counsel for the appellant, it was said that by reason of a
family dispute the elder brother was determined to bring about the ruin of the
company and it was for that purpose that the respondent was made to acquire the
shares of the company, and, thereafter, apply for registration. A reference was
made by counsel for the appellant to certain previous proceedings, namely, an application
for winding up of the company by the respondent in 1966, which was settled by
payment of a large sum of money to induce the respondent to sell his shares. A
second application was again made in the same year for winding up of the
company on just and equitable grounds. This application was again inspired by
the elder brother but was dismissed by P.B Mukharji J. (as he then was), on the
ground that the application was mala fide. This was followed by a suit in the
Sealdah Court by Sudhindra, the elder brother along with one Neelkamal, the
respondent. In this suit the validity of the annual general meeting of the
company held on October 7, 1966, was challenged. The suit was decreed as,
according to the respondent. Binoyendra Sen, secretary of the company, gave
false evidence contrary to the records. An appeal has been preferred against
the judgment of the Sealdah Court and the appeal is now pending. Thereafter,
the elder brother Sudhindra, it was contended, filed an application for winding
up of the company for non-payment of an alleged claim. According to the
appellant this claim was not genuine but the winding up petition was
compromised in order to avoid litigation. Relying on these facts,
counsel for the appellant contended that the respondent was an extremely
undesirable person as far as the company was concerned, and, therefore, the
company had rightly refused to register the shares which he. had acquired.
In our view, the second contention raised on behalf
of the appellant must also fail. A purchaser of shares in a company has
uncontrolled right to have the shares registered in his name in the company’s
share register, unless the articles of the company give an absolute discretion
to the directors of the company to refuse registration and such power has been
exercised bona fide. Even in exercising the power to refuse registration, the
ground on which this exercise of power can be upheld is the interest of the
company and the interest of the shareholders as a whole. Merely because a
person has in the past attempted to wind up the company and that more than one
attempt was made for such winding up, it cannot be said that the directors of
the company acted lawfully in refusing to register the shares in the name of
the respondent.
Before concluding I should refer to a decision, H.L.
Bolton (Engineering) Co. Ltd. v. T.J. Graham & Sons Ltd. , on
which reliance was placed by counsel for the appellant in support of the
proposition that the company’s decision in regard to refusal to register the
shares should be assumed or taken for granted, even though the directors of the
company had not passed a formal resolution to that effect. In that case a
company gave notice to tenants occupying land belonging to it to quit, The
directors met informally, but did not hold any meeting of the board nor pass
any resolution. The company’s business was normally left to the directors
individually and the board of directors only met about once a year. On the
question whether the company could validly oppose an application by tenants for
a new tenancy, it was held that the company was entitled to oppose the
application as the intention of the directors who had not met formally at a
meeting was the intention of the company. This question is not relevant, so far
as this appeal is concerned, as the trial court proceeded on the footing that
the board of directors had, in fact, refused to register the shares. This court
in dealing with this appeal also accepted the appellant’s contention that there
was a refusal by the board of directors of the company to register the shares
held by the respondent.
In our view, the court below was entirely right in making the order for rectification of the share register of the company. No grounds have been made out for interfering with the order made by the trial court. This appeal is accordingly dismissed with costs. Certified for two counsel.
[1990]
67 Comp. Cas. 518 (SC)
Supreme
Court Of India
v.
M.N. VenkatachaLIah, N.D. Ojha And J.S. Verma
Jj.
Civil Appeal No. 4565 of 1989.
November 7, 1989
Ojha J.—Special leave granted.
This appeal
by special leave has been preferred against the judgment dated May 4, 1988, of a
Division Bench of the Calcutta High Court in Appeal No. 806 of 1987. The facts
in brief and necessary for consideration of the submissions made by learned
counsel for the parties are that the respondent, Pradip Kumar Sarkar, made an
application under section 155 of the Companies Act, 1956 (hereinafter referred
to as "the Act"), for rectification of the share register of the
appellant-company by inserting his name therein as a registered shareholder of
certain shares transferred in his favour. These shares were fully paid-up and
the company had no lien over them. According to the respondent, notwithstanding
the shares being duly lodged with the company along with the transfer deeds and
requisite fees for registration being paid, the board of directors of the
company disapproved of the registration of the said shares. This disapproval
led the respondent to make an application under section 155 of the Act for
rectification of the share register. The case of the respondent was that the
shares in question being fully paid-up and the company having no lien over
them, the registration of the transfer of the shares in his favour could not be
refused under article 39 of the articles of association of the company which
was the article relevant for the purpose.
The aforesaid
application was contested by the company on various grounds. Overruling the
objections raised by the company, a learned single judge allowed the
application. Aggrieved, the company preferred the appeal aforesaid before a
Division Bench of the High Court which has been dismissed by the judgment
appealed against.
It has
been urged by learned counsel for the appellant that even if the articles of
association do not make any specific provision in this behalf, the company had
residuary inherent power to refuse registration of the transfer of shares for
the benefit of the company and its existing shareholders. Power of refusal to
register the transfer of shares was also sought to be derived from the words
"or otherwise" used in article 42 of the articles of association and
section 111(2) of the Act. The transferor not being made a party to the
application under section 155 of the Act was also pleaded in justification of
the submission that the said application deserved to be dismissed. It was also
urged that, in view of section 108 of the Act, the company was entitled to go
into the question whether consideration for transfer of shares as shown in the
transfer deeds was real consideration for purposes of finding out whether the
transfer deeds were duly stamped and refuse registration of the transfer of the
shares if the company was of the view that the transfer deeds were not duly
stamped. For the respondent, on the other hand, it was urged by his learned
counsel that, in view of the specific provision contained in this behalf in
article 39 of the articles of association and no residuary power whatsoever
having been conferred on the company or its directors to refuse registration of
the transfer of shares, it did not have the power claimed by it in aid of refusal
of registration of the shares transferred to the respondent.
Having heard
learned counsel for the parties, we are of the opinion that, unless there is
any impediment in the transfer of a share of a public limited company, such as
the appellant, a shareholder has the right to transfer his share.
Correspondingly, in the absence of any impediment in this behalf, the
transferee of a share, in order to enable him to exercise the rights of a
shareholder as against the company and third parties which is not possible
until the transfer is registered in the company's register, is entitled to have
rectification of the share register of the company by inserting his name
therein as a registered shareholder of the share transferred to him. To have
such rectification carried out is the right of the transferee and can be
defeated by the company or its directors only in pursuance of some power vested
in them in this behalf. Such power has to be specified and provided for. It may
even be residuary but in that case too it should be provided for and traceable
either in the Act or the articles of association. Even if the power of refusal
is so specified and provided for, the registration of a transferred share
cannot be refused arbitrarily or for any collateral purpose and can be refused
only for a bona fide reason in the interest of the company and the general
interest of the shareholders. If neither a specific nor residuary power of
refusal has been so provided, such power cannot be exercised on the basis of
the so-called undeclared inherent power to refuse registration on the ground
that the company or its directors take the view that, in the interest of the
company and the general interest of the shareholders, registration of the
transfer of shares should be refused. Indeed, making a provision in the Act or
the articles of association, etc., conferring power of refusal would become
futile if existence of an inherent power such as claimed by the company in the
instant case is assumed for the simple reason that the amplitude of the
so-called undeclared inherent power would itself take care of every refusal to
register the transfer of shares. Assumption of such a power would result in
leaving the matter of transfer of shares and its registration at the mercy and
sweet will of the company or its directors, as the case may be. In the absence
of any valid and compelling reason, it is difficult to comprehend such a
proposition.
Even the
submission based on the words "or otherwise" in sub-section (2) of
section 111 of the Act and in article 42 of the articles of association to the
effect that these words recognise the existence of an inherent power to refuse
registration of the transfer of the share does not commend itself to us. The
words "or otherwise" were inserted in sub-section (2) of section 111
of the Act in 1960 and it is this sub-section so amended which is applicable to
the facts of the instant case. Sub-section (2) of section 111 does not confer
any right but only casts a duty to give notice of refusal to register the
transfer of a share and provides for punishment in case of default in doing so.
Giving of notice is necessary, inter alia, to facilitate the exercise of the
right of appeal conferred by sub-sections (3) and (4) of section 111. To
introduce a concept of either conferment or recognition of a right to refuse
registration of the transfer of a share in sub-section (2) militates against
and runs counter to the very texture and purpose of this sub-section. Such an
interpretation would have the effect of imputing to the Legislature an
intention of making an effort to fix a square peg in a round hole, when the
purpose, if it was to confer or recognise any inherent power to refuse
registration of the transfer of a share, could plainly be achieved by inserting
the words "or otherwise" after the words "under its
articles" and before the words "to refuse to register" in
sub-section (1) of section 111 which is the sub-section relevant for the
purpose.
The words
"or otherwise" take colour from the context in which they are used.
In our opinion, the words "under its articles" in sub-section (2) of
section 111 of the Act have been used in the same sense as is expressed in
legal terminology by the familiar words "conferred by law".
Consequently, if the opening part of sub-section (2) is read as "If a
company refuses, whether in pursuance of any power conferred by law or
otherwise", it would be incongruous to suggest that the Legislature, in
using the words "or otherwise", intended to give recognition to a
power to refuse registration of the transfer of a share even otherwise than in
accordance with law. This would be tantamount to putting a premium on taking
the law into one's own hands. The Legislature cannot be imputed with any
such intention. For these reasons, we are of the view that, in the context in
which the words "or otherwise" have been used in sub-section (2) of
section 111, they only purport to cast a duty or impose an obligation of giving
notice of refusal to register the transfer of a share irrespective of the fact
whether such refusal is under the articles of association of the company or de
hors the articles, which would include even a case where such refusal has been
made arbitrarily or for any collateral purpose. A fortiori, this would be the
interpretation of even article 42 of the articles of association of the company
inasmuch as, on its plain language which, except for the provision for
punishment, is in pari materia with sub-section (2) of section 111 of the Act,
the purpose of this article is the same as that of the said sub-section (2).
Even the marginal note of article 42 lends support to this interpretation.
At this point, we may point out that it has not been
disputed before us by learned counsel for the appellant that the shares in
question having been fully paid-up and the company having no lien over them,
article 39 of the articles of association could not be invoked to refuse
registration of the transfer of these shares.
We may now advert to text books and the decided cases
on which reliance has been placed by learned counsel for the appellant in
support of the submission that the company had inherent power to refuse
registration of the transfer of shares. It was pointed out that the board of
directors is now the principal organ of a company. The management of the
affairs of the company is vested in the board of directors and all powers
excepting those which are specifically reserved for the general meeting by the
Act or the articles or memorandum of association or otherwise must now be done
by the board of directors, vide section 291 of the Act (The New Frontiers of
Company Law by S.C. Sen, 1971 edition, page 51). Whatever may fairly be
regarded as incidental to the objects for which the corporation was created is
not to be taken as prohibited. The incidental power is one that is directly and
immediately appropriate to the execution of the specific power created and not
one that has a slight or remote relation to it. Furthermore, the want of an
express enumeration of powers does not exclude such incidental powers as are
reasonably necessary to accomplish the corporate purpose. The mere creation of
a corporation was alone sufficient, in the absence of prohibition, to confer
upon such corporation all those powers which are regarded as incidental to
corporate existence. (Thomsons' Commentaries on the Law of Corporations, 3rd
edition, volume 3, pages 820 to 822). As to the relationship between the
general meeting and the directors, to some extent, a more exact analogy would
be with the division of powers between the federal and State Legislatures under
a federal constitution and the residual powers are in this case with the
directors (Gower's Principles of Modem Company Law, 4th edition, page 147).
Corporate authority (powers) are
determined by reference to (1) charter, (2) incorporation law or act, (3)
general and special corporation statutes relevant, (4) other applicable
statutes, (5) case decisions, (6) customary practices, and (7) treatises and
other discussions. They include (1) general powers usually recognised in all
corporations, (2) general powers usually recognized in corporations of the
particular type, (3) powers inherent in or limited by the purposes or business
as stated in the charter, and (4) implied powers to do all things reasonably
and properly incidental to the specified purpose and business (Modern
Corporation Law by Howard L. Oleck, volume 1, page 865). It is a
well-recognised rule that a corporation is not restricted to the exercise of
the powers expressly conferred upon it by its charter but has the implied or
incidental power to do whatever is reasonably necessary to effectuate the
powers expressly granted and to accomplish the purposes for which it was
conferred unless a particular act sought to be done is prohibited by the law or
its charter (American Jurisprudence, 2nd edition, volume 19, page 431). Every
corporation is of course created with certain express powers but in addition to
those, every corporation has also certain powers which attach to it as
incidental to its corporate existence. The powers which are incidental to
corporate existence and which are always implied in the absence of express
restrictions are : (1) the power to have perpetual succession, or succession
during the period for which the corporation is created which includes the power
to elect members in the place of those who are removed by death or otherwise,
(2) the power to have a corporate name, (3) the power to purchase and hold land
and chattels for authorised corporate purposes, (4) the power to have a common
seal, (5) the power to make bye-laws for the governance of the corporation, (6)
the power to disfranchisement or removal of members except in the case of
modern joint stock corporations (Corpus Juris Secundum, volume 19, pages 372
and 373).
Suffice it to
say in this behalf that what has been stated above with regard to residuary,
implied or incidental powers is calculated to accomplish the objects, the
corporate purpose or corporate existence of the corporation. Refusal to
register the transfer of a share obviously does not fall in this category. As
has been pointed out in Palmer's Company Law, 24th edition, page 121, the
objects or purposes for which a company is created should be distinguished from
the powers which it can exercise. So far as refusal to register the transfer of
a share is concerned, it is almost the consistent view in decided cases that
the power has to be specified and can be exercised only in the manner specified
and within the framework of the said specification. There is no inherent power
in this behalf. (See Smith, Knight and Co., In re [1869] 4 Ch Ap 20 ; National
Provincial Marine Insurance Co., In re [1870] 5 Ch Ap 559 ; Moffatt v. Farquhar
[1877-78] 7 Ch 591 ; Cawley and Co., In re [1889] 42 Ch 209 ;
Discoverers Finance Corporation Ltd., In re [1910] 1 Ch 312 and Sadashiv v.
Gandhi Sewa Samaj, AIR 1958 Bom 247).
Reliance was then placed by learned counsel for the
appellant on the Conservators of the River Tone v. Ash (109 Eng. Reports 479).
In that case, by an Act for making and keeping the River Tone navigable, it was
enacted that the thirty persons therein named and their successors should be
conservators of the river, and should have various powers referred to therein.
By a subsequent Act, some more powers were conferred on them. A question arose
as to whether the conservators were entitled to sue in their corporate name for
an injury done to their real property. It was held that as it manifestly
appeared from the different clauses of the Acts of Parliament that the
conservators should take land by succession and not by inheritance, although
they were not created a corporation by express words, they were so by
implication and that being so, they were entitled to sue in their corporate
name for an injury done to their real property. In our opinion, on the basis of
this decision, it is difficult to cull out any power in the board of directors
of the company in the instant case to refuse to register the transfer of a
share by implication.
Reliance was also placed on Attorney-General v. Lord
Mayor, etc., of the City of Leeds [1929] 2 Ch 291, where it was pointed out
that a corporation incorporated by royal charter stands on a footing different
from a statutory corporation, the difference being that the latter species of
corporations can do only such acts as are authorised directly or indirectly by
the statute creating them whereas the former can, speaking generally, do
anything that an ordinary individual can do. If, however, the corporatin by
charter, be a municipal corporation, then it is subject to the restriction
imposed by the Municipal Corporations Act, 1882. The question in connection
with which the above observations were made was whether the Corporation of
Leeds, a municipal corporation, was entitled to work or run certain omnibuses
along any route whether within or without the boundaries of the City of Leeds.
This again was obviously a question relating to the business of the corporation
to work or run omnibuses and has no bearing on the question whether the
directors of the appellant-company in the instant case had inherent power to
refuse to register the transfer of shares.
In E.M. Muthappa Chettiar v. Salem Rajendra Mills
Ltd. [1955] 25 Comp Cas 283 (Mad), it was held that if a person is of such a
character as to throw the company into confusion and if he was not a desirable
one, then the board of directors would certainly be acting in the best
interests of the company in refusing to register the shares in his name and
such a reason is quite a valid reason. Suffice it to say, so far as this case
is concerned, that article 56 which was the relevant article dealing with the
refusal to register the transfer of a
share itself clearly conferred power on the board of directors to refuse to
register the transfer of a share, inter alia, "if the transferee of the
share is not approved". It was thus a case where power had been conferred
by an article and it was not a case of refusal to register under any inherent
power.
Lastly,
reliance was placed on Life Insurance Corporation of India v. Escorts Ltd.
[1985] Suppl. 3 SCR 909 ; [1986] 59 Comp Cas 548 (SC). In that case, with
reference to an earlier decision of this court in Bajaj Auto Ltd. v. N.K.
Firodia [1971] 41 Comp Cas 1, it was held that where the articles permitted the
directors to decline to register the transfer of shares without assigning
reasons, the court would not necessarily draw an adverse inference against the
directors but will assume that they acted reasonably and bona fide. Here again,
as is apparent from the decision in the case of Bajaj Auto Ltd. [1971] 41 Comp
Cas 1 (SC), article 52 of the appellant-company in that case provided that the
directors might, at their absolute and uncontrolled discretion, decline to
register any transfer of shares. This too was, therefore, a case of power being
conferred by the articles of association and not a case of exercise of inherent
power. We may also point out that at page 997 of the reports of Escorts Ltd.
[1985] Supp. 3 SCR 909 ; [1986] 59 Comp Cas 548 (SC), it was held that even
though it was open to the company and, indeed, it was bound to refuse to
register the transfer of shares of an Indian company in favour of a
non-resident where the requisite permission under the Foreign Exchange
Regulation Act was not obtained, once permission was obtained, whether before
or after the purchase of the shares, the company could not thereafter refuse to
register the transfer of shares.
The third
submission made by learned counsel for the appellant that the application under
section 155 of the Act was not maintainable as the transferors had not been
made parties therein may now be considered. A similar submission had been made
before the Division Bench of the High Court also and was repelled by holding
that the transferor is not a necessary party to an application under section
155 of the Act unless the transfer was disputed by him. It was pointed out that
even though, in the instant case, the transferors had been served with notice
and in any event had knowledge of the proceedings for registration of transfer
of shares, they had not disputed the transfer of the shares. We do not find any
infirmity in the order of the High Court on this point.
Likewise, we
find no substance even in the submission made by learned counsel for the
appellant based on section 108 of the Act for the simple reason that, after
taking into consideration the evidence produced by the parties, it has been
found as a fact by the High Court that it had not been proved that the
respondent had paid higher price for the shares than those stated in the transfer deeds. We find
no justification for interfering with the said finding of fact in the present
appeal. On this finding, the transfer deeds could not be termed as not duly
stamped and power to refuse the registration of the transfer of shares
contemplated by section 108 of the Act could not be invoked.
In the
result, we find no substance in this appeal and it is, accordingly, dismissed
with costs assessed at Rs. 2,000.
[1994] 79 Comp.Cas.370 (CLB)
[Before the Company Law Board—Southern Region Bench]
v.
Teekoy Rubber & Tea Co. Ltd.
A. R. Ramanathan and S. Balasubramanian (Members)
Appeals Nos. 1 and 2/111/SRB of 1987
July 7, 1993
Jagadischandran
Nair for the appellants.
Markos
Vellapally for the respondent.
These are two
appeals preferred by the appellants herein under section 111(3) of the
Companies Act, 1956 (hereinafter referred to as "the Act") (before
the 1988 amendment), against the decision taken by the respondent company in refusing the transfer of 3,800 and
3,100 shares covered under these two appeals respectively. Since the issues and
facts are common in both the appeals, we are disposing of these appeals by this
common order.
The facts of
the cases are that the appellants lodged with the company two transfer forms on
July 16, 1987, and the company refused to register the transfer and informed
the appellants about the refusal on September 15, 1987. The appellants filed
these appeals against the refusal on October 26, 1987, i.e., within the
prescribed time as provided in the statute. According to the appellants, the
company did not disclose any reason for the refusal and, therefore, the
appellants asked for the following reliefs :
(a) to call upon the company under
sub-section (5A) of section 111 of the Act to disclose the reasons for refusal
;
(b) to
direct the company to register the transfer ; and
(c) pass
such other incidental and ancillary orders as may be just and proper.
On receipt of
the appeal papers, the Bench Officer issued notices to the company calling for
certain information including the reason for refusal on December 23, 1987. The
company filed a petition under article 226 of the Constitution of India in the
High Court of Kerala at Ernakulam, seeking to quash the notice of the Bench Officer
on the ground that only the Company Law Board had the powers to call for the
reasons and not the Bench Officer. The contention of the petitioner was upheld
by the court. Thereafter, the Bench Officer again issued another notice to the
company on August 3, 1988, with certain modifications which was again
questioned by the appellant in 0.P. No. 6840 of 1988 in the High Court of
Kerala which was dismissed by a single judge holding that the Bench Officer had
issued the notice not in his individual capacity but as a ministerial officer
by an order of the Company Law Board. The respondent company went on appeal
against this order before the Division Bench in Writ Appeal No. 170 of 1991.
This was also dismissed by the Division Bench on June 3, 1991, after going
through the files of the Company Law Board and observing that the then Member
had applied her mind before calling for the reasons.
In view of
the dismissal of the appeal by the Division Bench, the company filed its reply
on the appeals already before us praying for dismissal of the same on various grounds. The appeals were heard on
March 22, 1993.
Shri
Jagadischandran Nair, learned counsel for the appellants, reiterated the
contentions in the appeals and sought for issue of a direction to the company for
registration of the shares in the appellants' name. According to the
appellants, the company, being a listed company, is bound by section 22A of the
Securities Contracts (Regulation) Act, 1956, according to which there are only
four grounds under which a transfer can be refused. He also averred that the
company has relied on the powers vested in the board of directors under article
24 of the articles of association of the company, which the company, being a
listed company, cannot avail of and rely upon. He further refuted the
contention of the respondent company that since the transfers had been refused
as early as in 1980, and which has been upheld by the Kerala High Court—both on
the original side as well as on the appellate side—and as no fresh cause of
action has arisen for re-submitting the transfer form in 1987 the appeal should
not be considered. According to learned counsel for the appellants, every fresh
lodgment gives him a fresh cause of action and this right of the appellant
cannot be denied. According to him, when he lodged the transfer documents in
1987, section 22A of the Securities Contracts (Regulation) Act, 1956, had come
into force and since the company has refused the transfer on some grounds other
than those prescribed under that section, he has a right to appeal against the
decision of the board of directors under section 111(3). He prayed for the
issue of a direction to the company for registration of shares in the name of
the appellants as the grounds for rejection are not covered under any of the
four clauses of section 22A of the Securities Contracts (Regulation) Act, 1956.
He also questioned the plea of the company that as early as in 1985, the
company has written to the stock exchange for delisting the company's shares.
According to him, the company has no right under the listing agreement to seek
delisting of the shares, more so just by intimation. He also contended that
there are decisions of the Company Law Board holding that a second lodgment is
a fresh lodgment.
Shri Markos
Vellapally, learned counsel appearing on behalf of the respondent company,
opposing the grant of relief sought for by the appellants, prayed for outright
dismissal of the appeals on the principles of estoppel by election and res
judicata. According to him, the remedies available under sections 155 and 111
are alternative remedies and once an aggrieved person has chosen to avail of
one remedy in which he has failed, he cannot seek the alternative remedy under
another section. He cited Mathew
Michael v. Tekoy Rubber (India) Ltd. [1990] 69 Comp Cas 145 (Ker) and also
Harinagar Sugar Mills Limited v. Shyam Sunder Jhunjhun-wala [1961] 31 Comp Cas
387 (SC) wherein it was held that since the remedy available under sections 155
and 111 are alternative remedies, the function of the Central Government under
section 111 would be judicial as that of section 155 as applicable to High
Court. He also relied on [1988] KLT 724 (sic), wherein it was held that if a
person has chosen one remedy then he must be deemed to have waived the other
remedy. Giving a background of this case, Sri Vellapally stated that originally
in 1979, when the transfer instruments in respect of these shares were lodged
with the company, the company relying on its powers under article 24, rejected
the request for registration of transfers and informed the appellants
accordingly. The appellants questioned the powers of the company and the
validity of article 24 in the Kerala High Court. This case was heard by a
single judge in C.P. Nos. 79, 80, 82 and 84 of 1979 and by a common judgment
dated March 30, 1981, the
learned single judge upheld the validity of article 24 and the right of the
company to refuse the transfers. The appellants went on appeal to the Division
Bench and the Division Bench also confirmed the decision of the learned single
judge. The orders of the Division Bench were issued on April 10, 1987. The
appellants, instead of going on appeal against these orders, if they so
desired, re-lodged the same transfer instruments in 1987, by getting the
transfer instruments revalidated by the Registrar of Companies, Kerala, and
when the company once again refused to register the transfer, the appellants
have sought to establish a second cause of action and have now come under
section 111(3) which is nothing but abuse of the process of law. The appellants
have already exhausted the alternative remedy under section 155 and the claim
of the appellants that with every lodgment they get a fresh cause of action is
untenable and if accepted would never give any finality to any litigation. In
this particular case, there could not have been any fresh cause of action, inasmuch
as, when the company refused registration in 1979, the cause of action which
arose came to an end with the disposal of appeal by the Division Bench of the
High Court and the same transfer document can never be used again. Under these
circumstances, the second lodgment of the same transfer documents was wrong and
the company was fully justified in refusing to entertain the transfer on the
ground that the registration had already been refused earlier and this action
of the company had been upheld by the High Court also. Even assuming that the
appellants had exercised their right of coming on appeal under section 111,
then the principle of res judicata should be squarely applicable in the
sense that the subject-matter, facts and issue of section 155 petition and
section 111 appeal and the parties thereto are all common and the High Court
has finally decided the issue. Now, it is not open for a subordinate forum like
the Company Law Board once again to adjudicate. This is a fit case for
application of the principles of res judicata and on this ground alone the
appeals should be dismissed.
He
further stated that issues like whether the company was a listed company or not
during the relevant period or whether the company continues to be a listed
company, should be examined only after deciding the preliminary issue regarding
the application of the principles of estoppel and res judicata. However, he
hastened to add that this company having been incorporated in 1944, does not
have a copy of the listing agreement nor was it able to get a copy of the same
from the stock exchange. The company had already informed the stock exchange
about the decision taken to delist in 1985, and right from that time, the
company has had no dealings with the stock exchange nor had the stock exchange
asked the company to comply with any of the requirements of the listing
agreement. The delisting was done as there has been no transfer of shares in
the company for a long time. He suggested that once the preliminary issue is
decided and if the Company Law Board decides to proceed further, then further
details regarding the applicability of section 22A of the Securities Contracts
(Regulation) Act may be enquired into and opportunity be given to the company
to argue on this.
We have carefully considered the arguments advanced
by learned counsel for both parties. The admitted facts in this case are that
the transfer instruments presented to the company in 1987 were the same that
were submitted to the company in 1979, the transferor and the transferee and
the shares involved being the same on both occasions. It is also an admitted
fact that against the refusal by the company to register the transfer in 1979,
the appellants moved the High Court under section 155 of the Companies Act,
1956, and the case was decided in favour of the company both by the single
judge as well as the Division Bench upholding the validity of the decision of
the board of directors to refuse registration of transfer under the powers
vested in them by article 24 of the articles of association of the company.
According to the appellant, his present cause of
action has arisen on account of the company's refusal in violation of the
provisions of section 22A of the Securities Contracts (Regulation) Act, 1956,
to register the shares when tendered in
1987. His contention is that the earlier section 155 petition should not be
mixed up with his present appeals as his appeals under section 111 were against
the company's failure to comply with the provisions of the Securities Contracts
(Regulation) Act, 1956, even though according to the company it is no longer a
listed company.
The questions
that arise, therefore, for consideration, are (1) whether the instruments of
transfer that have been refused for registration under the powers vested in the
board of directors and the refusal of which has already been upheld by the
competent appellate authority, viz., High Court, can be again re-submitted to
the company ; (2) whether such lodgment would be covered by the provisions of
sub-section (10) of section 22A of the Securities Contracts (Regulation) Act,
1956 ; (3) whether the application under section 155 would be a bar to an
appeal under section 111; and (4) whether the principles of res judicata and
estoppel are applicable in this case.
Taking the
first issue for consideration it is to be kept in mind that the transfer
documents consist of the share certificate, the instruments of transfer duly
stamped with the signatures of the transferor and the transferee. The
instrument of transfer is the most important document. When the company refuses
to register a transfer, as was rightly pointed out by learned counsel for the
respondent, the company refuses to recognise the transfer that has taken place
between the transferor and the transferee. In this particular case, under the
powers vested in the board of directors, the board had already decided not to
register the transfer as early as in 1979. The same instruments without any
change except revalidation by the Registrar of Companies were once again
presented to the company in 1987, i.e., after eight years of execution of the
instruments.
Section
108(lA)(b) prescribes the period within which the instrument of transfer is to
be delivered/lodged with the company. No doubt, subsection (1D) of section 108
provides that the period could be extended by the Central Government (delegated
to the Registrar of Companies) such power is to be exercised to avoid hardship.
In the present case, the instrument had already been lodged in the year 1979,
and as such the question of granting extension of time for delivery/lodgment
does not arise at all. However, it is seen that the Registrar of Companies has
extended the period so as to enable the transferee to again submit the
instrument in 1987. The spirit of the words "to avoid hardship" used
in section 108(1D) should be construed to mean to avoid hardship, in lodging
the instrument for the first time with the company and as such according to us
the Registrar of Companies has
no powers to extend the validity of the currency of the same after such
lodgment. The Registrar of Companies should have, before extending the
validity, enquired into the circumstances which necessitated the transferor
applying for extending the validity of the instrument after such a long time
which he has obviously failed to do. Under the circumstances, the instruments
of transfer themselves were invalid due to the efflux of time and the Registrar
of Companies extending the validity would be of no avail.
As far as the
second issue regarding the applicability of sub-section (10) of section 22A of
the Securities Contracts (Regulation) Act, 1956, which came into force in 1985
is concerned, it is worthwhile to reproduce the sub-section : "For the
removal of doubts, it is hereby provided that nothing in this section shall
apply in relation to any securities the instrument of transfer in respect
whereof has been lodged with the company before the commencement of the
Securities Contracts (Regulation) Amendment Act, 1985". A strict interpretation
of this sub-section would mean that the provisions of section 22A would not be
applicable in a case where lodgment had taken place before the commencement of
the Amendment Act of 1985. In other words the coming into operation of this
section does not give any right to a person to lodge the same instrument of
transfer which had earlier been refused for registration by the company. In
addition, it is also seen that the original transfer took place in 1979, while
the second lodgment took place eight years later and two years after the coming
into force of section 22A. It is inconceivable that a transfer which has been
refused could revive a cause of action eight years later under the plea of
coming under a new enactment. Even assuming that there is no specific time
limit provided in the Limitation Act yet a delay of eight years itself would
extinguish whatever right the applicant may claim.
May be the
appellant could not take any action during the pendency of his earlier appeal
under section 155. If that be the case, then the question of alternative
remedies and application of estoppel and res judicata arises. Compared to
section 111, the provisions of section 155 are wider in the sense, that, not
only the transferor or transferee could seek remedy under this section, the
company or any other person can also seek intervention for rectification of the
register of members. The scope of powers under section 155 is also wider.
Therefore, once the transferor/transferee has chosen to avail of one of the
remedies, we are of the firm view that he cannot agitate under the other
section. However, in this case this may not be strictly applicable in the sense
that in the earlier case under section 155, this cause of action arose due to
refusal to register the transfer under the powers vested in the board under the articles of association. In
the present case under section 111, the cause of action has arisen on the plea
that the board of directors have not followed the provisions of section 22A,
though in both the cases, the cause of action is refusal to register the
transfer. Likewise, the orders of the High Court upholding the decision of the
board of directors was on the basis of the powers vested in the board by
articles and the plea of non-compliance with section 22A of the Securities
Contracts (Regulation) Act, 1956, was not an issue in this appeal. However, in
the present appeal, the main plea is failure to follow the provisions of
section 22A. Therefore, our decision in this case would be on a different
footing than that of the High Court and as such the principles of res judicata
as well as estoppel may not be applicable.
In view of
our finding that the appellant cannot present the instrument of transfer for
the second time and that sub-section (10) of section 22A of the Securities
Contracts (Regulation) Act, 1956, is applicable in this case, we dismiss the
appeals as not maintainable.
No order as
to costs.
[1969]
39 COMP.CAS. 161
[1968] 1 W.L.R. 1710
Swaledale
Cleaners Ltd., In re
HARMAN, DANCKWERTS AND SACHS L., JJ.
JULY 19, 1968
Swaledale Cleaners Ltd. (hereinafter called
"the company"), was incorporated in 1946 to carry on the business
of cleaners and dyers. It was a private company with authorised and issued
capital of £ 10,000 in shares of £ 1 each. The articles of association
incorporated, with variations, Table A of the
Companies Act, 1929. Article 8 read : "The directors may at any time in
their absolute and uncontrolled discretion refuse to register any
transfer of shares ; and clause 19 of Table A shall
be modified accordingly."
By article 14 "Unless and until the
company in general meeting shall otherwise determine, the number of
directors shall be not less than two nor more than
seven." The company had in fact never determined otherwise.
Table A of the Companies Act, 1929, contained in clauses 17 to 22 common form provisions relating to the transfer and transmission
of shares. The concluding sentence of clause 19 of Table A, which was
not varied by article 8, read : "If the
directors refuse to register a transfer of any shares, they shall within two
months after the date on which the transfer was lodged with the company send to
the transferee notice of the refusal."
Clause 67 provided that the business of the
company should be managed by the directors, and clauses 73 to 80
contained provisions for the rotation of directors,
including a power for the directors to appoint any person as an
additional director. Clause 82 provided :
"The quorum necessary
for the transaction of the business of the directors may be fixed by the
directors, and unless so fixed shall when the number of directors exceeds
three, be three, and when the number of directors does not exceed three, be
two."
No quorum had in fact been fixed. Clause 83
provided :
"The continuing
directors may act notwithstanding any vacancy in their body, but if and so long
as their number is reduced below the number fixed by or pursuant to the
regulations of the company as the necessary quorum of directors, the continuing
directors may act for the purpose of increasing the number of directors to that
number, or of summoning a general meeting of the company, but for no other purpose."
The shareholding of the company on August 3, 1967, was as follows: Mr. Henry Smart, deceased, 5,000 ;
Major Leslie Smart, 4,000 ; Mrs. Agnes Maude Smart,
deceased, 500 ; and Mr. Leslie William Smart (hereinafter called "the
applicant"), 500. By that time two transfers of shares both in
proper form and duly stamped had been executed; one by Mrs. Sybil Mary Smart,
as administratrix of Mr. Henry Smart, for the transfer to the applicant of the 5,000 shares registered in her name ; the other by
the applicant and Mrs. Susan Bramham, as administrators of Mrs. Agnes
Maude Smart, for the transfer, again to the
applicant, of the 500 shares registered in her name.
On August 3, 1967, a combined meeting of directors
and annual general meeting of the company was held, the two directors then
being the two surviving shareholders in the company, Major Smart and the
applicant, who was also the acting secretary. There were also present at
the meeting two solicitors, representing the two
individual members of the company ; and a third person, the company's
accountant. A minute was prepared by Major Smart, stating the following : I.
The meeting was declared constituted and the minutes of the last annual general
meeting were taken as read. 2. Mr. L.W. Smart not being a permanent director
retired by rotation and offered himself for re-election. Mr. L.W. Smart was not
re-appointed. 5. There were produced the following transfers of shares : (a) A
transfer of 5,000 ordinary shares from Mrs. Sybil Mary Smart to Mr. Leslie William
Smart, (b) A transfer of 500 ordinary shares from Mr. Leslie William Smart. The registration of these transfers of
shares was formally refused. 6. Mr. L.W. Smart as acting secretary of the
company was formally confirmed and reappointed secretary of the company
with effect from October 14, 1966.
No formal resolution refusing to register the
transfers was proposed.
On December 11, 1967, more than four months
after the date of the meeting, the applicant moved for an order,
pursuant to section 116 of the Companies Act, 1948, that the register of
members of the company should be rectified by
striking out the names of Henry Smart and Agnes Maude Smart as the holders
respectively of 5,000 shares and 500 shares and inserting in lieu
thereof the name of the applicant.
On December 18, 1967, Major Smart appointed Mrs. Eunice Smart as an
additional director of the company and later the newly constituted board of directors formally refused to register the transfers.
On the hearing of the applicant's motion Pennycuick J. held that there
had been unnecessary and unreasonable delay by the company in notifying the applicant of its refusal to register the transfers which
had been lodged, and that in consequence of that delay the director's power of
veto on the transfers had been lost, and he, accordingly, ordered that
the register of the company be rectified by the insertion of the applicant's
name in the register as the holder of the 5,500 shares in respect of which the transfers
had been lodged. The company appealed on the grounds
that there had not in the circumstances been any unreasonable or
unnecessary delay, and that even if there had been, it did not vitiate the
directors' power of veto on transfers.
Terence Cullen for the company.
T. M. Shelford for the applicant.
The following cases, in addition to those
referred to in the judgments were cited in
argument : In re Bede Steam Shipping Co. Ltd. : Moodie v. W.& J.
Shepherd (Bookbinders) Ltd. ; Barron v. Potter; Evling v. Israel
& Oppenheimer;
Re Cleadon Trust Ltd ;
In re European Central Railway Co., Henry
Holden's case; In re
Bank of Hindustan, China and Japan, Anderson's
case; In re European
Central Railway Co., Custard's case; and In re Smith and
Fawcett Ltd.
Harman L.J.—This is an appeal from Pennycuick J. on a motion to
rectify the register under 1he Companies Act, 1948, He decided that the register
ought to be rectified, and the company appeals. This
is one of these small private companies, carrying on a business as dry
cleaners in Swaledale in Yorkshire. It has a capital of £10,000 which was
divided among the members of the family. There was a Mr. Henry Smart, who held
5,000 shares ; there was his brother, Major Smart,
who held 4,000 shares ; and there were two smaller shareholders, one of them a
Mrs. Smart, who held 500, and another the applicant, who himself held 500. The
business has been going on for 20 years or more and no doubt it was a
prosperous affair. Mr. Henry Smart, the holder of the 5,000 shares, died. His
administrator has never been put on the register. Then more recently
Mrs. Smart died. So, that 5,500 shares are in the
hands of administrators not on the register. That left Major Smart as the only
permanent director under the articles, and the applicant as an elected
director, being elected year by year, and also in later times secretary to the
company.
The matter came to a head in August, 1967.
There was a meeting at that time, partly board meeting, partly general
meeting. So far as the board meeting was concerned, the applicant retired by
rotation and he was not re-elected. That left only
Major Smart as a member of the board. That was not a quorum according to the
articles of association, and, therefore, there was no effective board.
Everything else that happened at that meeting was thus ineffective so far as it
purported to be a board meeting. The applicant and Mrs. Smart presented
transfers of the 5,500 shares in their hands as administrators, but nothing
effective court be done about it because there was not a competent board to
consider the matter. There the matter seems to have gone temporarily asleep. So
that you have this rather anomalous position that the company is in the hands
of a minority shareholder and there is no effective board of directors.
That state of things continued to exist until
December, 1967. By that time there had been a four months' interval since the
application had been made for the rectification of the register and no step
taken to rectify it. It seems to me that by that time the natural right of a
shareholder to have his name put on the register must exist—must
prevail—unless there is some valid reason in the
contract between the parties (i.e., the articles) why that should not be done.
It is said here : oh, the directors have an absolute and uncontrolled
discretion to refuse registration. If they have, it has never been exercised
because there has never been an effective board meeting to consider it. It is
well settled, and appears from a decision of Astbury J. in In re Hackney
Pavilion Ltd. that
the refusal to register a transfer is a matter which needs a positive assertion
by way of resolution. There had been none here when the motion was
launched, so that at that date, it seems to me, the natural right of the would-be transferors was standing and had become as
absolute as Astbury J. held it to be in that case. But the difference
here is that between the launching of the motion and
the hearing Major Smart had appointed his wife an additional director, as he
was empowered to do under the articles, and there had been a board meeting at
which the registration was refused. The question here is, first, had there been
unreasonable delay in refusing such a registration, and, secondly, if there had
been such an unreasonable delay, had that delay destroyed the right to refuse ?
As to unreasonable delay, I take the view of
the judge (and it seems to me merely, if I may say so, common sense), that
since there is an obligation on directors, who refuse to register a
transfer, to inform the persons who are aggrieved within two months of such a
refusal, the Act of 1948 clearly indicates that a
reasonable time, other things being equal, within which directors must make up
their minds either to accept the transfer or to refuse it must be the two
months within which they must make an answer. Therefore, it seems to me that
waiting four months without any decision at all was an unreasonable delay. But
one must go one step further than that: one must say that that
unreasonable delay has destroyed the right so that
when, in December, 1967, the new board purported to refuse, they were no longer in a position to exercise that discretion which,
if they had acted promptly, undoubtedly would have been theirs, to consider
and, if they thought fit in the interests of the company, to refuse
registration of the transfers.
The judge said that there was no authority on
this point, and I think that is right. There is some suggestion of authority in
In re Contract Corporation, Weston's case, and In re
Joint Discount Co., Shipment's case. It is quite true
that in the report it appears that some such point
was raised, but you do not find anything in the judgments about it; and
anyhow the judgments are not binding on us and there
was not at the date when those two cases were decided the provision
which first appeared in the Companies Act, 1929,
making it obligatory on directors refusing to register a transfer to inform the
persons affected within two months. Consequently, even if there had been any
authority in those two cases, I do not think that they would have been anything
we need be troubled by here.
The judge firmly took the view that, if you
delay too long, you lose your rights, and that seems to me to be consonant with
good sense. A shareholder prima facie has a transferable right of
property in his shares and that can only be taken
away from him by an express prohibition in the articles of association. Perhaps
the best authority for that proposition is In re Copal Varnish Co, Ltd. decided by Eve J.
So here these administrators have in their
hands two bundles of rights which consist of transferable shares, subject only
to the limitation imposed by the articles. Those limitations, in my judgment,
only give the directors a right to refuse if they exercise that right
with reasonable promptitude— other things being equal, within the two months
which the Act of 1948 now gives them in which to
decide the question. They did not make any such decision here. At the time when
the motion was launched there had been no refusal, and by that time, in my
judgment, the right to register the transfer had become absolute and the
subsequent meeting and refusal after the motion was launched was ineffective. I
think that the judge was quite right and that the
appeal ought to be dismissed.
Danckwerts L.J.—I agree. I feel no doubt
that the judge reached the right conclusion. As my lord has pointed out, prima
facie a shareholder has the right to transfer his
shares ; but if that is prevented or obstructed by a harsh clause of this kind,
it seems to me that such an arbitrary and harsh right must be exercised within
a reasonable time. If it must be exercised within a reasonable time, then it
seems to me that the corollary that follows is that, if it is not exercised
within a reasonable time, that right has gone. It appears to me that it would
be unjust and unreasonable that the directors should be entitled to hold
up the matter of the approval of the transfer
indefinitely, and if they may not hold it up indefinitely, at what point does
it cease to be possible for them to hold it up ? The answer seems to me to be
clear : it must be, that after a reasonable time has expired they no longer
have that right. I think that the judge was correct in what he decided was a reasonable time in the present case.
I should also like to add a remark about In re Cuthbert Cooper & Sons
Ltd., which was
cited to us. With all respect to Simonds J., I think that the conclusion which he reached in that case was wrong. It was
a very hard case on the younger brothers to whom shares in the company were
left. The elder brothers acted in a cruel and arbitrary manner, not only
refusing to transfer the shares but also dismissing the younger sons, who were
employees of the company. It seems to me that when the younger sons were not
enabled to obtain the winding up of the company they were left without any
effective remedy.
I should also like to make an observation on
the question of the use of mandamus. It was all very fine to say that
the defeated shareholders could apply for a mandamus directing the directors to
operate their power, but the effect might simply be that they would refuse to
register the shares, and then, as it seems to me, the
shareholders would be no further on. It does not seem to me a very satisfactory
remedy.
I think that the judge, therefore, reached the right conclusion, and that
the appeals should be dismissed.
Sachs L.J.—I agree. The decision in In re Hackney Pavilion Ltd., a decision which Mr.
Cullen has in no way sought to impugn, makes it clear that the applicant on his side had a right to be registered as a
shareholder unless there were properly exercised against him the powers
conferred on the directors by article 8 of the company's articles of
association. Major Smart on his side, as sole surviving director, had in
practice an uncontrollable option under article 8, after appointing a
nominated director of his selection, such as his
wife, to proceed, with the assent of that selected director, to destroy
the prima facie right of the applicant by refusing, by proper resolution, to accept the registration. It seems to me that any
exercise of such an arbitrary power can be valid only if those who exercise it
conform strictly and punctually to the one and only procedure permitted to
them.
Contractually given options lapse, unless there
be provision to the contrary in the contract, upon the expiry of some specific
time, or alternatively upon the expiry of a reasonable time. In the same way
here, the right given under article 8 being one which must be exercised within
a reasonable time, and not having been exercised within such a time, it
seems to me that it lapsed when that time expired. In other words, when that
time expired the power of refusal given by article 8
did not survive. I would add that in cases such as the present it does not seem
at all unreasonable that those who seek to act in an arbitrary way should be bound to have had their tackle in order before
they can successfully claim that such exercise was valid.
There is only one other point to which 1 would
advert and which has given me considerable trouble, as indeed it appears to
have troubled Pennycuick J, when he said that he was not concerned with
exceptional cases. Section 78 of the Act of 1948 makes it a criminal
offence if a transferee is not sent notice of a
refusal to register within two months after the date when the transfer was
lodged with the company. There is in that section no escape proviso such as
"unless some reasonable cause be shown." The point which gives me
difficulty is how it can be said that there are exceptional cases when it would
be reasonable for the time for the exercising of powers such as those under
article 8 to exceed those two months, when it would yet be a criminal offence
if the notice has not been given in less than those two months. That, however,
is a problem which I am glad to say does not arise in the present case.
[1942] 12 COMP
CAS 21 (ALL.)
v.
BRAUND, J.
Miscellaneous Application No. 274 of 1941
AUGUST 11, 1941
M.N. Agarwala, for
the applicants.
S.N. Verma, for the
Opposite Party.
This is an
application which is, in my view, quite hopeless. It appears that a company called
the General Transport Company Ltd. was incorporated in 1938 with shares divided
into two classes, A and B respectively. The General Transport Company Ltd., was
incorporated as a private company with articles of association which restricted
the right of transfer in a not unusual form. Articles 16 to 22, inclusive,
provide in a very usual way that, except in the case of a transfer by a member
to an immediate relative, no member was to be entitled to transfer his or her
shares without giving the directors an opportunity as therein provided for
finding a purchaser or purchasers from among the existing members themselves. I
need not set out the actual articles, because they are there to read and, in
fact, nothing actually turns on them in this case. There then follows Art. 23,
which again is a very common form of article and which is the material one in
this case. It is in these words:
"The directors
may in their discretion, refuse to register the transfer of any share to any
person whom it shall, in their opinion, be undesirable in the interest of the
company to admit to membership, but such right of refusal shall not be
exercisable in the case of any transfer made pursuant to Art. 16, except for
the purpose of ensuring that the number of members does not exceed the limit
prescribed by Art. 2. The directors may refuse
to register any transfer of shares on which the company has a lien."
It happened that 90 of the shares of the General Transport Company Ltd., were held by another company called the Commercial Finance Company Ltd. This latter company on 12th January 1941 went into voluntary liquidation and the present applicants, Messrs. Prasad and Chatterji, are its liquidators. On the liquidation of the Commercial Finance Company Ltd., it seems that its liquidators cast about to find a purchaser or purchasers for the shares it held in the General Transport Company Ltd., and, on 14th January 1941, the liquidators wrote a letter to the directors of the General Transport Company Ltd., in which they said that they had succeeded in obtaining purchasers for the shares and, in pursuance of Art. 19, they required the company within 21 days either to find a member or members willing to purchase them or to the alternative to register the transfer. It purported to be, in short, a "sale notice" pursuant to Art. 18. The proposed transferees were, in fact, three in number and were, I understand, actually share-holders and directors of the Commercial Finance Company Ltd. What the directors of the General Transport Company Ltd., did on receiving the letter of 14th January was to hold a board meeting to consider the matter and on 5th February 1941 the General Transport Company Ltd. wrote a letter to the liquidators. It was in these terms:
"Dear Sirs,
With reference to your letter No. 23/41 of the
14th January 1941 we enclose herewith the true copy of Resolution No. 1 of the
Board of Directors of this Company held on the 3rd day of February 1941.
Please acknowledge and oblige.
Thanking you.
Yours faithfully, for the
General Transport Ltd.,
(Sd.) General
Manager."
The actual resolution enclosed was in this
language:
"Resolved that the directors in their
discretion under Art. 23 of the Company, are not inclined to register the names
of the intending purchasers named in their abovesaid letter, as they consider
them unsuitable for admission as members in the interest of the company."
I should of course say that technically
speaking no actual transfer was before them for registration. All the letter of
14th January had actually done was to give a sale notice under Section 1.8 of
the articles. That however is not material. On those facts the liquidators have
come to this Court to ask for an order on the directors of the General
Transport Company Ltd., to make them accept the transfer by the liquidators to the three named persons and to
register it accordingly. As I said in the beginning, in my view, this
application is quite hopeless. In their affidavit in support of the
application, after setting out the history of the matter, all that the
applicants say is (by para 10) that the action of the directors is mala fide
and contrary to the interests of the General Transport Company Ltd., and (by
para 11) that the directors' decision is not " judicial." They allege
that the majority of the share-holders in the General Transport Company Ltd.
are willing to recognize the transfer and they urge that as a ground why the
directors should be compelled to register it. After these ex cathedra
allegation of "mala fides" and lack of "judicial"
consideration, they say (by para 12) that:
"under the aforesaid
circumstances the discretion of the directors should be deemed to have been
actuated by malice and ulterior motives best known to them."
The respondents filed
an affidavit in reply in which, in effect, they allege that they were not bound
to give their reasons and finally by an affidavit in rejoinder, filed at the
very last moment, the applicant brings forward a number of extremely vague and
unconvincing charges against the directors. Now, the law applicable to matters
of this kind is extremely clear. The leading case is that of In re Gresham Life
Assurance Society; Ex parte Penney. The judgment
of Mellish, L.J., in that case has been referred to again and again in
subsequent cases. He says:
"But it is
further contended that in order to secure the existing shareholders against
being deprived of the right to sell his shares, the directors are bound to give
their reason why they reject the transferee, and if they reject him without
giving reason that is a ground from which the Court ought to infer that they
were acting arbitrarily. I cannot agree with that. It appears to me that it is
very important that directors should be able to exercise the power in a
perfectly uncontrollable manner for the benefit of the share-holders; but it is
impossible that they could fairly and properly exercise it if they were
compelled to give the reason why they rejected a particular individual. ... I
am therefore of opinion that in order to preserve to the company the right
which is given by the articles a shareholder is not to be put upon the register
if the board of directors do not assent to him, and it is absolutely necessary
that they should not be bound to give their reasons, although I perfectly agree
that if it can be shown affirmatively that they are exercising their power
capriciously and wantonly, that may be ground for the Court interfering.
..."
It is true that an article
such as Art. 23 of the articles of association of this company is not intended
to enable directors to act in a way which
Mellish, L.J., describes as "arbitrarily" or "wantonly."
But if a shareholder challenges the undoubted right of directors in a case like
this to use their discretion, the burden lies heavily on that shareholder to
allege with particularity and to prove such mala fides on the part of the
directors as amounts to arbitrary and wanton conduct. Quite consistently with
this view in Duke of Sutherland v. British Dominions Land Settlement
Corporation Ltd.,
interrogatories were allowed to be delivered to directors as to the particular
branch of the article under which they had exercised their discretion, but not
as to the reasons which influenced them in exercising it upon that ground. Lord
Tomlin in his judgment in that case says:
"I think therefore on the construction of
the article that the defendants are bound to say whether the directors declined
to register because they do not approve of the transferee or because the
transferor is indebted to the company, but that they are not bound to tell the
plaintiff why in those circumstances the directors did not choose to register
the transfer.........Prima facie the directors are assumed to act bona fide
just as ordinary trustees in exercising powers are assumed to act bona fide. If
anybody alleges the contrary the onus is on him to prove it, and if in fact he
adduces no evidence at the trial which justifies a conclusion either that there
has been no exercise of the discretion or that there has been a mala fide
exercise of the discretion, then the mere fact that the directors have refused
to give any reason for the exercise of the power, and for the manner in which
they have exercised it, throws no suspicion on them or in any sense shifts the
onus of proof so as to put upon them the burden of justifying that which they
have done........"
Reverting now to the present case, what is it
that the directors of the General Transport Co. Ltd., have done? They have said
that they are not prepared to register these transfers, because they consider
the transferees to be "unsuitable for admission as members in the interest
of the company." That follows very closely the wording of art. 23 itself
which speaks of persons "undesirable in the interest of the company to
admit to membership." They have clearly indicated upon what ground under
art. 23 they take this stand and, conformably with Sir George Mellish's
judgment in In re Gresham Life Assurance Society Ex parte Penney, there is no
obligation whatever upon them to go any further and to give their actual
reasons for having come to that conclusion. Nor, as Lord Tomlin puts it, are
they to be exposed to suspicion of mala fides by reason merely of the fact that
they have chosen to withhold their reasons. The applicants come here and tell
me that the directors have acted mala fide and arbitrarily. And they have
asserted that the vary fact that they have given no reasons is proof of that.
In my view, it proves nothing of the kind, because the directors are doing
exactly what they are entitled to do. Nor, in my opinion, is it a circumstance
that affects the matter one way or the other, even if it be true, that the
majority of the shareholders would welcome the transferees. It is a first and
elementary principle of company law that, when powers are vested in a board of
directors by the articles of association of a company, they cannot be
interfered with by the shareholders as such. If the shareholders are
dissatisfied with what directors do, their remedy is to remove them in the
manner provided by the articles. But so long as a board of directors exists and
particular powers are vested in it by the article, then they are entitled to
exercise those powers without interference by the shareholders and it is, I
think, irrelevant whether the shareholders approve of what the directors have
done or not. For all these reasons, I must dismiss this application with costs.
[1935] 5 COMP. CAS. 243 (MAD.)
Sri
Tripurasundari Cotton Press Co., Ltd.
v.
Adepalli
Venkatappayya
MOCKETT, J.
C.M.P. NO. 482 OF 1934
C.R.P. NO. 124 OF 1935
APRIL 5, 1935
V. Govindarajachari and S.
Sreenivasachari for the Petitioner.
V. Subramaniam, for the
Respondent.
This is a matter of some
importance to the companies and it has been dealt with very summarily in the
lower Court. The action is by the plaintiff against the defendant company in
respect of the non-registration of a transfer in which he was interested. Under
Article 6 of the company's Articles of Association it is stated that the
company reserves to itself the right of refusing any transfer if it appear to
be against the interests of the company. The plaintiff by his plaint alleges
that the defendant company refused to recognise the transfer under the evil
advice and guidance of the 2nd defendant. The company justified its refusal for
reasons given and also because under Article 6 of the Articles of Association
it claims to have unfettered discretion. The issues as originally framed were:
"(3) Are defendants entitled
to refuse to recognise the transfer of shares as stated by them in their
written statement?
(4) Whether the suit is not
maintainable for reasons alleged by the defendants?"
that is to say, it put the burden
of proof upon the defendants. The defendants sought to have the issues recast as
follows:—
"(3) Whether the refusal of
the defendant company to recognise the plaintiff as transferee is not bona fide
and valid."
(4) Whether the suit is maintainable?"
That was dealt with by the
learned District Munsif as follows: "I do not consider that there are
sufficient grounds for recasting the issues already framed."
The burden of proof in these
matters is upon the plaintiff as has been held in a number of cases one example
of which is Re Coalport China Company and another is Re Gresham Life Assurance
Society, exparte Penney. The same principle has been recognised in the Madras
High Court in Sree Mahant Kishore Dossjee v. The Coimbatore Spinning and
Weaving Company (I.L.R. 26 Mad. 79) at pages 84 and 85. The issues were
therefore wrongly framed and this Civil Revision Petition must therefore be
allowed.
But it has been argued on behalf
of the respondent that I should not interfere in this matter. The power of
interference in revision in a matter of this sort is naturally sparingly used.
But when the burden of proof as in this case, is definitely wrongly placed and
where the matter is, as I have said, one of considerable importance to
companies and a local precedent might possibly be caused, I think this a matter
in which I am properly asked to interfere. The matter has been dealt with,
though not without jurisdiction, certainly with material irregularity. A Bench
of this High Court composed of Oldfield and Venkatasubba Rao, JJ., in
Rajagopala Ayyangar v. Ramanuja Ayyangar has taken the view that discretion may
be used in that way.
The costs of this revision
petition will abide and follow the result of the suit.
[1989]
66 Comp. Cas. 679 (Kar.)
v.
S.
Venkatesan
P.A. KULKARNI J.
CRL. PETITION NO. 429 OF 1987
January 8, 1988
B.V.
Acharya for the Petitioner.
A.C.
Yadurayagowda for the Respondent.
P.A.
Kulkarni J.—Sri
B.V. Acharya for the petitioners and Shri A.C. Yadurayagowda for the respondent
submitted that the matter itself may be heard finally on merits. Accordingly,
final arguments on the merits of the petition are heard and it is disposed of.
This is a petition by
accused Nos. 1 and 3 to 10 against the order issuing process against them for
the offence under section 111(2) read with section 629-A of the Companies Act,
1956.
According to the
complainant, he is a shareholder of the accused No. 1 company and he was
holding 46 shares. Sri Sriramulu Naidu and his wife, Smt. Rupalatha Naidu, who
were also the shareholders of the accused No. 1 company and who were holding 50
shares under Certificate No. 514, sold their shares to the complainant on
September 12, 1985. On the same day, the complainant sent a letter to the
company for transfer. This was acknowledged by accused No. 2. The transferors,
Sri C.B. Sriramulu Naidu and Smt. Rupalatha Naidu, also wrote to A-1 on the
same day to register the transfer of the shares. The board of directors did not
intimate to the complainant that they were not inclined to register the
transferred shares in the name of the complainant. This was not done within two
months. Hence, the offence under section 111(2) read with section 629-A.
In the sworn statement, the
complainant has not stated that the company refused to register such transfer
of shares within two months from the date on which the intimation of the
transfer was made. In the complaint, no doubt, he has made an allegation to
that effect. The allegation in the complaint is not evidence by itself. The
main ingredients of the offence must be spoken to in the sworn statement. The
sworn statement of the party is most important. If a party himself does not
speak of the main ingredients of the offence, the simple bare allegation to
that effect in the complaint will not supplement the omission made in the
course of the sworn statement. Therefore, the main ingredients showing
violation of section 111(2) have not been spoken to by the complainant in the
course of his evidence. Therefore, the court below committed an error in
issuing the process for the offence under section 111(2) read with section
629-A of the Companies Act, 1956.
In the result, the order passed by the court below
issuing the process is set aside. The petition is allowed. The proceedings are
quashed. The complaint is dismissed.
COMPANIES ACT
[1999] 19 SCL 499 (BOM.)
v.
Company Law Board
R.M. LODHA, J.
COMPANY APPEAL NO. 6 OF 1998
DECEMBER 16, 1998
Section 111 of the Companies Act, 1956 - Transfer of shares - Power to refuse registration and appeal against refusal - Appellant company initiated eviction proceedings against company TMI, a tenant on its premises, and this company was under control and management of R-4 and R-5 (Respondent Nos. 4 and 5) - When R-4 and R-5 applied for transfer of 29.78 per cent shares of appellant company in their favour, this was rejected on 1-3-1989 because of certain infirmities in applications - Subsequent applications, complying with legal formalities, for transfer of 18.43 per cent shares, were also rejected by appellant on 3-1-1991 on ground that intention of acquisition was mala fide and if permitted, would be prejudicial to interests of appellant company - CLB however directed appellant to effect registration of transfer of shares - Appellant challenged finding of CLB and also contended that application before CLB was time barred as relodging of shares for transfer was fraudulent device to overcome limitation - Whether since cause of action which accrued to R-4 and R-5 by fresh rejection on 3-1-1991 was entirely distinct and different, appeals filed on 18-2-1991 could not be held as time barred - Held, yes - Whether it is for party challenging order before CLB to show that reasons assigned by board of directors rejecting application for transfer are not legitimate and in accordance with law - Held, yes - Whether burden always is on party assailing decision of board of directors to demonstrate that such decision suffers from unsustainable reasons, i.e., such reasons are not legitimate or that decision is vitiated by ulterior motive or corrupt motive of arbitrary conduct or mala fides of board of directors - Held, yes - CLB in instant case was influenced in its decision by consideration that eviction suit filed by appellant against TMI was already dismissed and not pending and that acquisition of 18.43 per cent shares would neither change composition of board of directors nor influence eviction proceedings - But subsequently restoration application of appellant was allowed and eviction suit became pending - CLB also did not advert to a very vital question about motive of acquisition of shares by R-4 and R-S when company was not listed on any stock exchange nor it paid any dividends for last many years - Whether when R-4 and R-5 challenged order of board of directors in appeal before CLB, it was for them to place sufficient material before CLB to show that acquisition of shares to extent of 18.43 per cent would not change composition of board of directors and would not put them in an advantageous position - Held yes - Whether in view of above, matter needed re-examination and reconsideration and hence order of CLB had to be set aside with directions to hear and decide appeals afresh in accordance with law - Held, yes
The appellant company
initiated eviction proceedings against a company, TMI, a tenant on its
premises, and this company was under the control and management of Respondent
Nos. 4 and 5 (R-4 & R-5) On 3-1-1989, R-4 and R-5 lodged with the appellant
company 14605 and 3270 equity shares respectively for transfer in their favour.
Another relative of them also made such application for transfer of 1100
shares. On 1-3-1989 the company intimated them that the board of directors had
refused to transfer the said shares on grounds that the application was not
accompanied by transfer fees as prescribed by article 40 of the articles of
association and was incomplete as full name of the transferor and transferee
were not furnished and further intended acquisition was mala fide and for
ulterior motives and if permitted would be prejudicial to the interest of the
company and general body of shareholders and could bring out such a change in
the composition of their board of directors resulting in placing the applicants
in an advantageous position vis-a-vis the company resulting in total conflict
of applicants' personal interests and that of the company. On 6-11-1990 R-4 and
R-5 relodged applications for transfer. However, the company on 3-1-1991
intimated the respondents that in the absence of any change in the
circumstances, their applications stood rejected.
On appeal, the CLB directed
the company to effect registration of the transfer of the said shares in favour
of R-4 and R-5. In the instant appeal the company contended that when the
earlier applications were rejected on 1-3-1989 the respondent did not prefer
appeal to the CLB immediately but invented a fraudulent device by relodging
shares for getting out of difficulty of limitation. Therefore, subsequent
rejection on 3-1-1991 could not be said to have given fresh cause of action. As
a result, appeal filed before the CLB after expiry of 2 months of first
rejection was time barred. It was further contended that the CLB proceeded to
examine the decision of the board of directors, as if the burden lay on the
company to show that it acted bona fide, in good faith and not with corrupt
motive but actually the burden was on R-4 and R-5 challenging the order of the
board of directors to show that the company acted mala fide, in bad faith,
arbitrarily and with corrupt motive. It was further contended that the
observations and findings recorded by the CLB were perverse and were not in
accordance of law. Hence, the order of the CLB required to be rejected.
HELD
R-4
and R-5 made the applications on 3-1-1989 to the company for transfer of
shares. Apparently the said transfer applications were not in accordance with
the articles of association and the provisions of law. The applications were not
accompanied by transfer fees as prescribed by article 40 of articles of
association. The applications were incomplete inasmuch as full names of the
transferors in all the applications were not furnished Some of the annexures to
the application were unsigned. Full name of the transferors in two applications
in respect of the shares covered by register folio 2289 were not furnished
These infirmities weighed in the mind of the board of directors while deciding
the transfer application coupled with other reasons in rejecting the said
transfer applications made by R-4 and R-5. On the face of such infirmities in
the transfer applications made by R-4 and R-5, even if the said respondents had
filed appeal before the CLB under section 111(2), no relief could have been
granted to them assuming that the CLB had not agreed with the view of the board
of directors on other grounds rejecting the transfer of shares. It would, thus,
be seen that the cause of action accrued to R-4 and R-5 on rejection of their
first transfer applications after relodgement in accordance with articles of
association and law. The cause of action which accrued to R-4 and R-5 by fresh
rejection on 3-1-1991 was entirely distinct and different and the appeals filed
by R-4 and R-5 on 18-2-1991 could not be held as time barred. The transfer
applications made by R-4 and R-5 on 3-1-1989 suffered from serious infirmities
and on the face of such patent infirmities, the applications for transfer of
shares were incompetent and if R-4 and R-5 were advised not to challenge the
same in appeal unless fresh applications for transfer of shares were made in
accordance with law, it could not be inferred that R-4 and R-5 invented
fraudulent device to overcome limitation under section 111. As a matter of law,
the right and appropriate occasion for challenging the order of the company
arose only after they relodged their applications for transfer of shares in
accordance and conformity with law and articles of association of the company
on 6-11-1990 and the said applications were rejected by the company on
3-1-1991. R-4 and R-5 filed the appeals before the CLB within two months of the
rejection of their applications on 3-1-1991. Therefore, the appeals filed by
R-4 and R-5 before the CLB could not be held as time barred
The legal position is that
despite the uncontrolled and unlimited power regarding rejection of the
application for transfer of shares given to the board of directors in the
articles of association such power has necessarily to be exercised apparently
for the benefit of the company and the shareholders but the presumption is that the board of
directors has acted fairly, properly and bona fide and it is for the party
challenging such decision to allege and prove that such decision was actuated
with ulterior motive or was mala fide and not in the interest of the company or
for the benefit of the shareholders. If the decision taken by the board of
directors is supported by reasons, upon challenge to such decision in appeal,
the CLB is required to see the legitimacy of the reasons assigned. Again it is
for the party challenging such order to show that the reasons assigned by the
board of directors rejecting the application for transfer are not legitimate
and in accordance with law. The burden always is on the party assailing the
decision of the board of directors to demonstrate that such decision suffers
from unsustainable reasons i.e., such reasons are not legitimate or that the
decision is vitiated by ulterior motive or corrupt motive or arbitrary conduct
or mala fides of the board of directors. The board of directors rejected the
applications of R-4 andR-5 because in the opinion of the board of directors,
the intended acquisition of shares by them was mala fide and for ulterior
motives and if such acquisition was permitted it would be prejudicial to the
interest of the company and the general body of shareholders. In the opinion of
the board of directors the intended acquisition could bring about a change in
the composition of the board of directors resulting in placing the R-4 and R-5
in advantageous position in their dealing vis-a-vis the company resulting in a
total conflict of personal interests of R-4 and R-5 and that of the company.
The basis of reaching such conclusion by the board of directors was that R-4 and
R-5 together with other relatives sought transfer of 28,875 shares which were
equivalent to 29.78 per cent of the total voting power. R-4, R-5 and their
relatives were in total management and control of the company, TMI. The entire
paid up equity share capital of the TMI was held by R-4, R-5 and their
relatives. TMI was tenant of premises owned by the company. A suit for eviction
was filed by the company against said TMI on various grounds in Small Causes
Court and the said suit was pending. The company had submitted plans to the
authorities for development of the said property part of which was in
occupation and possession of TMI. Besides that the motive of R-4 and R-5 was
doubted because the company had not declared any dividends for the last several
years. The CLB while reversing the said decision observed that one of the
reasons which prevailed and actively weighed in the decision making process of
the board was the pendency of the suit filed by the company against TMI but the
fact was that the said suit was already dismissed for default and was no more
pending. The CLB though noted that an application for restoration of the suit
was pending but observed that such application for restoration was time barred
and had not been allowed so far. The CLB also observed that it was not
understood how the acquisition of shares by R-4 and R-5 to the extent of 18.43
per cent shares would either change the composition of the board of directors
or influence the eviction proceedings or they would be in an advantageous position
in dealing with the company. The CLB was not inclined to agree with the reasons
of the board of directors as to the contention of the company that by
acquisition of 18.43 per cent shares it would be possible to change the
composition of the board of directors. The CLB was also influenced by the fact
that though there was dispute between TMI and the company but the shares of
which transfer was sought by R-4 and R-5 were 18.43 per cent of the total
holding of the company and the said acquisition was by R-4 and R-5 in their
individual capacity and not by TMI.
It
might be observed straightaway that so far as reason given by the CLB relating
to dismissal of the suit filed by the company against TMI was concerned, the
said suit had admittedly been restored by the Small Causes Court and was
pending trial before the Small Causes Courts. If the impugned decision was
required to be examined in the light of the facts and circumstances obtaining
on the date such decision was given, then the CLB was required to examine the
correctness and legality of reasons given by the board of directors on the date
such decision was taken. Admittedly, when the board of directors rejected the
applications made by R-4 and R-5 for transfer of shares, the suit for eviction
filed by the company against TMI which was fully owned and held by R-4 and R-5
was pending and the said suit had not come to an end. It was only during the
pendency of the appeal before the CLB that the said suit was dismissed for
default. However, an application for restoration was made by the company and at
the time the CLB decided the matter, the application for restoration was
pending and during the pendency of the present company appeal the said
restoration application had been allowed and the suit for eviction filed by the
company against TMI was pending. Therefore, the reason given by the CLB for not
agreeing with the board of directors concerning eviction suit no longer
survived and needed to be examined afresh by the CLB in the light of the
pendency of the said suit now. Similarly, as regards the observation made by
the CLB that it was not understood as to how the acquisition of shares by R-4
and R-5 to the extent of 18.43 per cent shares would either change the
composition of the board of directors and influence the eviction proceedings or
that they would be in an advantageous position in dealing with the company,
could not hold good for want of relevant material before the CLB about the
composition of board and the respective strength of the management. R-4 and R-5
challenged the order of the board of directors in appeal before the CLB and it
was for them to place sufficient material before the CLB to show that
acquisition of shares to the extent of 18.43 per cent would not change the
composition of the board of directors and would not put the said respondents in
an advantageous position in dealing with the company. From the memorandum of
appeal filed by R-4 and R-5 nothing was discernible about the strength of the
share holding of the management. When the earlier applications were made by R-4
and R-5 and some other transferees, the transfer of 29.78 per cent of the total
voting power was sought to be transferred and after rejection of the said
applications, subsequently two applications
for transfer of shares were made only in respect of 17875 equity shares (14605
+ 3270) and the said transfer of shares were only to the extent of 18.43 per
cent shares but then the CLB did not examine the likelihood of subsequent
application/s for transfer of remaining shares which were earlier lodged for
transfer which was likely to change the composition of the board of directors.
The CLB also did not advert to a very vital question about the motive of
acquisition of these shares by R-4 and R-5 inasmuch as, admittedly the company
was not listed on any stock exchange nor the company had paid any dividends for
the last many years.
Therefore, the order passed
by the CLB could not be sustained as it stood and the matter needed to be
re-examined and reviewed in accordance with law by the CLB. Consequently, the
company appeal was partly allowed. The order passed by the CLB was quashed and
set aside. The CLB was directed to hear and decide the appeals afresh in
accordance with law.
Harinagar Sugar Mills Ltd.
v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC), In Re, Bell Bros.
Ltd [1891] 7 TLR 689, Ex parte Penney [1872] 8 Ch. A446, Bajaj Auto Ltd. v.
N.K. Firodia [1971] 41 Comp. Cas. 1 (SC), Bajaj Auto Ltd v. CLB [1998] 6 SCC
218, Balwant Transport Co. Ltd. v. Y.H. Deshpande AIR 1956 Nag. 20.
N.H. Seervai and Pooniwala for the Petitioner. Janak Dwarkadas
and M.R. Sathe for the Respondent.
1. The legality and
correctness of the order dated 22-5-1992 passed by the CLB, Western Region
Bench, Bombay is subject matter of challenge in this appeal filed under section
10(f) of Companies Act, 1956 ('the Act'). By the said order the CLB disposed of
two appeals namely Appeal Nos. 4 and 5(m) CLB/WR of 1991 filed under section
111 of the Act, wherein the order of the company refusing to register the
shares lodged for transfer was impugned.
2. The present
appellant Vasant Investment Corpn. Ltd. (the Company) is incorporated under the
Companies Act. The issued, subscribed and paid up capital of the company is Rs.
36,97,435 divided into 96,961 shares of Rs. 37 each and 1500 equity shares of
Rs. 74. The company carries on business as dealer and consultant in securities
and investment. The company is not listed on any stock exchange. On 3-1-1989
Shri Kashi Deora, (respondent No. 4 - transferee) lodged to the company 14605
equity shares of the company for transfer of the said shares in his favour.
Shri Suresh Deora (respondent No. 5 herein - transferee) lodged with the
company 3270 equity shares for transfer of the said shares in his favour.
Another application, for transfer of 1100 shares was made by Shri Prashad Deora
on 3-1-1989 to the company for transfer of the said shares in his favour. The
company on 1-3-1989 intimated the respondent Nos. 4 and 5 - transferees that
the board of directors has refused to transfer the said shares in their favour
on various grounds, namely, (a) that the application is not accompanied by
transfer fees as prescribed by article 40 of the articles of association; (b)
that the application is incomplete inasmuch as full name of the transferor and
transferee are not furnished; (c) that the intended acquisition is mala fide
and for ulterior motives; (d) that the intended acquisition, if permitted,
would be prejudicial to the interest of the company and general body of
shareholders and (e) that the intended acquisition, if permitted, could bring
out such a change in the composition of their board of directors resulting in
placing the applicants in an advantageous position vis-a-vis the company
resulting in total conflict of applicants personal interests and that of the
company. On 6-11-1990 the respondent Nos. 4 and 5 herein - transferees relodged
applications for transfer of 14605 and 3270 equity shares along with transfer
deeds for transfer of those equity shares in their favour. The company on
3-1-1991 intimated the respondent Nos. 4 and 5 herein that their applications
for transfer had already been rejected and the reasons thereof were also
intimated and in the absence of any change in the circumstances their
applications stand rejected. The said rejection was challenged by the
respondent Nos. 4 and 5 by filing two separate appeals on 18-2-1991 before the
CLB under section 111. The company filed replies to the said appeals before the
CLB on 11-10-1991 and after hearing the learned counsel for the parties, the
CLB disposed of both the appeals on 22-5-1992. The CLB allowed both the appeals
and directed the company to effect registration of the transfer of the said
shares in favour of respondent Nos. 4 and 5 within 10 days of the receipt of
the order. The said order of CLB is under challenge in this appeal as
aforestated.
3. I heard Mr. N.H.
Seervai, the learned counsel for the appellant company and Mr. Janak Dwarkadas,
the learned senior counsel appealing for respondent Nos. 4 and 5 at quite some
length and also perused the available material including the impugned order
passed by the CLB and the reasons given by the company in rejecting the
applications for transfer of shares in favour of respondent Nos. 4 and 5.
4. Mr. Seervai, the
learned counsel appearing for the company strenuously urged that the appeals
filed by the transferees applicants before the CLB were barred by time under
section 111. His contention is that section 111 provides mandatory statutory
period of limitation for filing appeal against rejection of the share transfer
by the company's board of directors. He would urge that the applications made
by the respondent Nos. 4 and 5 herein for share transfers were rejected by the
company on 1-3-1989 but they did not challenge the said order of board of
directors rejecting share transfers within time as provided under section 111
and invented a fraudulent device by relodging shares for transfer in the year
1990 for getting out of difficulty of limitation and therefore the rejection of
transfer of shares by the board of directors on 3-1-1991 cannot be said to have given fresh cause of action
to the respondent Nos. 4 and 5 and these appeals were patently time barred.
5. Per contra, Mr. Dwarkadas,
the learned senior counsel appearing for respondent Nos. 4 and 5 urged that
earlier applications made by respondent Nos. 4 and 5 on 3-1-1989 for transfer of
equity shares were rejected on various grounds including non-compliance of the
mandatory provisions by the applicants inasmuch as the applications were not
accompanied by transfer fees and that the applications were incomplete in
various respects and, therefore, there was no occasion for respondent Nos. 4
and 5 to challenge the said decision of board of directors rejecting the
applications for transfer since even if they had challenged the said decision
in appeal, no relief could have been granted to them since the applications for
transfer were not in accordance with law.
Section
111 deals with power to refuse registration of shares and appeal against such
refusal. It reads thus:
"Power
to refuse registration and appeal 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 CLB 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 the 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 CLB for rectification of the
register.
(5) The CLB, 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 that 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.
(6) The CLB, while acting
under sub-section (5), may, at its discretion, make—
(a) such interim
orders, including any orders as to injunction or stay, as it may deem fit and
just;
(b) such orders as to
costs as it think fit; and
(c) incidental or consequential orders regarding payment of dividend
or the allotment of bonus or rights shares.
(7) On any application under
this section, the CLB—
(a) may decide any question relating to the title of any person who
is a party to the application to have his name entered in, or omitted from, the
register;
(b) generally, may decide any question which it is necessary or
expedient to decide in connection with the application for rectification.
(8) The provisions of sub-sections (4) to (7)
shall apply in relation to the rectification of the register of debenture
holders as they apply in relation to the rectification of the register of
members.
(9) If default is made in giving effect to the
orders of the CLB under this section, the company and every officer of the
company who is in default shall be punishable with fine which may extend to one
thousand rupees, and with a further fine which may extend to one hundred rupees
for every day after the first day after which the default continues.
(10) Every appeal or application to the CLB under
sub-section (2) or sub-section (4) shall be made by a petition in writing and
shall be accompanied by such fee as may be prescribed.
(11) In the case of a private company which is not
a subsidiary of a public company, where the right to any shares or interest of
a member in, or debentures of, the company is transmitted by a sale thereof held
by a Court or other public authority, the provisions of sub-sections (4) to (7)
shall apply as if the company were a public company:
Provided that the CLB may, in lieu of an order under sub-section
(5), pass an order directing the company to register the transmission of the
right unless any member or members of the company specified in the order
acquire the right aforesaid, within such time as may be allowed for the purpose
by the order, on payment to the purchaser of the price paid by him therefore or
such other sum as the CLB may determine to be a reasonable compensation for the
right in all the circumstances of the case.
(12) If default is made in complying with any of
the provisions of this section, the company, and every officer of the company
who is in default, shall be punishable with fine which may extend to fifty
rupees for every day during which the default continues.
(13) Nothing in this section and section 108, 109
or 110 shall prejudice any power of a private company under its articles to enforce
the restrictions contained therein against the right to transfer the shares of
such company.
(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."
7. It would be seen
from section 111 that if the company refuses to register the transfer of
shares, it is required to send notice of refusal to the transferee and
transferor within two months from the date on which the instrument of transfer
was delivered to the company. Sub-section (2) of section 111 provides that the
transferor or transferee as the case may be appeal to the CLB against a refusal
of the company to register the transfer. Such appeal by aggrieved transferor or
transferee has to be made within two months of the receipt of notice of such
refusal and where no notice has been sent by the company within 4 months from
the date on which the instrument of transfer was delivered to the company under
sub-section (3) of section 111. Sub-section (4) is not very relevant for the
present purposes. Sub-sections (5) and (6) of section 111 deal with the power
of the CLB while dealing with an appeal under sub-section (2) of section 111
finally or at an ad interim stage. Adverting to the facts now in the background
of section 111, it would be seen that the respondent Nos. 4 and 5 herein made
the applications on 3-1-1989 to the company for transfer of shares. The
respondent No. 4 made the application for transfer of 14,506 equity shares
while respondent No. 5 made the application for transfer of 3270 shares.
Apparently, the said transfer applications were not in accordance with the
articles of association and the provisions of law. The applications were not
accompanied by transfer fees as prescribed by article 40 of articles of
association. The applications were incomplete inasmuch as full names of the
transferees in all the applications were not furnished. Some of the annexures
to the application were unsigned. Full name of the transferors in two
applications in respect of the shares covered by register folio 2289 were not
furnished. These infirmities weighed in the mind of the board of directors
while deciding the transfer application coupled with other reasons in rejecting
the said transfer applications made by respondent Nos. 4 and 5. On the face of
such infirmities in the transfer applications made by respondents Nos. 4 and 5,
even if the said respondents had filed appeal before the CLB under section
111(2), no relief could have been granted to them assuming that the CLB had not
agreed with the view of the board of directors on other grounds rejecting the
transfer of shares. It would, thus, be seen that the cause of action accrued to
respondent Nos. 4 and 5 on rejection of their first transfer applications after
relodgement in accordance with articles of association and law. The cause of
action which accrued to the respondent Nos. 4 and 5 by fresh rejection on
3-1-1991 was entirely distinct and different and the appeals filed by
respondent Nos. 4 and 5 on 18-2-1991 could not be held as time barred. As
already indicated above the transfer applications made by respondent Nos. 4 and
5 on 3-1 -1989 suffered from serious infirmities and on the face of such patent
infirmities, the applications for transfer of shares were incompetent and if
the respondent Nos. 4 and 5 were advised not to challenge the same in appeal
unless fresh applications for transfer of shares were made in accordance with
law, it cannot be inferred that the respondent Nos. 4 and 5 invented fraudulent
device to overcome limitation under section 111. As a matter of law, the right
and appropriate occasion for challenging the order of the company arose only
after they relodged their applications for transfer of shares in accordance and
conformity with law and articles of association of the company on 6-11-1990 and
the said applications were rejected by the company on 3-1-1991. There is no
dispute that respondent Nos. 4 and 5 filed the appeals before the CLB within
two months of the rejection of their applications on 3-1-1991. The facts which
have come on record and for the reasons which I have already stated above, I am
not persuaded to accept the contention of the learned counsel for the company
that the appeals filed by respondent Nos. 4 and 5 before the CLB were time
barred.
8. In view of my
aforesaid finding, I do not feel it necessary to consider the contention raised
by Mr. Seervai, the learned counsel for the company that the CLB is a Court
within the meaning of Limitation Act, 1963 and that the CLB has power to
condone to delay on sufficient cause being shown since section 5 of Limitation
Act would be attracted and in the absence of any application for condonation of
delay, the appeals were liable to be dismissed. As I have already held that the
appeals preferred by respondent Nos. 4 and 5 before the CLB challenging the
decision of the company dated 3-1-1991 were within time, there was no question
of making any application for condonation of delay by respondent Nos. 4 and 5.
9. Mr. Seervai, the
learned counsel for the company then assailed the order of the CLB on merits.
He urged that the entire approach of the CLB was against law inasmuch as the
CLB proceeded to examine the decision of the board of directors as if, the
burden lay on the company to show that it acted bona fide, in good faith and not with corrupt
motive. Mr. Seervai, vehemently contended that the presumption is that the
board of directors acted bona fide and in good faith and the burden lay on the
transferees-applicants while were challenging the order of the board of
directors to show that the company acted mala fide, in bad faith, arbitrarily
and with corrupt motive. The learned counsel for the company also urged that
the observations and findings recorded by the CLB are perverse and not in
accordance with the settled law. He, therefore, urged that the order of the CLB
being erroneous in law as well as on facts, is liable to be set aside.
10. On the other hand, Mr. Dwarkadas, the learned senior counsel
appearing for respondent Nos. 4 and 5 would urge that there was total
non-application of mind by the board of directors in rejecting the applications
for transfer lodged by respondent Nos. 4 and 5 on 6-11-1990. The learned senior
counsel urged that when the decision was taken by the Board on 3-1-1991, the
circumstances and situation had changed inasmuch as the suit for eviction which
was earlier pending between the company and TMI (P.) Ltd., had been dismissed
for default and was no more subjudice before the Court. He also urged that
though earlier transfer applications related to 29.3 per cent of equity shares,
by the applications made on 6-11-1990 the transfer of shares only related to
about 18 per cent of the shares. According to Mr. Dwarkadas, the Board of
directors did not advert to these aspects at all and by their predetermined
decision rejected the applications for transfer made by respondent Nos. 4 and 5
and, therefore, the decision taken by the board of directors of the company on
3-1-1991 suffered from malice and actuated with ulterior motive and rightly set
aside by the CLB.
11. I feel appropriate at this stage to refer to the legal position
concerning the power of the board of directors of the company in relation to
transfer of shares. In Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala
[1961] 31 Comp. Cas. 387, the Apex Court held with reference to the then
section 155, of the Act, that rectification of register can be granted only if
it is established that the directors had, in refusing to register the shares in
the names of the transferee, acted oppressively, capriciously or corruptly, or
in some way mala fide and not in the interest of the company. Such a plea, the
Apex Court ruled, has to be expressly raised and affirmatively proved by evidence.
The Apex Court held that normally, the Court would presume that where the
directors have refused to register the transfer of shares when they have been
invested with absolute discretion to refuse registration, that the exercise of
the power was bona fide. In other words, the Apex Court ruled that
discretionary power conferred by articles of association to refuse to register
would be presumed to be properly exercised and it was for the aggrieved
transferee to show affirmatively, that it had been exercised mala fide and not
in the interest of the company.
12. In re Bell Bros. Ltd.: Ex parte Hodgson [1891] 7 TLR 689 with
reference to English Companies Act it has been held that power relating to
rectification of register is presumed to have been exercised reasonably, bona
fide and for the benefit of the company and a heavy onus lay on those
challenging the resolution of the directors to displace the presumption of bona
fide exercise of power. It was emphasised in Bell Bros. Ltd., that the
discretion to refuse to register transfers was not liable to be controlled
unless the directors "acted oppressively, capriciously or corruptly or in
some way mala fide."
13 In re Mellish, L.J. in Ex parte
Penney [1872] 8 Ch. A 446., James L.J. observed "But in order to interfere
it must be made out that the directors have been acting from some improper
motive, or arbitrarily and capriciously. That must be alleged and proved and
the person who has a right to allege and prove it is the shareholder who seeks
to be removed from the list of shareholders and to substitute another person
for himself....this Court could have jurisdiction to deal with it as a corrupt
breach of trust; but if there is no such corrupt or arbitrary conduct as
between the directors and the person who is seeking to transfer his shares, it
does not appear to me that this Court has any jurisdiction whatever to sit as a
Court of appeal from the deliberate decision of the board of directors to whom
by the constitution of the company the question of determining the eligibility
or on-eligibility of new members is committed."
14. In Bajaj Auto Ltd., v. N.K. Firodia [1971] 41 Comp. Cas 1, the
Apex Court laid down the legal position thus:
"In
the present appeals, the reasons of the directors have to be tested from three
points of view. First, whether the directors acted in the interest of the
company, secondly, whether they acted on a wrong principles; and, thirdly,
whether they acted with an oblique motive or for a collateral purpose. This
Court in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1962] 2 SCR
339, [1961] 31 Comp. Cas. 387 (SC) said that 'the discretion of the directors
would be nullified if it were established that the directors acted
oppressively, capriciously or corruptly or in some other way mala fide'. The
decision in Harinagar Sugar Milk Ltd’s case (supra) related to a case under the
Companies Act, 1956, prior to the introduction of section 111(5 A). That is why
if the directors under the articles were not to disclose reasons, it was said
that the Court would presume, where the directors refused to register the
transfer of shares, that their power of absolute discretion was exercised bona
fide unless corrupt or mala fide motives were affirmatively pleaded and proved.
It would be for the aggrieved transferor to show that the refusal to register
transfer was exercised mala fide and not in the interest of the company and
thereby the presumption of bona fide would be displaced.
The
words' bona fide and for the benefit of the company as a whole' have been
considered in some English decisions. Reference may be made to the decision in
Greenhalgh v. Arderne Cinimas Ltd [1951] Ch 286; [1950] 2 All. E.R. 120 C.A.
where Evershed M.R. said that if a resolution had the effect 'to discriminate
between the majority shareholders and the minority shareholders so as to give
the former advantage of which the latter were
deprived', the resolution could be attacked on grounds of elements of
dishonesty or impropriety. The acts of the directors would have to be scrutinised
as to whether they were the honest opinion of the directors acting for the
company as a whole.
Mellish
L.J., in Ex parte Penny: Gresham Life Assurance Society, In re, [1872] LR 8 CH App. 446 said that the directors would have no
right to force a particular shareholder to continue as a shareholder and not to
allow him to transfer shares at all because that would be an abuse of their
power. Lord Cozens-Hardy M.R., In re [1917] 1 Ch. 123 C.A. Bede Steam Shipping
Co. Ltd. said that the personal objections to a transferee were where the
transferee would be quarrelsome person or he would be an unreasonable person or
he would be acting in the interest of a rival company. The directors there had
power to refuse to register transfer of shares if 'in their opinion it is
contrary to the interest of the company that the proposed transferee should be
a member thereof. In that case there were disputes between the elder brothers
who were directors. One of the elder brothers sold his two shares to a clerk of
his and another share to his housekeeper. The other director said that the
company was really a family concern and therefore the shares should not be
transferred singly or in small lots to outside persons having no interest in,
or knowledge of, shipping.
In re, Bede Steam Shipping
Co. [1917] 1 Ch. 123 C.A. the power of the directors was to refuse to register
the transfer of share to any person of whom the directors did not approve as
transferee. The directors in declining to register the transfer gave two
reasons. First, that there would be increase in expenditure if the body of
shareholders were numerically increased and, secondly, the individuals who were
neither related to the founders' family nor connected in business with the
company would become members by the proposed transfer. Neither of these reasons
was held to touch the fitness of the transferees. The real power of the
directors in refusing registration of transfer was on the ground of personal
objections to the transferees. The apprehension on the part of the directors in
the increase in the number of shareholders was therefore found to be an abuse
of power. It was found that the directors in refusing registration to transfer
thought of the proposed transferees as mere nominees who could adopt the
attitude of the transferor who had disagreed with the directors of the company.
The directors did not look at the relevant circumstances in which they were
placed, namely, their status, their occupation, and, in particular, whether the
transferees were interested in any private business competing with the company.
Reference may be made to an
old decision in In re, Bell Brothers Ltd [1891] 7 TLR 689 as an illustration of
the power of the directors to refuse registration of transfer. The relevant
article in the case of Bell Brothers case (supra) conferred discretionary power
on the directors to refuse registration of transfer of shares on the ground
that the directors did not approve of the transferee. Chitty J. said in
relation to the directors' power that the directors must act in good faith and
in the interest of the company and with due regard to the right of a
shareholder to transfer his shares and they must fairly consider the question
of the transferee's fitness at a board meeting. The directors in that case were
not required to disclose reasons. Three propositions can be extracted from that
case. First, where the directors do not assign any reason because of the
articles it is competent for those who seek to have the transfer registered to show
affirmatively by proper evidence that the directors had not duly exercised
their power. Secondly, if reasons are given by the directors and the reasons
are legitimate the Court will not overrule the directors' decision merely
because the Court itself would not have come to the same conclusion. Thirdly,
if the reasons are not legitimate, the Court would hold that the power had not
been duly exercised. An example would be where the directors said that they
rejected the transfer because the transferor's object was to increase the
voting power in respect of his shares by splitting them among his nominees.
In the case of Bell
Brothers two Bell Brothers, John and Lowthian, and the members of their
families were shareholders in Bell Brothers. John died leaving a Will and the
beneficiaries under the Will were his widow and children. The Will provided for
the widow and annuity. The Will contained a general trust for .conversion.
John's shares were sold to provide a found to meet the annuity. Hodgson
purchased those shares. The directors were Lowthian, his son, Hugh, and his
son-in-law. Hugh was an executor trustee under the Will of John and as such was
one of the transferors of the shares of John. The shares of the testator were
in the names of Hugh, the nephew, and Charles, the son of the testator, as
executor trustees. The shares being registered in two names, Hugh as the first
on the register had the right to vote. Hugh had on the one hand expressed the
opinion to sell the shares in the true interest of the beneficiaries and on the
other hand as a director opposed the sale to Hodgson on the ground that the
shares should be held by the members of the Bell family. The directors did not
allow registration either in the name of Hodgson or his nominees.
It has been well settled
since the decision in Pender v. Lushington [1877] LR6 Ch.D 70 (Ch.D) that the
directors are not entitled to look behind the register for any purpose. They do
not take notice of trust. Similarly, they cannot say that the transferee is the
nominee of some one whom they consider objectionable. The accent is always on
personal objections to the transferee. The solicitors of the directors in the
case of Bell Brothers gave the real reason for refusal of registration that
Hodgson was holder of shares in a rival company. Chitty J. said that the
directors carefully abstained from stating what their personal objection to
Hodgson was and put forward their solicitors to assign the reason for it. The
directors who had an opportunity of exercising their power attempted to
exercise it upon a wrong principle and therefore their power was gone. It is
quite likely that if the directors had given evidence of their real reason the
Court might have accepted it as legitimate. The decision in the case of Bell
Brothers (supra) illustrates that where the directors have the power to refuse registration of the
transfer of shares, their exercise of power on a wrong principle will vitiate
the exercise of the power.
It
follows that where the directors have uncontrolled and absolute discretion in
regard to declining registration of transfer of shares, the Court will consider
if the reasons are legitimate if the directors have acted on a wrong principle
or from corrupt motive. If the Court found that the directors gave reasons which
were legitimate, the Court would not overrule that decision merely on the
ground that the Court would not have come to the same conclusion. Reference may
be made to the decision in Balwant Transport Co. Ltd. v. Y.H. Deshpande AIR
1956 Nag. 20 which is a Bench decision of the Nagpur High Court. Sapate was a
shareholder in the company and owned shares. One of his shares was sold by
public auction and was purchased by Deshpande. Deshpande applied for
registration. The article in the Nagpur case conferred absolute and
uncontrolled discretion on the directors to refuse to register transfer where
in the opinion of the directors it was not in the interest of the company to
admit the proposed transferee to membership. The evidence in that case was that
Deshpande was the lawyer of Sapate. Sapate was quarrelling with the company.
Sapate also joined a rival concern. The directors' decision in those
surrounding circumstances was found to be a legitimate exercise of the power of
the directors in the interest of the company.
The
decision in In re, Smith & Fawcett Ltd [1942] Ch. 304 (C.A.) indicates the
extent to which the Court upholds the exercise of absolute and uncontrolled
discretion of the directors to refuse to register any transfer of shares. In
that case there were two directors who held the shares in equal numbers. One
died. The other director refused to register the transfer of shares in the
names of the executors of the deceased director except in respect of a part of
the holding and upon the condition that the balance be transferred to the
surviving director. It was found to be a justifiable act of the director in the
interest of the company.
In
the old Bombay decision in Kaikhosro Muncherji Heeramaneck v. Coorla Spg. &
Wvg. Co. [1891] ILR 16 (Bom.) 80 the board of directors might decline to
register any transfer of shares, unless the transferees were approved by the
board. A shareholder became insolvent. His share vested in the official
assignee. The official assignee sold the shares. The purchaser applied for registration.
The directors declined to approve of the transferees unless the transferees
would pledge themselves not to oppose a certain change in the mode of
remunerating the agents of the company, which the directors desired to effect,
and which they believed would be very advantageous to the company. It may be
mentioned here that the purchaser of the shares required the official assignee
to register transfer in the names of the two nominees who were already the
holders of shares in the company. The company, however, did not take any
objection to the nominees in their personal capacity. The directors acted on
wrong principle and in abuse of power in insisting on obtaining a pledge from
the transferees not to oppose change in the remuneration of the managing
agents.
A Bench decision of the
Allahabad High Court in Muir Mills Co. Ltd. v. T.H. Condon [1900] ILR 22 All.
410 related to the absolute power of the directors to refuse registration of
transfer of shares on personal objections to the transferee. The Muir Mills in
that case disallowed the transfers on the ground that the transferees were
subordinates of McRobert, the managing director of Cawnpore Mills. There was
personal animosity between Johnson, the managing director of the Muir Mills,
and McRobert. The directors of the Muir Mills came to a conclusion that
McRobert should not add to his voting power and 'harass the management'. It was
found to be abuse of fiduciary discretionary power of the directors when they
wanted to safeguard the directors' personal interest against McRobert."
(p.7)
15. The Apex Court thus emphasised that the decision of the
board of directors has to be examined by applying the tests viz., (i) whether
the directors acted in the interest of the company, (ii) whether they acted on
wrong principle and (iii) whether the board of directors acted with an oblique
motive for a collateral purpose. The CLB in exercise of its power conferred
under sub-section (2) of section 111 has to examine the decision of the board
of directors in the light of these legal principles and not as an appellate
court from the decision of the Court of the original jurisdiction.
16. Recently, the Apex Court in Bajaj Auto Ltd. v. CLB [1998]
6 SCC 218 considered the relevant provisions of the Companies Act including section
111 in the light of the articles of association of the company conferring
absolute, uncontrolled and unbridled power of the board of directors to decline
to register the transfer of shares and held thus:
"14. As we see if the power
of the board of directors to refuse registration of transfer of shares must be
in the interest of the company and the general body of shareholders. No doubt
in the year, 1983, section 82 of the Act provided that the shares or other
interest of any member in the company shall be movable property, transferable
in the manner provided by the articles of the company. Article 52 sought to
give absolute and uncontrolled discretion to the board of directors to decline
to register or acknowledge any transfer of shares. Even then as already held in
Bajaj Tempo Ltd's case (supra) the Board has to act bona fide, and not
arbitrarily and for the benefit of the company as a whole. In the case of a
public Ltd. company which is listed with Stock Exchange, an important right of
shareholder is to be able to sell his shares at a favourable price. It is
seldom in the interest of the general body of shareholders that transfer of
shares be refused because that will have an adverse impact on the market price
of the shares. Free transferability of shares will not artificially deprive its
market price. This does not mean that if there is a good reason then the Board
has no power to refuse to register the transfer of shares. This Court while
examining the action of the Board of directors is not expected to exercise
original appellate jurisdiction and sit in appeal on question of fact. The
judicial review while hearing in appeal from the decision of the CLB would be
limited to see whether there was a bona fide exercise of power by the board of
directors while refusing to register the transfer of shares."
17. It would be relevant here to refer to a Division Bench
judgment of the then Nagpur High Court in Balwant Transport Co. Ltd. v. Y.H.
Despande AIR 1956 Nag. 20 wherein the Division Bench was concerned with an
appeal arising out of the order on the application for rectification of
register. The Division Bench presided over by Hidayatullah, J. (as he then
was), held that the onus was on the shareholder to prove that the action of directors
in refusing to register transfer of shares was mala fide. In the words of the
Division Bench:
"(11) The learned
Judge of the trial Court came to the conclusion that the exercise of discretion
was arbitrary and, regard being had to what is stated above, we have to see
whether the finding is proper or not. We cannot overlook the fact that under
the proviso to section 38 this appeal is to be treated as equivalent to one
filed under section 100, C.P.C. A finding fairly reached on the evidence would,
therefore, be binding.
In the present case, the
learned Judge of the trial Court did not consider the question of onus at all.
He felt that it was for the board of directors to justify their order, rather
then for the applicant before him to show that there was lack of 'bona fides'.
But it is well settled that the onus is on the shareholder to prove that the
action of the directors was 'mala fide': - In Gresham Life Assurance Society;
Ex Parte Penney, [1872] 8 Ch. A. 446 (A), In re Coalport China Co. [1895] 2 Ch.
404 (B), In re, Hannan's King (Browning) Gold Mining Co. Ltd [1898] 14 TLR 314
(Q; Sutherland (Duke) v. British Dominions Land Settlement Corpn. Ltd. [1926] I
Ch. 746 at p. 756 (D). As in the present case the learned Judge reached his
decision after placing the onus wrongly, the decision is open for further
consideration even in an appeal under section 100, Civil P.C.-"Peddi Reddi
Jogi Reddi v. Chinnabbi Reddi, AIR 1929 PC 13 (E) and Jogeshchandra Ray v.
Emdad Meah MR 1932 PC 28 (F).
"(12) In the resolution
which the Company passed and which is described at page 7 of the paper book, it
merely stated that it was not in the interests of the Company to admit the
applicant to the membership of the Company as a shareholder. Clause 9 of the
articles of association says:
Clauses 18 to 23 inclusive,
of Table A, annexed to the Indian Companies Act, 1913, shall apply with the
following modification:—
Clause 20 shall be modified
so as to provide that the directors may in their absolute and uncontrolled
discretion refuse to register any transfer of shares; whether fully paid or
not, where in the opinion of the directors it is not to the interest of the
Company to admit the proposed transferee to membership of (if he is already a
member) to allow him to increase his holding. Save this change the other
provisions of clause 20 will remain intact".
"(13) Under this
clause the directors enjoy very vast powers. Unless it can be shown that a
power to vested in them was exercised 'mala fide’ or for any collateral
purpose, the Court cannot overrule the decision of the directors and substitute
its own judgment about the desirability of bringing the name of a person as a
shareholder in the register".
“(14)………
"The question,
therefore, is simple whether, on the true construction of the particular
article, the directors are limited by anything except their 'bona fide’ view as
to the interests of the company. In the present case the article is drafted in
the widest possible terms, and I decline to write into that clear language any
limitation other than a limitation, which is implicit by law, that a fiduciary
power of this kind must be exercised 'bona fide' in the interest of the company
subject to that qualification, an article in this form appears to me to give
the directors what it says, namely, an absolute and uncontrolled
discretion".
"(15) Judged from this
test which, in our opinion, states the reasons of the law and the sense of
matter, we cannot say that the learned Judge of the Court below reached a
proper conclusion in all the circumstances of this case. He should have
directed his attention to the question whether the action of the directors in
refusing to register Shri Deshpande disclosed a lack of 'bona fides' or some
oblique purpose not connected with the interests of the company or, lastly
whether it was based on some wrong principle.
He did not approach the
question that way. He considered the action of the directors arbitrary. If the
directors of the company had not given any reasons, the burden on Shri
Desphande would have been all the heavier. Fortunately for Shri Deshpande, the
directors of the company in stating their reasons give certain clue to the
working of their minds. We have, therefore, to examine the reasons given
together with the evidence of the Managing Director and to see whether they are
valid under the Articles
or 'bona fide’ ".
"(17) The directors'
decision has to be understood in the circumstances surrounding the purchase of
the share by the respondent. The company was not paying dividends for four
years. The transferee purchased but one share in the company. In fact, Shri
Sapate managed to get one share sold in the Court auction, while retaining 30
still with him, and the purchaser was no other than his lawyer. The directors
probably considered that the lawyer, who was appearing for Sapate in some cases
against the company, purchased just one share, though the company was not
paying any dividend, probably only with a view to furthering the obstructionist
policy of Shri Sapate.
Nothing has been shown that
the directors, in reaching the decision they did, were actuated by any
considerations other than the interests of the company. It is not suggested
that the decision of the directors was motivated by mere considerations of
group dominance as distinguished from, what they genuinely conceived to be, the
interests of the company. Having regard to all the relevant circumstances, the
objection to the transferee cannot be considered to be beyond the scope of
their power under Art. 20.
In the absence of 'mala
fide', the Court cannot substitute its own discretion in place of that which is
given to the directors by the Article to refuse to register the transfer."
18. The legal position
that emerges from the aforesaid discussion is that despite the uncontrolled and
unlimited power regarding rejection of the application for transfer of shares
given to the board of directors in the articles of association such power has
necessarily to be exercised apparently for the benefit of the company and the
shareholders but the presumption is that the board of directors acted fairly,
properly and bona fide and it is for the party challenging such decision to
allege and prove that such decision was actuated with ulterior motive or was
mala fide and not in the interest of the company or for the benefit of the
shareholders. If the decision taken by the board of directors is supported by
reasons, upon challenge to such decision in appeal, the CLB is required to see
the legitimacy of the reasons assigned. Again it is for the party challenging
such order to show that the reasons assigned by the board of directors
rejecting the application for transfer are not legitimate and in accordance
with law. The burden always is on the party assailing the decision of the board
of directors to demonstrate that such decision suffers from unsustainable
reasons i.e., such reasons are not legitimate or that the decision is vitiated
by ulterior motive or corrupt motive or arbitrary conduct or mala fides of the
board of directors.
19. In the light of the aforesaid legal position, the impugned
order of the CLB setting aside the decision of the board of directors may now
be examined.
20. The board of directors rejected the applications of
respondent Nos. 4 and 5 because in the opinion of the board of directors, the
intended acquisition of shares by respondent Nos. 4 and 5 was mala fide and for
ulterior motives and if such acquisition was permitted it would be prejudicial
to the interest of the company and the general body of shareholders. In the
opinion of the board of directors the intended acquisition could bring about a
change in the composition of the board of directors resulting in placing the
respondent Nos. 4 and 5 in advantageous position in their dealings vis-a-vis
the company resulting in a total conflict of personal interests of respondent
Nos. 4 and 5 and that of the company. The basis of reaching such conclusion by
the board of directors was that the respondent Nos. 4 and 5 together with other
relatives sought transfer of 28,875 shares which were equivalent to 29.78 per
cent of the total voting power. The respondent Nos. 4 and 5 and their relatives
were in total management and control of the company, namely, Transformer
Manufacturer of India Pvt. Ltd. The entire paid up equity share capital of the
Transformer Manufacturer of India Pvt. Ltd., (TMI) is held by respondent Nos. 4
and 5 and their relatives. TMI is tenant of premises owned by the company
situated at Vile Parle. A suit for eviction was filed by the company against
said TMI on various grounds in Small Causes Court and the said suit was
pending. The company had submitted plans to the authorities for development of
the said property part of which was in occupation and possession of TMI
(company fully owned by respondent Nos. 4 and 5 and their relatives). Besides
that the motive of respondent Nos. 4 and 5 was doubted because the company had
not declared any dividends for the last several years. The CLB while reversing
the said decision observed that one of the reasons which prevailed and actively
weighed in the decision making process of the Board was the pendency of the
suit filed by the company against TMI but the fact was that the said suit was
already dismissed for default and was no more pending. The CLB though noted
that an application for restoration of the suit was pending but observed that
such application for restoration was time barred and has not been allowed so
far. The CLB also observed that it was not understood how the acquisition of
shares by the respondent Nos. 4 and 5 herein to the extent of 18.43 per cent
shares would either change the composition of the board of directors or
influence the eviction proceedings or they would be in an advantageous position
in dealing with the company. The CLB was not inclined to agree with the reasons
of the board of directors as to the contention of the company that by
acquisition of 18.43 per cent shares it would be possible to change the
composition of the board of directors. The CLB was also influenced by the fact
that though there is dispute between the TMI and the company but the shares of
which transfer is sought by respondent Nos. 4 and 5 are 18.43 per cent of the
total holding of the company and the said acquisition is by respondent Nos. 4
and 5 in their individual capacity and not by TMI.
21. It may straightaway be observed that so far as reason
given by the CLB relating to dismissal of the suit filed by the company against
TMI is concerned, the said suit has admittedly been restored by the Small
Causes Court and is pending trial before the Small Causes Court. Mr. Dwarkadas,
the learned senior counsel appearing for respondent Nos. 4 and 5 urged that
subsequent change of events in relation to the restoration of suit should not
be taken into consideration because this Court is only required to see the
legality and correctness of the CLB on the facts which were obtaining on the
date the decision was given by the CLB and not the events that had taken place
subsequently. If the impugned decision is required to be examined in the light
of the facts and circumstances obtaining on the date such decision was given,
which ordinarily is, then the CLB was required to examine the correctness and
legality of reasons given by the board of directors on the date such decision
was taken. Admittedly, when the board of directors rejected the applications
made by respondent Nos. 4 and 5 for transfer of shares, the suit for eviction
filed by the company against TMI which is fully owned and held by respondent
Nos. 4 and 5 was pending and the said suit had not come to an end. It was only
during the pendency of the appeal before the CLB that the said suit was
dismissed for default. However, an application for restoration was made by the
company and at the time the CLB decided the matter, the application for
restoration was pending and during the pendency of the present company appeal
the said restoration application has been allowed and the suit for eviction
filed by the company against TMI is pending. Therefore, the reason given by the
CLB for not agreeing with the board of directors concerning eviction suit no
longer survives and needs to be examined afresh by the CLB in the light of the
pendency of the said suit now. Similarly, as regards the observation made by
the CLB that it is not understood as to how the acquisition of shares by the
respondent Nos. 4 and 5 herein to the extent of 18.43 per cent shares would
either change the composition of the board of directors and influence the
eviction proceedings or that they would be in an advantageous position in
dealing with the company cannot hold good for want of relevant material before
the CLB about the composition of Board and the respective strength of the
management. The respondent Nos. 4 and 5 herein challenged the order of the
board of directors in appeal before the CLB and it was for them to place
sufficient material before the CLB to show that acquisition of shares to the
extent of 18.43 per cent would not change the composition of the board of
directors and would not put the said respondents in an advantageous position in
dealing with the company. From the memorandum of appeal filed by respondent
Nos. 4 and 5 nothing is discernible about the strength of the shareholding of
the management. It is true that when the earlier applications were made by the
respondent Nos. 4 and 5 and some other transferees, the transfer of 29.78 per
cent of the total voting power was sought to be transferred and after rejection
of the said applications, subsequently two applications for transfer of shares
were made only in respect of 17875 equity shares (14605 + 3270) and the said
transfer of shares were only to the extent of 18.43 per cent shares but then
the CLB did not examine the likelihood of subsequent application/s for transfer
of remaining shares which were earlier lodged for transfer which was likely to
change the composition of the board of directors. The CLB also did not advert
to a very vital question about the motive of acquisition of these shares by
respondent Nos. 4 and 5 in much as admittedly the company is not listed on any
stock exchange nor the company has paid any dividends for the last many years.
I do not intend to deal with these aspects at great length since in my view the
order passed by the CLB cannot be sustained as it stands and the matter needs
to be re-examined and reconsidered in accordance with law by the CLB in the
light of the decisions of the Apex Court as noted and the reasons I have
recorded.
22.Consequently, the company appeal is partly allowed. The
order passed by the CLB on 22-5-1992 is quashed and set aside. The CLB Western
Region, Bench Bombay is directed to hear and decide Appeal Nos. 4 and 5 (111)
CLB/WR of 1991 afresh in accordance with law after hearing the parties. Since
the appeals are quite old, their expeditious disposal is expected preferably
within three months from the date of the appearance of the parties. The parties
are directed to appear before the CLB on 18-1-1999.
[1971] 41 COMP. CAS. 1 (SC)
SUPREME COURT OF INDIA
v.
N.K. Firodia
M. HIDAYATULLAH, C.J.
G.K. MITTER AND A.N. RAY, JJ.
CIVIL
APPEAL NOS. 546, 547 AND 692-1031 OF 1970
SEPTEMBER 4, 1970
Appeals by special leave
from orders dated March 14, 1970, of the Company Law Board, Department of
Company Affairs, Ministry of Industrial Development, Internal Trade and Company
Affairs, New Delhi, in Appeals Nos. 4 to 7 of 1969, etc.
C.K. Daphtary.A.K. Sen and
L.M. Singhvi, Senior Advocates (S. Swarup and B. Datta Advocates, and J.B.
Dadachanji, O.C. Mathur and Ravinder Narain, Advocates of J.B. Dadachanji and
Co., with them), for the Appellant.
F.S. Nariman, A.B. Diwan,
K.J. Merchant and I.N. Shroff, Advocates, for Respondent.
Ray J.—These appeals are by special leave against the order dated
March 14, 1970, made by the Company Law Board, Department of Company Affairs,
Ministry of Industrial Development, Internal Trade and Company Affairs, New
Delhi, under section 111(3) of the Companies Act, 1956, directing the
appellant-company to register transfer of 3,643 shares forming the
subject-matter of these appeals.
The respondents in these
appeals are Jaya Hind Industries Ltd., N.K. Firodia and other persons who will
be referred to as the Firodia group.. The appellant will be referred to as the
Bajaj group.
The Firodia group lodged in
different lots 3,643 shares of the appellant for being transferred to different
names. Jaya Hind Industries Private Ltd. applied for transfer of 1,500 shares
in their names. Firodia applied for transfer of 30 shares in his name. The
other transfers were in the names of associates, nominees and friends of the
Firodia group. The board of the appellant refused to register transfer of the
said shares at the board meetings held on May
23, 1968, in respect of 2,532 shares and on June 24, 1968, in respect of 1,111
shares. The appellant communicated the said refusal to transfer the shares in
the month of June, 1968.
Thereafter, in the month of
August, 1968, 338 appeals were filed before the Company Law Board in respect of
refusal of the appellant to transfer 3,643 shares. The Company Law Board by its
letter dated January 16, 1969, asked the appellant to disclose the reasons for
refusal to register transfer of shares. The appellant-company gave three
reasons for refusal to register transfer of the said 3,643 shares. First, that
Jaya Hind Industries Private Ltd. was a beneficiary to the extent of 1/4 share
in the managing agency remuneration receivable by Jamnalal Sons Private Ltd.
from Bajaj Auto Ltd. and yet N.K. Firodia chose to write to the Company Law
Board against the extension of the managing agency of Jamnalal Sons Private
Ltd. The company further said that N.K. Firodia, according to the
appellant-company, was their representative and when N.K. Firodia acted in such
a treacherous fashion and against the interest of the company and behind the
back of the board of directors it became evident that Firodia’s design was to
create mischief. Secondly, the transfer of shares received from Jaya Hind
Industries Private Ltd. was part of the design to acquire interest in the
company which was likely to result in a threat to the smooth functioning of the
management of the company, and to vote down the passing of a special resolution
required for the management of the company, and, therefore, transfer should not
be permitted. Thirdly, the purchase of shares by Jaya Hind Industries Private
Ltd. was not with a view to bona fide investment but was with a mala fide
purpose and evil design. It was said that the issued share capital of the
company was 1,04,250 shares of Rs. 100 each. Firodia group was holding 21,500
shares. Transferring further shares to the names of Firodia group would
obstruct the business of the appellant-company in the passing of special
resolution which was required in the day to day business of the company. It was
also said that from the investment point of view with a dividend of Rs. 10 per
share on a paid up share of Rs. 100 the purchase price paid by Firodia group
was artificial and could only be with a view to try to take control and/or
obstruct the business and smooth working of the company and to injure the
existing management. The appellant-company concluded by saying that the board
of directors came to the conclusion that it was in the interest of the company
to refuse the said transfers.
In order to appreciate
whether the directors used the discretion in proper exercise of their fiduciary
power and the reasons were bona fide and legitimate in the interest of the
company as a whole, it is necessary to refer to certain features of the case.
In the year 1947 a joint
venture business was entered into between Jaya Hind Industries Ltd. and
Bachhraj Trading Corporation Ltd. In the month of March, 1950, Bachhraj Trading
Corporation suffered heavy losses and the joint venture was transferred to
Bajaj Factories Ltd. with the consent of Jaya Hind Industries Ltd.
In the year 1952, N.K. Firodia became a director of Bachhraj Trading Corporation Ltd. In the month of April, 1954, Jaya Hind Industries Ltd. acquired 1,800 shares of the face value of Rs. 1,80,000 of Bachhraj Trading Corporation Ltd. at Rs. 36-8-0 per share which together with 50 shares held by N.K. Firodia equalled 3/8ths of the share capital. In the month of May, 1954, Bachhraj Trading Corporation Ltd. again took over the business of the joint venture from Bajaj Factories Ltd. In the year 1955, N.K. Firodia as a director of Bachhraj Trading Corporation Ltd. applied to the Central Government for the manufacturing licence of scooters, auto rickshaws and tempo three wheeler vehicles. In the year 1957, Bachhraj Trading Corporation Ltd. was granted the manufacturing licence of tempo three wheelers. In 1958 Bajaj Tempo Private Ltd. was formed to manufacture tempo three wheeler vehicles and N.K. Firodia was appointed the managing director of the same. In the year 1959, Bachhraj Trading Corporation Ltd. was granted licence to manufacture scooters and auto rickshaws. In the year 1960 the name of Bachhraj Trading Corporation Ltd. was changed to Bajaj Auto Private Ltd. Shares of Bajaj Auto Private Ltd. were offered to shareholders of Bachhraj Trading Corporation in proportion to their shareholding.
Between the years 1954 and
1960 Jaya Hind Industries Private Ltd. of the Firodia group had provided
substantial funds amounting to Rs. 4,36,000 to the appellant-company in its
former name. In the year 1960 there was a managing agency agreement between the
appellant-company and Jamnalal Sons Private Ltd. for a period of five years. In
1960 when the appellant was converted into a public limited company and Firodia
was appointed as its chief executive, the respondent-company of the Firodia
group by themselves, their shareholders and friends subscribed for 37½%
of the shares offered to the then existing shareholders of the
appellant-company. An agreement was entered into between Jamnalal Sons Private
Ltd., managing agents of the appellant-company, and the respondent, Jaya Hind
Industries Private Ltd., on August 15, 1960, by which the managing agents
agreed to pay 25% of the remuneration of the managing agency to the respondent
company in consideration of services rendered to the appellant-company.
Gradually, the appellant-company grew into a prosperous and very well-developed
automobile unit. Land was acquired, buildings were constructed and machinery
and equipment worth more than a crore of rupees was purchased and installed.
The manufacturing activity of the appellant-company made good progress and 90% of the components of scooters
and auto rickshaws were capable of being manufactured indigenously.
In the month of June, 1965,
the appellant-company applied to the Central Government for re-appointment of
Jamnalal Sons Private Ltd. as managing agents of the appellant-company for a
period of 10 years. The Central Government on August 11, 1965, sanctioned the
said re-appointment of managing agents for the period commencing August 16,
1965, and ending March 31, 1968, viz., for an approximate period of three
years. The appellant-company entered into an agreement with the managing agents
on similar terms.
In the month of August, 1967,
Kamalnayan Bajaj of the Bajaj group proposed at the board meeting of the
appellant that an application should be made to extend the term of the managing
agency. Firodia of the respondent-company group opposed any such extension. In
the month of December 1967, the appellant applied to the Company Law Board for
extension of the term of managing agency of Jamnalal Sons Private Ltd. for a
period of 7 years so that the managing agents would have a term of 10 years
commencing August 16, 1965. The letter of the appellant-company was signed by
the secretary. In the month of March, 1968, Firodia came to know about the said
letter and wrote to the Chairman of the Company Law Board that there was
neither any resolution of the general meeting of the company for such extension
nor any publication of such appointment. Firodia said that the
appellant-company contravened, in particular, the provisions contained in
sections 326 and 640B of the Companies Act, 1956. The Company Law Board,
however, approved of the extension of the managing agency for a period of two
years from March 31, 1970.
The appellant-company was
converted into a public limited company in 1960 and the share capital was
increased from Rs. 9,90,000 to Rs. 70,00,000. In the months of February and
March, 1967, the capital of the appellant-company was increased by issue of
right shares. By the endiof February, 1968, out of the issued share capital of
1,04,250 shares the Bajaj group held about 28,600 shares, the Firodia group
23,40.0 shares, and the general public about 52,250 shares. The Bajaj group,
however, alleged that in February, 1968, they held 31,500 shares and the
Firodia group had 21,735 shares. In the month of March, 1968, the Bajaj group
bought about 16,230 shares up to the maximum value of Rs. 411 per share. It may
be mentioned here that out of the said 16,230 shares the Bajaj group bought
about 4,000 shares from the Life Insurance Corporation Ltd. and the Unit Trust
of India. The Bajaj group obtained transfer of the said 16,230 shares in their
names. The Firodia group, on the other hand, from the month of April, 1968,
onwards lodged in different lots 3,643 shares of the appellant-company for being transferred to their names. The board declined to
register any transfer in respect of the said 3,643 shares.
It is also necessary to
know about the antecedents and activities of Firodia in relation to the affairs
of the appellant-company. When the joint venture was started in the year 1946
between Bachhraj Trading Corporation Ltd. and the respondent-company Firodia
was in actual charge of the joint venture. In the year 1950 Firodia went to
Germany and obtained representation from Vidal and Sohn Tempo Works, Hamburg,
Germany, in connection with the manufacture of tempo three wheeler vehicles. In
1952 Firodia became a director of Bachhraj Trading Corporation Ltd. Firodia
thereafter submitted a scheme for the manufacture of scooters and auto
rickshaws and obtained a licence for Bachhraj Trading Corporation Ltd. in that
behalf. The Firodia group acquired shares of the face value of Rs. 1,80,000 in
Bachhraj Trading Corporation in the year 1954 and helped its rehabilitation
after it suffered heavy losses. The Firodia group provided funds to the extent
of Rs. 4,36,000 to the Bajaj group during the years 1954 and 1960. When the
appellant-company became a public limited company in the year 1960 the Firodia
group subscribed for 37½% of the shares and assisted in procuring subscription
to the shares offered to the public. Jamnalal Sons Private Ltd., the managing
agents of the appellant, agreed to pay 25% of their remuneration of the
managing agency to the respondent-company of the Firodia group in consideration
of the services rendered.
Article 52 of the
appellant-company provided that the directors might at their absolute and
uncontrolled discretion decline to register any transfer of shares. Discretion
does not mean a bare affirmation or negation of a proposal. Discretion implies
just and proper consideration of the proposal, in the facts and circumstances
of the case. In the exercise of that discretion the directors will act for the
paramount interest of the company and for the general interest of the
shareholders because the directors are in a fiduciary position both towards the
company and towards every shareholder. The directors are therefore required to
act bona fide and not arbitrarily and not for any collateral motive.
If the articles permit the
directors to decline to register transfer of shares without stating the
reasons, the court would not draw unfavourable inferences against the directors
because they did not give reasons. In other words, the court will assume that
the directors acted reasonably and bona fide and those who allege to the
contrary would have to prove and establish the same by evidence. Where, however,
the directors gave reasons the court would consider whether they were
legitimate and whether the directors proceeded on a right or wrong principle.
As a result of the introduction of section 111(5A) in the Companies Act, 1956,
two consequences follow.
First,
if the articles permit the directors not to disclose reasons for declining to
register a transfer the statute confers power to interrogate the directors and
disclose the reasons. Secondly, if the directors do not disclose reasons
presumption can be drawn against the directors for non-disclosure of reasons in
spite of being called upon to do so.
In
the present appeals, the reasons of the directors have to be tested from three
points of view. First, whether the directors acted in the interest of the company;
secondly, whether they acted on a wrong principle; and, thirdly, whether they
acted with an oblique motive or for a collateral purpose. This court in
Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala said that
“the discretion of the directors would be nullified if it were established that
the directors acted oppressively, capriciously or corruptly or in some other
way mala fide”. The decision in Harinagar Sugar Mills Ltd. related
to a case under the Companies Act, 1956, prior to the introduction of section
111(5A). That is why if the directors under the articles were not to disclose reasons,
it was said that the court would presume, where the directors refused to
register the transfer of shares, that their power of absolute discretion was
exercised bona fide unless corrupt or mala fide motives were affirmatively
pleaded and proved. It would be for the aggrieved transferor to show that the
refusal to register transfer was exercised mala fide and not in the interest of
the company and thereby the presumption of bona fide would be displaced.
The
words “bona fide and for the benefit of the company as a whole” have been
considered in some English decisions. Reference may be made to the decision in
Greenhalgh v. Arderne Cinemas Ltd., where
Evershed M.R. said that if a resolution had the effect “to discriminate between
the majority shareholders and the minority shareholders so as to give the
former advantage of which the latter were deprived”, the resolution could be
attacked on grounds of elements of dishonesty or impropriety. The acts of the
directors would have to be scrutinised as to whether they were the honest
opinion of the directors acting for the company as a whole.
Mellish
L.J., in Ex parte Penny: Gresham Life Assurance Society, In re, said that
the directors would have no right to force a particular shareholder to continue
as a shareholder and not to allow him to transfer shares at all because that
would be an abuse of their power. Lord Cozens-Hardy M.R. in In re Bede Steam
Shipping Co. Ltd.
said that the personal objections to a transferee were where the transferee
would be quarrelsome person or he would be an unreasonable person or he would
be acting in the interest of a rival company. The directors there had power to
refuse to register transfer of shares if “in their opinion it is contrary to
the interest of the company that the proposed
transferee should be a member thereof”. In that case there were disputes
between the elder brothers who were directors. One of the elder brothers sold
his two shares to a clerk of his and another share to his house-keeper. The
other director said that the company was really a family concern and therefore
the shares; should not be transferred singly or in small lots to outside
persons having no interest in, or knowledge of, shipping.
In In re Bede Steam
Shipping Co. the power of the directors was to refuse to
register the transfer of share to any person of whom the directors did not
approve as transferee. The directors in declining to register the transfer gave
two reasons. First, that there would be increase in expenditure if the body of
shareholders were numerically increased and, secondly, the individuals who were
neither related to the founders’ family nor connected in business with the
company would become members by the proposed transfer. Neither of these reasons
was held to touch the fitness of the transferees. The real power of the
directors in refusing registration of transfer was on the ground of personal
objections to the transferees. The apprehension on the part of the directors in
the increase in the number of shareholders was therefore found to be an abuse
of power. It was found that the directors in refusing registration to transfer
thought of the proposed transferees as mere nominees who could adopt the
attitude of the transferor who had disagreed with the directors of the company.
The directors did not look at the relevant circumstances in which they were
placed, namely, their status, their occupation, and, in particular, whether the
transferees were interested in any private business competing with the company.
Reference may be made to an
old decision in In re Bell Brothers Ltd. as an
illustration of the power of the directors to refuse registration of transfer.
The relevant article in the case of Bell Brothers conferred discretionary power
on the directors to refuse registration of transfer of shares on the ground
that the directors did not approve of the transferee. Chitty J. said in
relation to the directors’ power that the directors must act in good faith and
in the interest of the company and with due regard to the right of a
shareholder to transfer his shares and they must fairly consider the question
of the transferee’s fitness at a board meeting. The directors in that case were
not required to disclose reasons. Three propositions can be extracted from that
case. First, where the directors do not assign any reason because of the
articles it is competent for those who seek to have the transfer registered to
show affirmatively by proper evidence that the directors had not duly exercised
their power. Secondly, if reasons are given by the directors and the reasons
are legitimate the court will not overrule the directors’ decision merely
because the court itself would not have come to the same conclusion. Thirdly,
if the reasons are not legitimate, the court would hold that the power had not
been duly exercised. An example would be where the directors said that they
rejected the transfer because the transferor’s object was to increase the voting
power in respect of his shares by splitting them among his nominees.
In the case of Bell
Brothers two Bell brothers, John and Lowthian, and the members of their
families were shareholders in Bell Brothers. John died leaving a will and the
beneficiaries under the will were his widow and children. The will provided for
the widow an annuity. The will contained a general trust for conversion. John’s
shares were sold to provide a fund to meet the annuity. Hodgson purchased those
shares. The directors were Lowthian, his son, Hugh, and his son-in-law. Hugh
was an executor trustee under the will of John and as such was one of the
transferors of the shares of John. The shares of the testator were in the names
of Hugh, the nephew, and Charles, the son of the testator, as executor
trustees. The shares being registered in two names, Hugh as the first on the
register had the right to vote. Hugh had on the one hand expressed the opinion
to sell the shares in the true interest of the beneficiaries and on the other
hand as a director opposed the sale to Hodgson on the ground that the shares
should be held by the members of the-Bell family. The directors did not allow
registration either in the name of Hodgson or his nominees.
It has been well settled
since the decision in Fender v. Lushington that the
directors are not entitled to look behind the register for any purpose. They do
not take notice of trust. Similarly, they cannot say that the transferee is the
nominee of some one whom they consider objectionable. The accent is always on
personal objections to the transferee. The solicitors of the directors in the
case of Bell Brothers gave the real reason for refusal of registration that
Hodgson was holder of shares in a rival company. Chitty J. said that the
directors carefully abstained from stating what their personal objection to
Hodgson was and put forward their solicitors to assign the reason for it. The
directors who had an opportunity of exercising their power attempted to
exercise it upon a wrong principle and therefore their power was gone. It is
quite likely that if the directors had given evidence of their real reason the
court might have accepted it as legitimate. The decision in the case of Bell
Brothers illustrates that where the directors have the power to refuse
registration of the transfer of shares, their exercise of power on a wrong
principle will vitiate the exercise of the power.
It follows that where the
directors have uncontrolled and absolute discretion in regard to declining
registration of transfer of shares, the court will consider if the reasons are
legitimate if the directors have acted on a wrong principle or from corrupt
motive. If the court found that the directors gave reasons which were legitimate, the court
would not overrule that decision merely on the ground that the court would not
have come to the same conclusion. Reference may be made to the decision in
Balwant Transport Co. Ltd. v. Y.H. Deshpande, which is a
Bench decision of the Nagpur High Court. Sapate was a shareholder in the
company and owned 31 shares. One of his shares was sold by public auction and
was purchased by Deshpande. Deshpande applied for registration. The article in
the Nagpur case conferred absolute and uncontrolled discretion on the directors
to refuse to register transfer where in the opinion of the directors it was not
in the interest of the company to admit the proposed transferee to membership.
The evidence in that case was that Deshpande was the lawyer of Sapate. Sapate
was quarrelling with the company. Sapate also joined a rival concern. The
directors’ decision in those surrounding circumstances was found to be a
legitimate exercise of the power of the directors in the interest of the
company.
The
decision in In re Smith & Fawcett Ltd. indicates the
extent to which the court upholds the exercise of absolute and uncontrolled
discretion of the directors to refuse to register any transfer of shares. In
that case there were two directors who held the shares in equal numbers. One
died. The other director refused to register the transfer of shares in the
names of the executors of the deceased director except in respect of a part of
the holding and upon the condition that the balance be transferred to the
surviving director. It was found to be a justifiable act of the director in the
interest of the company.
In
the old Bombay decision in Kaikhosro Muncherji Heeramaneck v. Coorla Spg. &
Wvg. Co.,
the board of directors might decline to register any transfer of shares, unless
the transferees were approved by the board. A shareholder became insolvent. His
share vested in the official assignee. The official assignee sold the shares.
The purchaser applied for registration. The directors declined to approve of
the transferees unless the transferees would pledge themselves not to oppose a
certain change in the mode of remunerating the agents of the company, which the
directors desired to effect, and which they believed would be very advantageous
to the company. It may be mentioned here that the purchaser of the shares
required the official assignee to register transfer in the names of the two
nominees who were already the holders of shares in the company. The company,
however, did not take any objection to the nominees in their personal capacity.
The directors acted on wrong principle and in abuse of power in insisting on
obtaining a pledge from the transferees not to oppose change in the
remuneration of the managing agents.
A
Bench decision of the Allahabad High Court in Muir Mills Co. Ltd. v. T.H. Condon related to
the absolute power of the directors to refuse registration of transfer of
shares on personal objections to the transferee. The Muir Mills in that case
disallowed the transfers on the ground that the transferees were subordinates
of McRobert, the managing director of Cawnpore Mills. There was personal
animosity between Johnson, the managing director of the Muir Mills, and
McRobert. The directors of the Muir Mills came to a conclusion that McRobert
should not add to his voting power and “harass the management”. It was found to
be abuse of fiduciary discretionary power of the directors when they wanted to
safeguard the directors’ personal interest against McRobert.
The
first reason of the appellant-company for the refusal of registration of
transfer of the shares was that Firodia acted in a treacherous fashion against
the interest of the company and behind the back of the board of directors. The
evidence is that the managing agents of the Bajaj group in the year 1965 failed
to obtain from the Government approval of an extension of term for 10 years.
The Government sanctioned the term for about three years which was to expire on
March 31, 1968. In the month of August, 1967, when Kamalnayan Bajaj of the
Bajaj group proposed an extension of the term of the managing agents, Firodia
represented to the Board that Firodia was opposed to the same. No application
for extension of the term of managing agents was made at that time. The appellant,
however, behind the back of Firodia, wrote to the Company Law Board in the
month of December, 1967, and, though Firodia was the chief executive, the
letter was signed by the secretary and kept concealed from Firodia. Firodia
came to know of the letter in the month of March, 1968, and he wrote to the
Company Law Board that the company had made “false statement” in the
application for extension of the term, namely, that the appellant-company gave
a wrong impression that it had received permission to increase its production
to 60,000 scooters per year whereas in fact no such permission had been
granted. Firodia also pointed out that the appellant suggested that its
progress was because of the Bajaj group and made no reference to Firodia who
was the chief executive of the appellant.
In
1965 the appellant asked for appointment of the managing agents for ten years.
The Company Law Board approved of the appointment up to March 31, 1968. It is
true that there was a resolution of the appellant-company in the year 1965 for
the appointment of the managing agents for a period of ten years. That
resolution of 1965 after the appointment of the managing agents for a term of
less than three years and, in particular, after an agreement had been entered
into between the appellant-company on the one hand and the managing agents on the other in that behalf, was exhausted,
and spent its force and could not be said to have either a life of its own for
10 years or to spring into action in the year 1968 for a revival of the resolution
to enable the appellant-company to ask for appointment of managing agents for a
period of seven years on the basis of any such resolution. Firodia rightly
protested against the absence of any resolution of the shareholders and also
against the absence of any publication of proposal for appointment of managing
agents for seven years. Firodia, furthermore, rightly cavilled against the
total obscuration of his name or of any reference to his activities in relation
to the affairs of the company and the contrary suggestion in the letter that
the prosperity of the appellant-company was on account of Kamalnayan Bajaj.
This aspect is important to show that the allegations of Firodia were against
the managing agents and, further, that Firodia was acting in the larger
interest of the company whereas the managing agents were actuated by their
personal motives of preservation and aggrandisement of their power. The letter
written by the appellant to the Company Law Board was not circulated to the
shareholders. Firodia came to know about the letter and that is why he informed
the Company Law Board of the state of affairs.
On this evidence it is
apparent that Firodia wrote to the Company Law Board in the larger interest of
the company. Firodia’s allegations were against the managing agents. Firodia
was justified in opposing re-appointment of the managing agents without a
specific resolution of the shareholders of the company and without a public
notice to the shareholders to represent their views in the matter. The Bajaj
group acted behind the back of Firodia and wanted to steal a march. The real
motive of the Bajaj group was revealed first by imposing restrictions in the
month of March, 1968, on the powers of Firodia as chief executive of the
appellant-company and, secondly, by the resolution in the month of May, 1968,
to terminate the services of Firodia as chief executive. The refusal to
register the transfers was at the meetings of the board held in the months of
May and June, 1968.
The directors had a hostile
feeling against Firodia and they had the dominant desire to keep Firodia out of
the company. The directors did not act in the interest of the company and their
discretion was tainted by unfair conduct and unjustifiable attitude against
Firodia.
The second reason given by
the appellant-company was that the Firodia group acquired the shares with a
design of acquiring interest in the company which was likely to result in a
threat to the smooth functioning of the management of the company and to vote
down the passing of the special resolution. There are well recognised
safeguards as to notice and content for passing special resolutions. Special
resolutions are for limited purposes and are not matters of daily occurrence or
of daily routine administration. The mere apprehension
that special resolutions will not be passed is not a legitimate reason. The
shareholders will bestow their intention on matters forming the subject-matter
of resolution. Passing of special resolutions will depend upon the mandate of
the shareholders. It is manifest that the reason given by the directors was a
camouflage to cover their collateral and corrupt motive of preserving the
hegemony of the Bajaj group. The motive is corrupt because the Bajaj group
acted for their personal interest and not in the bona fide general interest of
the company.
The third reason given by
the appellant-company was that the shares were being acquired by the Firodia
group not with a view of bona fide investment but with a mala fide purpose and evil
design of obstructing the business of the appellant-company. Acquisition or
transfer of shares under the articles of the present case does not suffer from
any restrictive impediment like pre-emption or personal objections to the
transferees. There is no evidence that the transferees belonged to a rival
concern. Equally, there is no evidence that the Firodia group ever obstructed
in the management of the company. On the contrary, the Firodia group advanced
large sums of money. Firodia was largely responsible for the gradual growth of
the appellant-company and for the prosperity of the company. It was, therefore,
an abuse of the fiduciary power of the directors to refuse to register transfer
of shares.
The Bajaj group obtained
transfer of 16,230 shares in their favour in the month of March, 1968. The
Bajaj group purchased shares in the market at a maximum value of Rs. 411 per
share. The holding of the Bajaj group prior to the acquisition of the said
16,230 shares was 28,600 shares or, according to the Bajaj group, 31,500
shares. The Firodia group on the other hand prior to the proposed transfer had
23,400 shares or 21,735 shares according to the Bajaj group. The general public
held 52,250 shares. This was the position in the month of February, 1968. The Bajaj
group by the acquisition of 16,230 shares would have a numerical strength of
44,830 shares whereas the Firodia group would be having 26,863 shares if the
proposed transfers were allowed by the directors. The Bajaj group paid Rs. 411
per share. The Firodia group paid roughly about Rs. 200 per share. Firodia was
not on the board of directors of the appellant-company. The Bajaj group and
their friends were the directors. In the year 1967 the Firodia group lodged
4,243 shares for transfer in their names and the transfers were registered.
Again, in the month of February, 1968, when the Firodia group lodged 68 shares
with the appellant-company for transfer, the appellant-company accepted the
said transfer. It is, therefore, revealed that after the appellant came to know
that Firodia wrote to the Company Law Board in the month of March, 1968; the
directors of the appellant-company developed antipathy against Firodia. The
refusal to register the shares was a sequel to the termination of the appointment of Firodia as chief
executive and it is manifest that the directors acted for collateral reasons
and in their own interest.
Counsel
on behalf of the appellant contended that of the seven directors only
Kamalnayan Bajaj belonged to the Bajaj family and each director was an
independent industrialist and could not be described to be of Bajaj group.
Neither the status and wealth of the directors nor their lack of relationship
with the Bajaj family could be decisive as to whether they exercised their
discretion on correct principle or without any corrupt motive. The Firodia
group alleged that Kamalnayan Bajaj was an arbitrator in the family dispute of
Ramnath A. Podar and that Shriyans Prasad Jain was a close associate of
Kamalnayan Bajaj. Irrespective of these allegations, we have already indicated
that the directors failed to exercise their discretion properly by refusing to
register transfer of shares on wrong principles and for corrupt and oblique
motives.
The
discretion of the directors is to be tested as the opinion of fair and sensible
men in the interest of the company. In the present case, the directors did not
act bona fide nor did they act in the general interest of the company. On the
contrary, they acted upon a wrong principle and for the oblique motive of squeezing
out Firodia. The in scapable conclusion is that the directors acted arbitrarily
and unjustifiably.
For
these reasons we are of opinion that the appeals fail. They are dismissed with
costs. The respondents will be allowed one set of hearing fees.
[1972] 42 COMP. CAS. 350 (MAD.)
v.
Gudiyatham Textiles (P). Ltd.
PALANISWAMY, J.
Criminal Procedure
NO. 32 OF 1969
Gopalaratnatn for A.
Venkatachalam for the Petitioner.
T. Raghavan and T.K.
Seshadri for the Respondents.
ORDER
This petition is filed under section
155 of the Companies Act, 1956, for rectification of the register of the
members of the Gudiyatham Textiles Private Ltd., the first respondent herein.
Respondents Nos. 2 and 3 are the surviving directors of the company. To start
with, there were four directors of whom one subsequently transferred his shares
in favour of the other three directors, namely, Govindaraja Mudaliar (father of
the petitioner), and respondents Nos. 2 and 3. Govindaraja Mudaliar died on
September 6, 1964, leaving a will, under which he bequeathed his shares in the
company in favour of the petitioner. The petitioner obtained succession
certificate in O.P. No. 38 of 1968 on the file of the District Court, Vellore,
in respect of the amount due by the first respondent-company to his deceased
father. He has obtained an extension of the succession certificate to cover the
shares of his deceased father in the first respondent-company. On October
5,1964, the petitioner applied to the company to transmit the shares of his
father to his name. He made another application on February 23, 1968, for the
same purpose. A third and final application was made on November 4,1968. He was
called upon to produce the necessary succession certificate and other documents
to show his right, and on his producing the same on January 10, 1969, the
directors, respondents Nos. 2 and 3, informed the petitioner by a letter dated
March 31,1969, declining to effect the transfer. The reason given was that in the
opinion of the directors the activities of the petitioner were against the
interest of the company, and that it was, therefore, not desirable or feasible,
in the interest of the company, to permit the transmission of the shares to the
name of the petitioner as requested by him. The petitioner was also informed
that the company was agreeable to purchase the shares in question according to
the prevailing value. It is in these circumstances that the petitioner has come
forward with this petition praying for rectification of the register of the
company, by the substitution of his name in the place of his father.
The respondents have filed
a counter-affidavit reiterating the objections put forward in the communication
sent to the petitioner declining to accede to his request for substitution of
his name. Their contention is that under the
articles of association of the Company, they have got discretion; to decide
whether it would be proper, in the interest of the company, to recognise the
transmission, that having regard to the conduct of the petitioner which was
detrimental to the interest of the company, it was decided that the
transmission should not be accepted. It is their contention that if the
petitioner is admitted, it would be the beginning of the end of the company.
The first respondent-company was floated with, certain objects the chief of
which were:
(i) to manage the affairs of Messrs. Rajeswari Mills Ltd.,
as managing agents, that company being a public limited company;
(ii) to
promote limited companies, mills, factories, cinema studios, etc;
(iii) to buy
or sell cotton, yarn silk or cloth and to deal in the same; and
(iv) to
construct, build factories or godowns, etc.
In the first respondent-company,
out of the’ total of 20 shares, the petitioner’s father has 62/3rd
shares; the remaining 13l/3rd shares belong to equal moieties to
respondents Nos. 2 and 3.
The main contention urged on
behalf of the petitioner is that under the articles of association, there is no
power conferred upon the board of directors to refuse recognition of the
transmission of shares by operation of law in case of death of one of the
directors. It is also contended on behalf of the petitioner that even if there
was such a power, it has not been exercised bona fide and that the exercise of
power by respondents Nos. 2 and 3 is arbitrary and unjust and is mala fide. On
the other hand, the contention urged on behalf of the respondents is that under
it be articles of association wide discretion is give to the board of directors
to decide whether recognition of the transmission of shares even in the case of
devolution by operation of law should be considered in the interest of the
company. They contend that, in the instant case, they have taken into
Consideration all the relevant circumstances with regard to the interest of the
company and have decided that the; recognition of the petitioner with regard to
his father’s share would be detrimental to the interest of the company.
The articles of association
are in Tamil. There are two articles of which require to be noted in this
proceeding, and they are 15 and 19. To understand the real import of these
articles, I set them bit roily and they are: Article 15, on a reading of it, would show that it is clear
and unambiguous. According to that article, a transfer either by a shareholder
or by the heir of a deceased shareholder can be made in the name of a relative
of the shareholder or heir, as the case may be. If request for such a transfer
is made, discretion is given to the board of directors to decide whether it is
just and proper that the transfer should be made. If they so decide, then the
transfer could be effected subject to the liability of the transferee to
discharge any debt or encumbrance subsisting on the share. So far as article 19
is concerned; it is not clearly worded. It refers to transfer by the
shareholder and also transfer by the heir of the deceased shareholder. So far
as the shareholder is concerned, the expression used is But so far as the heir
of a shareholder is concerned, a different expression is used and that is The expression means who desires to transfer his share. The expression would
mean who desires to have the shares transferred. This difference in language
appears to have been deliberately adopted to cover the case of transfer if such
a request is made by the heir of a deceased shareholder. Such request can be
made to recognise the transfer either in the name of the heir himself or in the
name of a relative of the heir as provided in article 15. That appears to have
been the reason why the difference in language is adopted in article. 19.
According to article 19, any member desirous of transferring his share or the
heir of a deceased member desirous of having the share transferred should, in
writing, apply to the company giving the particulars specified therein. That
article further provides that within 60 days after the receipt of the
application, the transfer should be effected, if, on examination by the board,
there was no objection. This article undoubtedly gives discretion to the board
to decide whether there is objection or not to recognise the transfer. This
discretion is applicable not only to the case of an application for transfer by
a shareholder but also to an application for transfer by the heir either to his
name or to the name of a relative. I, therefore, do not accept the contention
urged on behalf of the petitioner that under the articles of association no power is conferred upon the
board to examine the request for transmission of a share in case of devolution
by operation of law.
The
law relating to the right of the board of directors to refuse to register
transfer of shares is well settled. Where the regulations confer a discretion
on directors with regard to the acceptance of transfers, this discretion, like
all the directors powers, is a fiduciary one to be exercised bona fide in what
they consider to be in the interest of the company. If, on a true construction
of the regulations, the directors are only given power to reject on certain
prescribed grounds and it is proved that on those grounds the request for
transfer was rejected, the court would not substitute its opinion for the
opinion of the directors. If the articles of association give an unfettered
discretion, the court would interfere with it only on proof of bad faith. These
principles have been enunciated in a number of decisions. In Moodie v. W. &
J. Shepherd Book Binders Ltd. (1) the articles of association provided that any person
becoming entitled to a share in consequence of the death of a member shall have
the right subject to the directors not exercising their powers as provided
therein, to acquire the said shares, either to be registered as a member or to
make such transfer of the share as the deceased person could have made. But the
directors shall have the same right to decline or suspend registration. Another
article provided that it shall be in the absolute discretion of the directors
to refuse to register any transfer of shares of which they do not approve. The
company had three directors. On the death of one of them, his executors applied
for transfer. Out of the two remaining directors, one was in favour of
recognising the transfer and the other was opposed to it. But the directors did
not pass any resolution. One of the articles of association required a
resolution to be passed in case of rejection of request for transfer. As no
such resolution had been passed, it was held that the executors were entitled
to be recognised.
In Smith and Fawcett Ltd,
In re, one
of the articles of association provided:
“The directors may at any
time in their absolute and uncontrolled discretion refuse to register any
transfer of shares.”
On the death of one of the
two directors, his executor applied to have his name registered. The other director
refused to consent for the registration but offered to register some shares and
to buy the remaining shares at a fixed price. The executor applied to the court
by way of motion that the register of members of the company might be rectified
by inserting his name as the holder of all the shares held by the deceased. The
court held that the articles of association gave the directors the widest
powers to refuse to register a transfer and
that while such powers are of a fiduciary nature and must be exercised in the
interest of the company, there was nothing to show that they had been otherwise
exercised. In Babulal Choukhani v. Western India Theatres Ltd., the
relevant articles of association gave absolute and uncontrolled discretion to
the directors to decline to register transfer of shares. It was held that the
directors were not bound to give reasons for their refusal.
In Coimbatore Kamala Mills
Ltd. v. T. Sundaram the articles
of association of the company provided:
“The directors may decline
to register any transfer of shares in respect of which any member solely or
jointly with others is indebted to the company in any manner whatsoever or if
the directors shall not approve of the proposed transferee, and they shall not
be obliged to give any reason for not approving the transferee.”
The company did not specify
in their letter the ground upon which they refused to accept the plaintiff’s
application for transfer. It was held:
“1. that the company was bound to specify which of the two grounds
mentioned in the article was the ground on which the directors declined to
register the transfer:
2. that if the ground was that they did not approve of him they
were not obliged to give the reasons for not approving him;
3. that because the directors did not specify the ground on which
they had declined to register the transfer, the court should not draw
unfavourable inferences against them; and
4. that the presumption would be that the directors had acted bona
fide and the onus would be on the person challenging their action to establish
the lack of bona fides and the impropriety on their part.”
In Muthappa Chettiar v.
Salem Rajendra Mills Ltd., it is
pointed out that if a discretion as to registering transfers of shares of a
company is given by the articles of association of the company to the directors,
the court. would not control the exercise of such discretion unless it is
proved that the directors are not exercising the discretion bona fide or are
acting in other ways oppressively, capriciously or corruptly or in some way
mala fide. It is also pointed out that if the directors give their reasons, the
court should consider whether they are legitimate or not, that is, with a view
to find out whether the directors acted on right or wrong principles. The
Supreme Court has pointed out in Harinagar Sugar Mills Ltd. v. S.S.
Jhunjhunwala,
that rectification of the register of members of a company under section 155 of
the Companies Act, 1956, can be granted only if it is established that the
directors had, in refusing to register the shares in
the names of the transferee, acted oppressively, capriciously or corruptly, or
in some way mala fide and not in the interest of the company. It is also
pointed out that such a plea has, in a petition for rectification, to be
expressly raised and affirmatively proved by evidence and that, normally, the
court would presume, where the directors have refused to register the transfer
of shares when they have been invested with absolute discretion to refuse
registration, that the exercise of the power was bona fide. In Indian Chemical
Products Ltd. v. State of Orissa, the articles
of association gave power to the directors to refuse registration of transfer
without showing any cause. But on facts it was found that the refusal to
register was mala fide. It was held that though there was power to refuse
registration without showing any cause, the power had been exercised
capriciously and in bad faith and that, therefore, the refusal would not be
sustained. In Thenappa Chettiar v. Indian Overseas Bank, the question
arose for consideration in a regularly framed suit; the court found that the
objections to recognise the transfer were capricious and untenable. It is
pointed out that though the articles of association may confer absolute power
on the directors, the refusal must not be arbitrary.
Keeping the foregoing
principles in view, the facts of this case may be examined. The petitioner’s
father died on September 6, 1964. At that time, the first respondent-company
was functioning as the managing agents of Rajeswari Mills Ltd. The agreement
under which the said managing agency was created was to expire on 15th August,
1965. The petitioner was appointed as the director-in-charge of the day to day
management of the Rajeswari Mills after the death of his father. In that
capacity, he called for a meeting of that company on November 11,1964, and a
resolution was passed in that meeting removing the first respondent-company
from the office of managing agents. The petitioner got himself appointed as the
managing director. This gave rise to-institution of a suit, O.S. No. 132 of
1964, on the file of the Sub-Court, Vellore, by the first respondent-company
challenging the action of the petitioner in passing the resolution. Certain
shareholders of Rajeswari Mills themselves questioned the validity of the
resolution and instituted O.S. No. 140 of 1964 on the file of the same court
for certain reliefs. Alleging that the action of the petitioner in causing the
removal of the first respondent from being the managing agents had caused
substantial loss to the first respondent-company, the first respondent-company
instituted O.S. No. 132 of 1964 claiming damages against the petitioner and
Rajeswari Mills Ltd. It appears that the said suit has been dismissed so far as
the petitioner is concerned, but has been decreed for a smaller amount than the
amount claimed as against Rajeswari Mills Ltd. It
is represented on behalf of the respondent that the first respondent-company is
intending to file an appeal not only with regard to the disallowed portion
against the Rajeswari Mills but also against the petitioner.
It appears that the first
respondent-company was indebted to the late father of the petitioner. The
petitioner instituted C.P. No. 49 of 1966 on the file of this court to wind up
the company alleging that the company was unable to pay its debts and that the
substratum of the company had disappeared. That matter was ultimately
compromised. Under the compromise, the petitioner was allowed to draw a
particular amount without prejudice to his rights to institute fresh
proceedings to recover the balance due to him. It was also agreed that the
petitioner’s rights as a shareholder were left open. Ultimately, the petition
was dismissed as not pressed and withdrawn. The contention urged on behalf of
the respondents is that the institution of this petition reveals the attitude
of the petitioner. Their submission is that the petitioner is bent upon seeing
that the first respondent-company is wound up. It is represented that there are
some more suits pending between the petitioner on the one hand and the respondents
on the other.
From the foregoing facts,
it is clear that the conduct of the petitioner has been such that it is
inconsistent with his profession of being interested in the affairs of the
first respondent-company. The fact that money was due to him from the company
does not necessarily mean that he should rush to court with a petition to wind
up the company on the serious allegation that the substratum of the company had
disappeared. The contention urged on his behalf that as a creditor he was
entitled to take all such steps as were open to him according to law, has no
substance in the consideration of the question whether his conduct was for the
benefit of the company. The board of directors have taken into consideration
the relevant circumstances and come to the conclusion that the activities of
the petitioner were against the interest of the company, and that it was,
therefore, not desirable in the interest of the company to permit transmission
of the shares of his father to his name. It cannot be said that this reason is
capricious or arbitrary or mala fide. The decision taken by the board of
directors is in the best interest of the company and, therefore, even if it is
conceded for the sake of argument that the court is entitled to go into the
question of validity or otherwise of the reasons given by the directors, the
evidence on record amply justified the view taken by the board of directors.
All that the articles of association says is that the board of directors may
admit the transmission if they see no objection. The board had sufficient and
valid reasons for rejecting the request of the petitioner.
Mr. Gopalarathnam,
appearing for the petitioner, family suggested that on account of the
inordinate delay in considering the application of the petitioner by the board, it should be deemed that the
petition was allowed. No such claim is put forward in the petition, and there
is also no merit in this submission. It is true that the petitioner had applied
twice on previous occasions, once on October 5, 1964, and again on February 23,
1968. On these occasions, he had not obtained the necessary proof by way of
extension of succession certificate to cover his claim to the rights in the
shares of his deceased father. It was only in August, 1968, that the petitioner
obtained extension of succession certificate and he made a third application on
November 4,1968, for recognition of transmission of his right. The board of
directors called upon the petitioner to produce proof and he furnished proof on
January 10,1969. On March 31,1969, the board decided to reject the request.
Thus there was no delay in disposing of the petitioner’s application.
Mr. Gopalarathnam next
contended that under the compromise arrived at between the petitioner on the one
hand and the first respondent on the other in C.P. No. 49 of 1966 it was
expressly stipulated that the petitioner’s right as a shareholder was left
open. On the basis of that stipulation it is contended that it should be deemed
that the petitioner’s right as a shareholder was accepted. There is no merit in
this argument. The fact that his right was left open does not mean that his
right was recognised. It is obvious that the question of the petitioner’s right
as a shareholder was not decided, but it was merely left open. The compromise
does not in any way advance the petitioner’s claim.
Lastly, Mr. Gopalarathnam
contended that, after all, the petitioner is only a minority shareholder having
62/3rd shares, and that recognition of his share as a shareholder
would not in any way affect the working of the company inasmuch as the two
majority shareholders are going together. On this aspect also I find no
substance. From the mere fact that the petitioner is only a minority
shareholder it does not mean that the decision of the board rejecting his
request for transmission is in any way vitiated. It is rightly contended on
behalf of the respondents that the petitioner, even though a minority
shareholder, can give trouble to the working of the company, if he wants to do,
as there are adequate provisions in the Companies Act under which the
petitioner can come up to this court. It is undoubtedly so. The petitioner, as
a minority shareholder, can approach this court under sections 397 and 398
alleging that the affairs of the company are being conducted in a manner
prejudicial to the public interest or in a manner oppressive to him. By this
way, he can drag the company to court. Therefore, the fact that the petitioner
is a minority shareholder does not mean that he cannot take any action against
the company.
In the result, the petition fails and
is dismissed. There will be no order as to costs.
[1994]
80 COMP. CAS. 64 (SC)
v.
Calico Dyeing and Printing Mills Ltd.
K.
JAYACHANDRA REDDY AND G.N. RAY, JJ.
Civil Appeal No. 854 of 1994
(arising out of SLP (Civil)
No. 9345 of 1990)
FEBRUARY
15, 1994
A.M.
Singhvi, Vibhu Bahhru, M.N. Shroff and Ms. Reema Bhandari for the appellants.
Ashok
H. Desai, Dushyant Dave, Vikram B. Trivedi, Ms. Manjula Gupta and Bharat Sangal
for the respondent.
K.
Jayachandra Reddy, J.—Special leave granted.
This appeal arises out of Company Petition No. 39 of 1985, which was dismissed by a learned single judge of the Bombay High Court by his order dated February 27, 1987, and an appeal filed against the said order was also dismissed by a Division Bench. The order of the Division Bench is impugned in this appeal.
The
appellants are the son, widow and married daughter of one late Shri Prabhudas
V. Mehta who was holding 100 equity shares of the respondent, Calico Dyeing and
Printing Mills Ltd. ("the company" for short) of the face value of
Rs. 100 each. Shri Prabhudas V. Mehta died on August 26, 1974, without leaving
any will. The appellants are the only legal heirs and representatives of Shri
Prabhudas Mehta and they filed a company petition for rectification of the
register of members of the company by deleting the name of Shri Prabhudas V.
Mehta and substituting in its place the names of the appellants in respect of
those 100 shares in the company bearing Distinctive Nos. 9101 to 9200. Prior to
his death the deceased, Shri Prabhudas V. Mehta, was holding these shares and
was working as an employee of the company. It appears that there were certain
disputes between Shri Prabhudas V. Mehta and the directors of the company who
made efforts to purchase the said shares. The negotiations in this regard could
not be completed in view of the sudden death of Shri Prabhudas V. Mehta. It is
also alleged that the appellants entered into negotiations for sale of shares
which were carried on for several years. Extensive correspondence ensued
between the appellants and the company. However, as no positive reply was
forthcoming for the transmission of shares, the appellants sent a letter to the
company on May 28, 1977, for transmission of shares and for the notice of the
annual general meeting stating that they were entitled to the same even in the
absence of their names being taken on the register of members by virtue of
articles of association and the provisions of the Companies Act. On June 27,
1977, a reminder was sent to the company. On July 9, 1977, a reply was given by
the company stating, inter alia, that the appellants were not entitled to
exercise any voting right in any of the meetings of the company. On September
21, 1977, the then existing articles of association were replaced by a new set
of articles of association wherein new articles were introduced conferring
power on the company to reject any application for transfer or transmission
without assigning any reason in that behalf. According to the appellants, this
was done mainly with an intention of defeating the appellants' rights as
shareholders-cum-beneficiaries of the said shares. In the month of March, 1984,
the company closed down its operations and by arriving at a settlement with the
workers retrenched all the workmen obtaining voluntary resignations from them.
It is alleged by the appellants that this was done with the motive of making
huge profits by the directors and their related shareholders by disposing of
the plant, machinery, etc. On or about June 23, 1984, the company requested the
appellants to approach the company for transmission of shares after obtaining
the succession certificate in respect of the estate of the deceased, Shri
Prabhudas V. Mehta. On August 21, 1984, the appellants received the heirship
certificate in which 100 shares were mentioned as one of the assets standing in
the name of Shri Prabhudas V. Mehta in the company. On August 31, 1984, the
appellants sent a letter to the company intimating that the heirship
certificate-cum-letter of administration has been received by them and,
therefore, the company should give to them the details about the formalities to
be complied with for the purpose of effecting the transmission of the said
shares in their favour. On September 16, 1984, since there was no response from
the company a reminder was sent. On September 19, 1984, the company requested
the appellants to send a certified true copy of the heirship certificate to do
the needful. On September 21, 1984, the appellants addressed a letter to the
company requesting to furnish the details of the procedure so as to comply with
the prerequisites of transmission of shares. On November 21, 1984, the
appellants forwarded a true copy of the heirship certificate and requested the
company to do the needful. A reminder also was sent on December 29, 1984, Since
there was no reply from the company, Company Petition No. 39 of 1985 was filed
in the High Court of Bombay praying for rectification of the register of
members. The company filed an affidavit opposing the grant of the relief prayed
for, stating that the directors of the company have decided to refuse to
register the appellants as members of the company in exercise of the powers
conferred under the articles of association of the company. The appellants
filed a rejoinder. On April 17, 1985, the company filed an additional affidavit
purporting to enclose therewith a resolution of the company dated April 9,
1985, by which the board of directors declined to register the shares of the
appellants as the owners thereof and to admit them as members. On April 17,
1985, the learned single judge of the High Court dismissed the petition on the
ground that alternative remedy was available under section 111 of the Companies
Act. Questioning the same the appellants preferred an appeal which was
admitted. Pending the disposal of the appeal, the appellants took out notice of
motion and the interim order was passed directing the company not to dispose of
its assets and that the company should give notice of each and every general
meeting to the appellants. The Division Bench ultimately allowed the appeal and
the matter was remanded back to the learned single judge to decide the same
afresh. Further affidavits were filed. The company petition again after remand
came up for hearing before the learned single judge and the same was again dismissed
on the ground that the appellants should file either an appeal under section
111 of the Companies Act or file a separate suit to agitate the issues involved
in view of the diverse disputes raised between the appellants and the company.
Being aggrieved by the said order the appellants again filed an Appeal No. 516
of 1987. Pending the said appeal various applications were made for diverse
interim reliefs. In respect of some of the reliefs that were refused the
appellants filed a Special Leave Petition (Civil) No. 13605 of 1988, in this
court but before the same came up for hearing, the Division Bench of the High
Court completed the hearing of the main appeal and dismissed the appeal on
December 22, 1989. Questioning the same the present appeal is filed.
The
Division Bench of the High Court mainly considered two questions, namely, (1)
whether the board of directors lost its powers to refuse to transmit the shares
to the names of the appellants after a lapse of two months, and (2) whether the
board's failure to register the transmission within the period of two months
and the subsequent decision taken on April 9, 1985, was mala fide and not taken
in the interest of the company. The Division Bench observed that the first
contention is obviously based on the provisions of the English Companies Act
and cases decided thereunder and after referring to some decided cases held
that they do not lay down that on the expiry of period of two months the power
would be lost and the whole question would be exercise of discretion rather
than any alleged loss of power and for that purpose the factual position in the
case has to be examined. Relying on section 111 of the Companies Act, the
Division Bench observed as under:
"Certainly,
if there is inaction beyond the period of two months the delay, if unexplained,
may influence the appellate authority or the court whilst considering the
question whether discretion has been exercised bona fide or not but this cannot
imply, in our opinion, loss of power in the board of directors. If that was to
be the consequence, then, in our opinion, it was obligatory for the Legislature
to have provided the same specifically by enacting a specific deeming provision
to that effect and not leaving it for argument or a fiction to be implied by a
reading of the provisions".
Having
thus disposed of the first issue, the Division Bench adverted to the second
question, namely, whether the action of the directors was mala fide. The
Division Bench also considered the question whether the directors have acted in
the interest of the company. Having examined the materials on record and the.
ratio laid down in several cases, the Division Bench ultimately held
that".It is not possible on the material shown to us to characterise the
decision as capricious or perverse or mala fide and that it is a commercial
decision taken honestly by businessmen in the interest of the company and its
shareholders". The Division Bench concluded that subject to the rights of
the petitioners to adopt such appropriate proceedings as may be available to
them, the appeal was dismissed.
Shri
A.M. Singhvi, learned senior counsel appearing for the appellants, submitted
that the company has no power to refuse registration or transmission in the
absence of specific provision in the articles of association empowering the
company to do so and that transmission of shares is by operation of law and was
completed in 1974 itself, i.e , on the
death of Shri Prabhudas V. Mehta and that the subsequent amendment of article.
29 to deny registration of transmission is invalid and ineffective. His further
submission is that in any event non-refusal within the statutory period of two
months renders such power ineffective and exhausted. But,. even otherwise,
according to learned counsel, the refusal of registration by the board was
wrongful and mala fide exercise of discretion. Shri Ashok Desai, learned senior
counsel appearing for the respondent-company, on the other hand, submitted that
there are concurrent findings of fact that the refusal was not a mala fide
action and it was a proper exercise of discretion in the interest of the
company and that the company in the instant case is only a private company in
the nature of partnership and that the appellants cannot force themselves to be
partners.
The
first and second submissions can be dealt with together as they are very much
based on the provisions of the Companies Act and articles of association.
Articles 26 and 34 of the articles of association of the respondent-company are
relevant in this regard. Article 26 lays down that subject to the provisions of
section 111 of the Companies Act, the directors may in their absolute
discretion and without assigning any reason decline to register any transfer of
any share and if the directors decline to register a transfer of any share,
they shall, within two months after the date on which the transfer was lodged
with the company, send to the transferee and the transferor notice of the
refusal. Article 34 is to the effect that any person becoming entitled to a share
in consequence of the death or insolvency of a member may, upon such evidence
as may be produced and as required from time to time by the directors elect
either to be registered himself as holder of the share or to make such transfer
of share as the deceased or insolvent member could have made and that the
directors shall, in either case, have the same right to decline or suspend
registration as they would have had, if the deceased or insolvent member had
transferred the shares before his death or insolvency. Section 111 of the
Companies Act gives the power to refuse registration and also provides for an
appeal against such refusal. Section 111(1) lays down that nothing in sections
108, 109 and 110 shall prejudice any power of the company under its articles to
refuse 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. Sub-section (2) is to the effect that if the company refuses, whether
in pursuance of any power under its articles or otherwise, to register any such
transfer or transmission of rights, 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. The latter part of this sub-section reads as
under:
"If
default is made in complying with this sub-section, the company, and every
officer of the company, who is in default, shall be punishable with fine which
may extend to fifty rupees for every day during which the default
continues".
Then
sub-section (4) provides for an appeal against such refusal to the Central Government.
Relying on these provisions, Shri Singhvi submitted that the appellants are the
persons entitled to the shares and that since a notice of intimation of refusal
has to be compulsorily sent within a period of two months, it automatically
follows that the right of refusal must be exercised within the period of two
months and since the directors have not exercised this right of refusal within
the prescribed period of two months, the said right is lost forever and,
therefore, the appellants get an absolute and unrestricted right to have the
shares transferred in their names and accordingly correct the shares register.
In this context reliance is placed on Swaledale Cleaners Ltd., In re [1968] 1
All ER 1132 and some of the observations made by Pennycuick L.J. thereunder. In
that case, it was held that (at page 1136):
"(i) The period of two months mentioned in clause
19 of Table A under the Act of 1929 and specified in section 78 of the Act of
1948, may safely be taken as the outside limit after which there is unnecessary
delay.
(ii) The power of veto is a restriction on the
right of alienation and as such must be exercised at the proper time for its
exercise, if it is to be exercised at all. For this purpose, the proper time is
the occasion on which the transfers are placed before the board for
confirmation if—and it seems only if—they are so placed without unnecessary
delay. If there is unnecessary delay in placing the transfers before the board,
the power of veto must be regarded as lost, so that the right of transfer
becomes unrestricted. It cannot be the law that the board of a company can
improperly delay considering a transfer and then when driven to do so, as for
instance here, by the launching of a motion, exercise the power of veto ?"
Learned
counsel placed strong reliance on these observations.
But
the observations made in this case were later considered in Swaledale Cleaners
Ltd., In re [1968] 3 All ER 619 and they have been diluted and it was held by
the Court of Appeal as under (at page 622):
"As
to unreasonable delay, I take the view of the judge (and it seems to me merely,
if I may say so, common sense), that, as there is an obligation on directors
who refuse to register a transfer to inform the persons who are aggrieved
within two months of such a refusal, the Act of 1948 quite clearly indicates
that a reasonable time, other things being equal, within which directors must
make up their minds either to accept the transfer or to refuse it must be the
two months within which they have to make an answer. Therefore, it does seem to
me that waiting four months without any decision at all was an unreasonable
delay. One has, however, to go one step further than that; one has to say that
unreasonable delay has destroyed the right so that when, in December, 1967, the
new board purported to refuse, they were no longer in a position to exercise
that discretion which, if they had acted promptly, undoubtedly would have been
theirs, to consider and, if they thought fit in the interests of the company,
to refuse registration of the transfers".
These
observations make it clear that the appellate court did not confirm the opinion
of Pennycuick L.J. that on the expiry of the period of two months, the power
would be lost. In this case, the scope of section 78 of the English Companies
Act was being considered and the said provision reads as follows (at page 1134
of [1968] 1 All ER):
"(1)
If a company refuses to register a
transfer of any shares or debentures the company shall, within two months after
the date on which the transfer was lodged with the company, send to the
transferee notice of the refusal".
We
find that the language of section 78 of the English Companies Act is not the
same as that of section 111 of our Companies Act and section 78 does not
provide for any penalty or for any appeal. It is necessary to note that if the
right to refuse was to come to an end, as contended by learned counsel, after
the expiry of two months and that an absolute right was created in favour of
the transferee then the Legislature would have so categorically provided. But,
on the other hand, the section provides for penalty if there is failure on the
part of the company to send such an intimation within two months and that
itself shows that no absolute right was to be created in favour of the
transferee. Further, section 111 of the Act provides for a right of appeal to
the Central Government and if as contended by learned counsel on a mere failure
to send an intimation within two months an absolute right came to be vested in
the transferee then the question of the transferee filing an appeal would not
arise at all. Thus, this section mainly deals with the right to receive a
notice and the consequence of non-sending of such a notice results in penalty.
These provisions would go to show that what was intended was to provide for a
notice of refusal to be sent and failure thereof only resulting in levying
penalty.
The
submission that the company had no power to refuse registration or transmission
of shares in the absence of a specific provision in the articles of association
is also untenable. According to learned counsel, the articles of association at
the time of death of the deceased did not provide for such a refusal and even
if there is an amendment later the same cannot empower the board to refuse the
registration of the shares. In our view, particularly in view of the facts of
this case, the board had such power when the registration and transfer was
sought in 1984. Even otherwise the facts show that the registration and
transmission was sought only in 1984 as mentioned above. By then the articles
were amended and the board was given power to refuse registration or
transmission. Therefore, we are not able to see any irregularity or lack of
bona fide action, as contended, in bringing about those amendments. However, we
notice that before the learned single judge as well as before the Division
Bench of the High Court, the main question urged was that of limitation of two
months and for the aforesaid reasons, we are of the view that the High Court
has rightly held that the right to refuse is not lost.
At
this stage, we may refer to. the factual background in the instant case.
Initially, the company petition was dismissed by the company judge on April 17,
1985, on the preliminary ground. As against that the appellants went in appeal
and in that appeal the order of dismissal of the company petition was set aside
and a remand was ordered for disposal on merits and that the appellate court
also permitted the filing of further affidavits and they were in fact filed
before the matter came up for rehearing before the company judge on remand. It
must further be remembered that the appellants moved the High Court even before
the expiry of the period of two months and from the dates mentioned above it
can be seen that the appellants complied with the requirements, namely, sending
the heirship certificate, etc., only after 6 or 7 years from the date of their
letter to the company seeking transmission. Therefore, it has to be concluded
that some time after November 21, 1984, when the appellants' letter with
necessary enclosures was received by the company, necessary formalities to
become heirs had been completed. The appellants without waiting for the expiry
of period of two months filed the company petition on January 14, 1985, for
rectifying the shares register by bringing them on record. From these facts, it
can broadly be accepted that the power or discretion vests in the board of
directors for two months after submission of the proper application supported
by the necessary documents. However, that does not mean that the right would be
lost after the expiry of two months and all that it is necessary to see is
whether the board has acted in a bona fide manner in rejecting the transmission
of shares.
We
shall now, therefore, deal with the other submission, namely, whether the
action of the board of directors was mala fide. In Bajaj Auto Ltd. v. N.K.
Firodia [1970] 2 SCC 550 ; [1971] 41 Comp. Cas. 1 it was laid down that the
court can consider whether the directors acted in the interests of the company.
This case was cited in Life Insurance Corporation of India v. Escorts Ltd.
[1986] 1 SCC 264; [1986] 59 Comp. Cas. 548 with approval and in that case the
nature of the power of the directors and scope of scrutiny by the court were
explained and it was observed as under (at page 6 of 41 Comp. Cas.):
"Discretion
implies just and proper consideration of the proposal in the facts and
circumstances of the case. In the exercise of that discretion, the directors will
act for the paramount interest of the company and for the general interest of
the shareholders because the directors are in a fiduciary position both towards
the company and towards every shareholder. The directors are, therefore,
required to act bona fide and not arbitrarily and not for any collateral
motive".
Keeping
these principles in mind, we shall examine the reasons that weighed with the
board of directors in refusing transmission. The board of directors have stated
in the affidavits and also appended copies of the earlier correspondence
including the proceedings of the mediator and the history of the disputes
originally between the late Shri Prabhudas V. Mehta and the management of the
company and subsequently between the heirs of Shri Prabhudas V. Mehta and the
management of the company. The learned single judge as well as the Division
Bench have exhaustively examined the correspondence and the affidavits and have
given a concurrent finding that there is animosity between the parties and that
the decision of the management was a proper and commercial decision keeping in
view the interest of the management of the company. Therefore it cannot be said
that there was dishonest intention. In any event this is a concurrent finding
of fact based on the affidavits and records in which we need not interfere.
We
have already held that the decision of the directors was a commercial decision
made in the interest of the management of the company. It is also significant
to note that the appellants have only 100 shares which are very insignificant
as compared to the total shares and the contention that the relevant articles
were amended only to defeat the rights of the appellants in respect of those
100 shares, is wholly untenable.
For all these
reasons, the appeal is dismissed. In the circumstances of the case, there will
be no order as to costs.
[1958] 28 COMP. CAS. 523 (ORI.)
v.
Western India
Theatres Ltd.
MUKHARJI AND BACHAWAT, JJ.
DECEMBER 5, 1956
P.B.MUKHARJI
J.-This appeal questions the
refusal by the board of directors of the defendant, Western India Theatres
Ltd., to register certain shares transferred by defendant Shantaraman Raghurao
Hemmand in favour of the plaintiff Babulal Choukhani. Two essential points
arise for determination in this appeal. The first point relates to the
construction of the articles of association restricting the right of transfer
and limiting such transfer by certain conditions mentioned in the articles. The
second point raises the question of proper exercise of such power by the
directors under those articles and how far and to what extent the director’s
decision in this respect is reviewable by the courts.
The
plaintiff’s case briefly is that he obtained shares of the face value of Rs.
5,00,000, in the defendant company bearing Nos. 30057 to 35056 together with
blank transfer deed duly executed and completed and transferred by the
defendant Hemmad. The transfer was made on or about the 27th April 1950, and is
said to be for the consideration of debts owned by defendant Hemmand to
plaintiff Choukhani. It is the plaintiff’s case in the plaint that Hemmand
executed the relevant transfer deed in favour of the plaintiff in respect of
the said shares and also completed the same. The plaintiff thereupon applied to
the defendant company for registration of those shares in his name, but at
meetings held on the 5th June, 1950, and 30th June, 1950, the board of
directors of the defendant company refused to register such transfer of shares
in the name of the plaintiff.
The plaintiff
challenges such refusal as wrongful and not bona fide. H pleads that there is
on valid reason for such refusal. In paragraph 16 of the plaint the plaintiff
states that the directors of the defendant company did not exercise their
powers bona fide under the articles of association of the defendant company in
refusing to register the shares. He then proceeds to set out in different
sub-paragraph, namely (d) to (1), the different facts and circumstances on
which the states that the defendant company in refusing to register his name
did to act bona fide.
The defendant
company by its written statement stated that the decision of the board of
directors to refuse to register the transfer was arrived at bona fide and after
due consideration. It also pleads that the said transfer deed was not duly
stamped as required by law. It denied all charges of bad faith.
The defendant
Hemmad neither entered appearance, nor filed any written statement.
Three issues
were raised before the learned trial Judge.
The first
issue was: “Was the transfer deed duly completed as alleged in paragraph 11 of
the plaint? If not, has the defendant company waived the conditions ? Is the
defendant stopped from stating that the deed was not duly executed ?”
The second
issue was : “Did the directors of the defendant company act mala fide in
refusing to accept or register the transfer of the shares in favour of the
plaintiff as alleged in the plaint?”
The third
issue was a general one : “To what reliefs, if any, is the plaintiff entitled?”
The learned
Judge after hearing the evidence dismissed the suit with costs.
The right to
transfer shares is regulated by the company’s articles. The Companies Act lays
down that the shares of any member in a company shall be movable property, transferable
in the manner provided by the articles of the company. The relevant article of
the defendant company in this case is article 52 which reads as follows :
“The directors
may at their absolute and uncontrolled discretion decline to register or acknowledge
any transfer of shares and shall not be bound to give any reason for such
refusal and in particular may so decline in respect of shares upon which the
company has a lien or whilst any member executing the transfer is either alone
or jointly with any other person or persons indebted to the company on any
account whatsoever or whilst any moneys in respect of the shares desired to be
transferred or any of them remain unpaid or unless the transfer is approved by
the directors and such refusal shall not be affected by the fact that the
proposed transferee is already a member. The registration of a transfer shall
be conclusive evidence of the approval by the directors of the transfers.”
This is an
express charter of large powers given to the directors of the company to
decline to register shares and also gives them the power to withhold reasons
for such refusal to register. Expressly the power is said to be absolute and
uncontrolled. The director’s discretion is uncontrolled and absolute. But if it
is shown that there has been no exercise of any discretion but an exercise of a
whim or a caprice, then such purported exercise of power under such an article
can be examined by the court. The test of “discretion” is not satisfied if the
act or the decision of the directors declining to register is oppressive,
capricious, corrupt or mala fide or not in the interest of the company at all.
But once it is shown to the court that the directors have exercised their
discretion, then this court does not sit as a court of appeal reviewing or
revising that discretion. This court in that event will not set aside that
discretion of the directors even though it would have come to a different
conclusion on the same se of facts. It has been held that such power is not
illegal and under such power the directors are not bound to give reasons for
their refusal. Cases have gone so far as to lay down the law that the court
should not draw even an adverse inference because the directors under such a
power refuse to disclose or reasons are given by the directors in a particular
case, the court can always enquire if they are legitimate or not. But even then
when the court considers whether such reasons are legitimate or not, that only
means that it tries to ascertain whether the directors have proceeded on a
right or wrong principle. CHITTY J. in In re Bell Brothers Ltd. : Ex parte
Hodgson, explain this part of the law in these words :
“If the
reasons assigned are legitimate, the court will not overrule the director’s
decision merely because the court itself would not have come to the same
conclusion. but if they are not legitimate, as, for instance, if the directors
state that they rejected the transfer because the transferor’s object was to
increase the voting power in respect of his share by splitting them among his
nominees, the court would hold that the power had not been duly exercised. So
also, if the reasons assigned is that the transfer’s name is Smith, or is not
Bell. Where the directors do not assign any reason, it is still competent for
those who seek to have the transfer registered to show affirmatively, if they
can by proper evidence, that the directors have not duly exercised their
power.”
In a more
recent case, In re Smith and Faweett Ltd., the English Court of Appeal had to
construe a similarly worded power under the articles of association. There the
power was couched in these words :
“The directors
may at any time in their absolute and uncontrolled discretion refuse to
register any transfer of shares.”
SIMONDS J.
held that the directors under such a clause had the widest power to refuse to
register a transfer and that whilst such powers are of a fidicuary nature and
must be exercised in the interest of the company, there was nothing to show
that they had been otherwise exercised in that particular case. The court of
Appeal with Lord GREENE M.R. presiding affirmed that decision. At page 308 of
the report the Master of the Rolls observed:
“There is
nothing, in my opinion, in principle or in authority to make it impossible to
draft such a wide and comprehensive power to directors to refuse to transfer as
to enable them to take into account any matter which they conceive to be in the
interests of the company, and thereby to admit or not to admit a particular
person and to allow or not to allow a particular transfer for reasons not
personal to the transferee but bearing on the general interests of the company
as a whole-such matters, for instance, as whether by their passing a particular
transfer the transferee would obtain too great a weight in the councils of the
company or might even perhaps obtain control. The question, therefore, simply
is whether on the true construction of the particular article the directors are
limited by anything except their bona fide view as to the interests of the
company. In the present case the article is drafted in the widest possible
terms, and I decline to write into that clever language any limitation other
than a limitation which is implicit by law, that a fiduciary power of this kind
must be exercised bona fide in the interests of the company. Subject to that
qualification, an article in this form appears to me to give the directors what
it says, namely, an absolute and uncontrolled discretion.”
It is,
therefore, clear on the construction of this articles in the present case that
unless it is established that there has not been any bona fide exercise of this
power in the interest of the company, the decision of the directors must remain
inviolate. The appellant wants to establish this by a number of arguments.
The first
argument on behalf of the appellant is that the defendant company refused to
register the transfer on the ground that the defendant Hemmand was indebted to
the company y when in fact the was not so at any material time. In support of
this argument reliance was placed on a letter. It is a letter which is undated
and in fact originally unsigned and was never used or dispatched to the
addressee. In other words, it was a draft which was never used but which
remained on the file of the defendant company, and in the usual course of the
discovery of documents appeared in the brief of documents appeared in he brief
of documents disclosed it will be useful to set out the contents of that
letter. It was addressed to the plaintiff and is in these terms:
“Dear Sir,
Re. 5,000
shares Nos. 30057/35056 standing in the name of Mr. S R Hemmad.
With reference
to your letter of the 24th instant we are to say that the various statements
made in para. I of your said letter are absolutely untrue.
With reference
to the last para, of your letter, our directors are not bound to give any
reason for their refusal to register any transfer ; without prejudice to our
aforesaid contention, we may state that if you will refuse this matter to Mr.
Hemmad he will tell you that he is heavily indebted to our company.
Yours
faithfully,
(In
pencil) Western India Thereafter Ltd.”
This draft of
a letter even on its own language does not seem to us to be a refusal based
only on the ground of Hemmad’s indebtness to the company. Even in the draft it
is quite expressly clear that the directors are relying on their powers not to
give any reasons for their refusal. It is only at the end that the draft
proceeds to say, and that also expressly without prejudice to that contention,
that even if the plaintiff referred the matter to Mr. Hemmad, he would tell him
that Hemmad was heavily indebted to the company. A true construction of even
the draft cannot in our view mean that the directors gave reasons for their
refusal and one of the reasons for such refusal was Hemmad’s indebtedness to
the company.
There are,
however, features in respect of this draft which show that it does not achieve
the purposes for which it was attempted to be used by the appellant before the
learned trial Judge. To appreciate that aspect of the case it is necessary to
state the circumstances in which this draft came to be used at the trial court.
According to the usual price on the original side of this court an admitted
brief of documents containing this draft was repaired and was sent by the
plaintiff’s attorneys to the defendant company’s attorneys for comparison. At
that stage the defendant company’s attorney put the words “Western India
Theaters Limited” in pencil on that draft signifying that the draft had been
signed by the company. Then the plaintiff’s attorneys asked the defendant
company’s attorney to initial that copy draft when they replied that they would
take instructions on the matter from, the defendant company. Subsequently, the
draft was initialed by the attorneys of the defendant company and the brief of
documents containing this draft was admitted. At the trial the learned
Advocate- General who appeared on behalf of the defendant company admitted that
brief of documents without taking any exception to that draft. The
Advocate-General in his address before the learned trial Judge said that he
admitted the draft on a misapprehension of facts. The facts as they appear now
are what have been stated before, namely, (1) that this wa only a draft, (2)
that it was not actually signed and used by he company, (3) that it was not
dispatched to the addressee at all and (4) that the addressee who was the
plaintiff did not get, he could not, the original of that letter.
Whether the
defendant in refusing to register shares did so on the ground of indebtedness
of Hemmad or not has in our opinion first to be found from the terms of the
resolution of the meeting of the board of directors. The company or the board
of directors speak primarily through its or their resolution. If the enquiry is
as to what was the decision taken by the board of directors the court would
look more and depend more on he actual terms of the resolution that on the
terms and that language in which such decision was conveyed by dispatched. It
is, therefore, necessary to refer to the resolutions in this case. The first
resolution is the one that was passed at the meeting of the board of directors
on 5th June, 1950. The terms of that resolution are:
“It was
proposed by C J Desai that the application for transfer of shares received from
Mr. Babulal Choukhani be declined in exercise of article 52 of the articles of
association of the company and Mr. Babulal Choukhani be informed accordingly.
The said resolution was seconded by Mr. B K Pai and passed unanimously.
(Sd).
K M Modi,
Chairman.
(Sd)
C L Diwan,
Secretary.”
The second
resolution is the one passed at the meeting of the board of directors on 30th
June 1950. Its terms are:
“The chairman
then placed before the board a letter dated 24th June, 1950, received from Mr.
Babulal Choukhani in respect of 5000 shares standing in the name of Mr. S R
Hemmad. The said application for transfer of shares was not accepted for
registration and transfer by the directors at the meeting held on 5th June,
1950. Mr. Babulal Choukhani has now again requested the board of reconsider
their decision. After careful consideration, the directors once again
unanimously decided to adhere to the former decision not to register the said
application for transfer of shares under article 52 of he company’s articles of
association and the managing agents were asked to inform the applicant
accordingly.
(Sd).
K M Modi,
Chairman.
(Sd).
C L Diwan,
Secretary.”
It is clear from
the actual terms of the resolution that no reason whatever was disclosed or
stated by the board of directors for refusing to register this transfer.
Hemmad’s indebtedness to the company is not one of the reasons on which the
refusal was made accordingly to the terms of the resolution of the board of
directors.
The letters of
the defendant company dated 5th July, 1950, conveying the unanimous and
considered opinion of the board of directors arrived a on 30th June, 1950, also
does not state Hemmad’s indebtedness as one of the grounds or as any ground for
refusing to register the shares.
The whole
object of this argument was that the statement of Hemmad’s indebtedness to the
company in that draft showed that the company was repaired to put forward a
false reason as a ground for company was prepared to put forward a false reason
as a ground for refusing the register and, therefore, being based on a false
reasons the company was not acting in bona fide exercise of it powers under
article 52 of the articles of association. We have found it extremely difficult
to appreciate this argument for may reasons. The first reason is that this was
not a letter which was in fact used or sent to the plaintiff at all. The second
reason is that the very fact that this letter was not sent to the plaintiff
shows that the company was not prepared to put forward a false reason to the
plaintiff. That is a point in favour and not against the defendant company. If
the defendant company were going to put forward a false reason and that false
reason was Hemmad’s indebtedness to that company, there was nothing to prevent
the defendant company from sending this letter to the plaintiff with that false
reason. Thirdly, neither the two relevant resolutions nor the letter dated July
5, 1950, suggested to the plaintiff that the defendant company was refusing to
register on the ground of Hemmad’s indebtedness to the company. Even if the
unused draft be regarded as an attempt to find a false reason, that does not
all help the appellant. Assuming that at one stage the company thought of
putting forward a false reason and that false reason was Hemmad’s indebtedness
to the company and, therefore, a draft was under preparation putting that
forward as a reason. But then what is the explanation of its not being sent to
the plaintiff. The explanation can only be that the company thought better. It
may also be that the company thought that that was not the right thing and the
right ground on which they had taken the decision and the draft did not correctly
represent the facts. It will be idle for us in this court of appeal to
speculate overt this unused, undated and undespatched letter and hold the
company guilty of mala fides on that ground. Releasing the difficulty that this
argument died not find any support either from the resolutions from the letter
of 5th July, 1950, the appellant tried to use the evidence of K M Modi where
the counsel introduced this draft as if it were a letter. In fact, he was being
asked at that time by the counsel whether there was any reason for the refusal
to register. When the witness, Modi, wanted to refer to his letter he was at
once shown this particular document and asked whether this was not the reason
that he gave in the letter. The questions we have in view are questions 487 to
493. We do not read Modi’s answer to those questions as any admission that this
draft was in fact a letter duly signed and despatched to the plaintiff. In
fact, it is now common ground that this letter was never sent to the plaintiff,
ourselves in agreement with the conclusion of the learned trial Judge on this
point.
Before leaving
this branch of the case, a reference perhaps will not be inappropriate to a
certain distinction which has been made in some of the decision between grounds
and reasons in considering articles of association of similar import although
not couched in the same language. The cases that we have in view are Duke of
Sutherland v. British Domision Lan Settlement Corporation Ltd. and Berry and
Stewart v. Tottenham Hotspur Football and Athletic Co. Ltd. IN the first case
Tomlin J. said, on the construction of the article and the expression there
“without assigning any reason,” that the reason for exercising the power is a
distinct thing from the grounds which gave rise to its exercise. In that case
the interrogatories, therefore, on the grounds as distinguished from the
reasons were allowed. The ratio of that decision was that the company was not
entitled to refuse to state which of the grounds mentioned in the article the
director s had acted under although the company had the right to refuse t say
what reasons influenced them in exercising their discretion upon that ground.
In the second case CROSSMAN J. very rightly pointed out that in coming to that
conclusion the actual language of the article was important. In fact, at page
726 of the report the learned Judge observed :
“I think they
are quite different things, and that what the directors are excused or saved
from doing in the case before me is naming the species of ground under which
they have acted; that is to say the particular interrogatories which it is
sought to administer here ask them to do the very thing which in my judgment,
on the construction of this article, it is provided that they are not bound to
do.”
The point is
not important in the facts of this of case first because no distinction was
attempted to be made by the appellant at any stage between grounds and reasons
a such, secondly because no question of interrogatories arises in this case
because at no stage did the appellant apply to deliver interrogatories to find
out the grounds, and thirdly because the language of article 52 of the articles
of associations in this case is in our opinion plain and unambiguous. Here the
intention of the article as gathered from the express language in which the
article is framed is clear. The director may at their absolute and uncontrolled
discretion decline to register decline to register or acknowledge any transfer
of shares and shall not be bound to give any reason for such refusal. That is
the first part of article 52. It is in our view, subject to the discretion
having been exercised, absolute and uncontrolled. The letter part of articles
52 is only illustrative of the grounds on which the direction could decline to
register but not exhaustive. It does not control the absolute and uncontrolled
discretion given in the first part of article 52.
For these
reasons we hold in this case the directors did not give any reason for
rejecting to register the shares transferred to the plaintiff and that they
were not bound to give nay reason. We also hold that the draft cannot be used
and read in this case as an actual letters informing the plaintiff putting
forward Hemmad’s indebtedness to the company as a reason for their refusal to register
the shares.
The more
fundamental attack of the appellant is based on the ground of mala fides. The
list of the appellant’s case is that the real object of the defendant company’s
refusal to register the transfer was that Modi wanted to buy the shares himself
and as the plaintiff had refused to sell the shares to Modi he, that is Modi,
was exercising his influence and control over the board of directors and by
practicing such influence and control denied registration of these shares. In
support of this contention the appellant urged a number of reasons. He tried to
show that Modi has been attempting to corner the shares of the company for some
time past. In fact, the appellant also urged that the shares of this company
when transferred to the name of some persons were refused registration and
ultimately were allowed to be registered when they were retransferred in the
name of Modi. The outstanding incident which the appellant relies in proof of
this contention is the transfer of certain shares to the Sahas. In support of
this branch of the appellant’s case it has also been argued that most of the
directors were under the influence and control of Modi. These directors, it was
argued , were in fact indebted to Modi. That in briefs is the appellant’s case
on the allegation of mala fides against the company.
It is in
evidence that Modi had been purchasing large blocks of shares of this company.
But concerning as such or purchase of large blocks of shares as such so long as
they are permissible by law is not unjustified. That by itself does not prove
mala fide or bad faith either in fact or in law. To acquire a control which the
law permits cannot be illegal.
It is said
that between March and December, 1950 Modi Bought in the name of himself and
his wife 11,536 shares from Wadi H. Kazi and Hari Bhusan Ghose. In fact certain
shares which had been transferred by the defendant Hemmad to other persons like
the Sahas were not recognised by the board of directors on the ground that the
defendant Hemmad was in debt to the company. But when those very identical
shares were sold to Modi , the transfer was duly registered in his name. The
minutes of the board of directors of the meeting held on Saturday, the 20th
May, 1950, show that Hari Bhusan Ghose transferred 1,000 shares to Modi and
Mrs. Modi and the applications for such transfer of those shares were duly
approved and it was resolved that the shares be transferred and entered in. the
company’s register as holders of the said shares in place of the transferors. Although
the shares were thus duly registered in name of Mr. and Mrs. Modi as
transferees on 20th May,1950, yet in respect of these very shares the board had
resolved at a meeting of the directors on 9th March, 1950, that :
“The chairman
explained to the board that Mr. Hari Bhusan Ghose was actually the nominee of
Mr. S.R.Hemmad who was the virtual holder of the shares. Mr. Hemmad, however,
was indebted to the company and as such the chairman was of the opinion that in
exercise of the article 52 of the company’s articles of association this
application for transfer should be rejected. Accordingly, it was proposed by
Mr. C.J.Desai that in exercise of article 52 of the company’s articles of
association the directors are unable to register the said transfer. The said
resolution was seconded by Mr. J.B.H.Wadia and passed unanimously.
(Sd).
K.M.Modi,
Chairman.”
The appellant
urged us to infer mala fides and bad faith from this particular instance as
showing that there was no inherent defect in the shares transferred by Hemmad.
So long as the transfer was to other persons they could not be registered, but
the same when the transferred in favour of Modi or his nominees the company
found no difficulty in registering such transfers. For that purpose our
attention has also been drawn to the actual attempt at transfer by Hari Bhusan
Ghose to whose names had been crossed out in the transfer deeds to be
subsequently replaced by the names of Modi and his wife. Our attention has also
been drawn to Mr. Modi’s evidence on this subject of transfer of shares in the
name of the Sahas. Modi’s evidence appears in his answers to question 321 to
334 as also 240 to 262. Modi’s evidence is that a public auction was held with
regard to these shares and that he purchased those shares at Rs. 50 per share.
On this evidence and on those facts it was contended on behalf of the appellant
that a glance at the transfer deeds showed that the shares had been or
originally sold to the Sahas for Rs. 75 and, therefore, the Sahas had not
voluntarily sold the shares but were in fact compelled or forced to sell the
shares to Modi.
Before
considering how far the court would be justified in drawing an inference of
fraud and mala fides or bad faith from one solitary instance as that of the
transfer regarding the Sahas it is necessary to discuss the legality and the
weight of such extraneous evidence of transactions not in issue in the suit and
not between the parties to the suit. Mr. A.C.Gupta the learned counsel
appearing for the appellant argued that the transaction of the Sahas is
admissible under section 11(2) of the Evidence Act. That section lays down that
facts not otherwise relevant are relevant if by themselves or in connection
with other facts they make the existence or non-existence of any fact in issue
or relevant fact highly probable or improbable. Neither by canons of common
sense nor by construction of the statute of Evidence Act can it be said in our
opinion that one particular, such as the one in this case, can render the issue
of bad faith and mala fide in a totally different transaction “highly
probable”? The words “highly probable” are significant. The words are not
“reasonably probable”. The words is not just only “probable”. The significant
words is “highly”. That means more than the normal standard of probability. the
illustration although not controlling the section indicate clearly what is the
standard of high probability or high improbability. We have no hesitation in
holding that the single instance of the Sahas in this case does not reach
anywhere near such standard of high probability as in our view is contemplated
under section 11(2) of the Evidence Act. After all section 11 of the Evidence
Act is making irrelevant facts relevant in other words, section 11 represents
an exception. the general rule of evidence is contained in section 5 of the
Evidence Act which says that evidence may be given in any suit or proceeding of
the existence or non-existence of every fact in issue and of such other facts
as are declared to be relevant and of no others. Then section 6 of the Evidence
Act says that facts which, though not in issue, are so connected with a fact in
issue as to form part of the same transaction, are relevant, whether they
occurred at the same time and place or at difference times and places. This is
usually known as the rule of res gestae in evidence, the essence of which
doctrine is that the facts which though are not in issue are so connected with
the fact in issue as to form part of the same transaction and thereby become
relevant like the fact in issue. By that standard the transaction of the Sahas
cannot be said to be so connected with the transaction of the plaintiff which
is in issue in the case as to form part of the same transaction. In face there
is no connection between the transaction of the Sahas and the transaction of
the plaintiff in suit, and these two transactions in shares are independent
transactions. The Evidence Act goes on to provide in section 8 that any fact in
issue or relevant fact. We cannot imagine how bad faith, assuming it to exist,
in the case of the transfer regarding the Sahas can be motive or preparation of
bad faith for the plaintiff’s transaction. Whether the evidence relating to the
transaction of the Sahas could be evidence on other points such as cornering of
shares by Modi we need not pause to enquire. We are, however, satisfied that
the transaction of the Sahas cannot be used as evidence of mala fides or bad
faith in the transaction in respect of the plaintiff. The only other section of
the Evidence Act to which reference is necessary is section 15. Section 15 of
the Evidence Act lays down that when there is a question whether an act was
accidental or intention, or done with a particular knowledge or intention, the
fact that such act formed part of a series of similar occurrences in each of
which the person doing the act was concerned, is relevant. If the transaction
of the Sahas could be brought within the limits of section 15, then certainly
it would be a piece of relevant evidence on the intention of Modi or the
company. But in order to become relevant under section 15 such act has to form
part of a series of similar occurrences. A solitary act or a single instance is
the very antihesis of the expression “part of a series of similar occurrences.”
Here again, the illustration at least ar good guides to indicate what “series
of similar occurrences” would mean. Common sense would suggest quite apart from
legal consideration, that one act cannot be called the “series” of similar
occurrences. It will not be inappropriate in this connection to refer to an
English decision which although cannot be regarded as an authority under
section 15 of the Evidence Act here represents the principle on which the court
would act apart from the express language of any particular statute.
In Berry v.
Tottenham Hotspur Football and Athletic Co. Ltd. evidence as to rejection of
transfers on previous occasions was held to be inadmissible as it could not be
material to the issue in the case and an attempt was there made to adduce
evidence that directors had systematically refused to register transfer of
shares which would increase the voting power of shareholders. The relevant
article of association of the defendant company in that case was :
“The director
may decline to register any transfer of shares made by a member who is indebted
to the company, or i case the transferee shall be a person of whom the
directors do not approve or shall be considered by them to be objectionable, or
the transfer shall be considered as having been made for purposes not
conductive to the interest of the company and the directors shall not be bound
to specify the grounds upon which the registration of any transfer is declined
under this article.”
A shareholder
in that case sought to transfer a number of his shares, but the directors
declined to register the transfer. By another article the holder of one share
had one vote, the holder of 5 shares had 2 votes and there was an additional
vote for every addition 10 shares, with the result that by splitting a holding
of shares, the voting power could be increased. It was alleged that the
directors had systematically rejected transfers in order to prevent an increase
in the voting power of the shareholders. The plaintiff brought an action to
enforce registration of the transfer and there attempted to adduce evidence to
show that the directors had refused registration in accordance with that
systematic practice. CLAUSON J. expresses his decision on this particular
point, at page 556 of that report, in his judgment in this manner:
“The plaintiff
sought to establish their case by putting in certain evidence which was
directed to show that on certain previous occasions the directors had rejected
other transfers for reasons which would not justify the rejection and were to
within the terms of the article. I rejected that evidence on the ground that
the issue before me was as to what the directors did on November 5, 1935, and
that I was not entitled to listen to evidence as to what took place on other
occasions, as it could not be material to the issue. I have been referred to a
certain number of authorities but it will be sufficient to indicate the nature
of them if I mention Makin v. A.G. for New South Wales.”
CLAUSON J.,
having ruled that evidence out, said that in that event there was no evidence
before him in any shape or way to justify the inference by the court that the
directors had exercised their powers otherwise than reasonably and bona fide.
In the English Case, however, there was more than one act attempted to be put
in evidence. Here, however, the only reliance is on this solitary instance in
respect of the Sahas which fact makes it worse because on cannot make up a
“series” with one incident.
We are,
therefore, of opinion that the evidence of what happened in respect of the
transfer of Sahas shares is not admissible on the point of bad faith and mala
fides in respect of an subsequent transaction in respect of the transfer to the
plaintiff which is in issue in this case.
We need only
add that the learned Judge also referred to the fact that at best this piece of
evidence was only a suggestion because no independent evidence was adduced in
respect of the transaction of the Sahas and certainly the Sahas did not give
evidence. Any court would hesitate long and much to condemn a transaction as
one of bad faith (1) when the transaction is to in issue, (2) when all the
interested parties in the transaction are not before the court, and (3) when
the most material evidence of the person whose transaction is condemned is not
available to the court.
The next
branch of the case of bad faith and mala fide relates to the influence of modi
on the other directors. It is essential to recite certain facts in this connection.
Now, at the relevant times the company had six directors of whom three were
Modi Brothers and the other three were J.B.P.Wadia, C.J.Desai, and B.K.Pai. All
that is suggested in evidence is that at all material times all the directors
except one were indebted to Modi. The evidence of indebtedness of course is not
satisfactory but assuming that there was indebtedness we fail to see how that
fact goes to prove either influence or mala fides on the part of the defendant
company. The fact that a person is indebted to somebody else does not
necessarily make the debtor surrender al his judgment in other respects to the
creditor. The fact that the other directors are indebted is in our opinion not
sufficient to induce the conclusion that the creditor director exercised the
biggest influence even in this particular matter in suit. Even then one of the
directors was in fact not indebted to Modi. There is in our opinion hardly any
real or substantial evidence to show first that Modi had such influence over the
other directors, and, secondly, that even if he had exercised such influence,
all the other directors in fact were so overcome as to act in fraud of the
power contained in the article and not in the best interests of the company.
After all, these other directors were also interested in the company and they
had their stakes. It is difficult to believe how they could surrender all their
interests to modi. In fact, the conclusion would appear to be the other way and
if some of them were indebted to Modi, then far from surrendering the rest of
their interests to Modi the natural instinct would impel them to protect such
of the remaining rights and interests which they had and stick on to them. In
fact, this is the inherent contradiction in the appellant’s case to which
reference has been made by the learned trial Judge, and on the ground of which
the learned Judge has rightly ejected the plaintiff’s evidence. The plaintiff’s
evidence was that he met the directors in May when they told him that they had
no voice in the affairs of the company because everything was in Mr. Modi’s
hands, the suggestions being that the registration of the transfer in favour of
the plaintiff depended entirely on Modi. That would mean that the directors
confessed their own helpless in the matter. But then again the plaintiff’s
evidence is that the directors gave assurance to the plaintiff that the
registration in his favour would be effected as soon as possible. Naturally the
learned trail Judge said how could the directors give assurance when they had
already expressed their helpessness in the matter. We do not, therefore, think
that the influence or control of Modi on the other directors is at all,
established in evidence.
The central
core of the plaintiff’s case on this point of mala fides and bad faith is that
the board refused to register the transfer as the plaintiff had refused to sell
the shares to Modi and so Modi by the exercise of control over the other
directors induced the board of decline to register the transfer with a view to
put pressure on the plaintiff to sell the shares ultimately to Modi. But then
to find in favour of the plaintiff the court has to be satisfied that there was
in fact an offer of Modi to buy the plaintiff’s shares and there is in fact
refusal by the plaintiff to sell the shares to Modi. Apart from the evidence of
the plaintiff on this point which the learned trial judge in our opinion
rightly disbelieved, the circumstances are all against this contention. The
most important circumstances is the correspondence of the time. The material
letters from the plaintiff to the company dated the 24th June, 11950, and the
18th July,1950, appear to show conclusively that there was no offer by Modi to
buy those shares of the plaintiff or that there was any refusal by the
plaintiff to sell the shares to Modi. It is difficult to get away from the fact
why the plaintiff should not put forward the very central reason, his very
major grievance, at least in the letter of the 18th of July, 1950, when the
disputes had come to a breaking point with the plaintiff charging bad faith ad
mala fides and threatening to hand over his papers to his solicitors to take
legal proceedings. to make the charge of mala fides and bad faith no to put
forward the main act of bad faith which was the attempt of Modi to buy the
plaintiff’s shares at an under-value and the plaintiff’s refusal to sell the
same to Modi is inexplicable and must be taken as the most consent evidence
disproving the plaintiff’s contention on this most material allegation of bad
faith against the defendant company.
We, therefore,
hold that the charge of bad faith and mala fides has not been established
against the defendant company. The charge of bad faith and mala fides is
against the defendant company and it is not proved by crating what at best may
be called suspicion against the conduct of one individual director, Modi. The
hurdles the plaintiff had to overcome in proving fraud and mala fides are (1)
that Modi had the requisite influence over each one of the other directors ad
(2) that Modi in fact successfully exercised that influence and (3) that in
pursuance of such influence of such influence all the other directors of the
company acted in the way that Modi had suggested. We are of opinion that the
plaintiff had failed on these hurdles. The onus of proving fraud, mala fides
and dishonestly is upon the party who alleges them. The onus in this case is
upon the plaintiff to prove his charge that the directors of the defendant
company acted dishonestly and that their act was in fraud upon their powers in
the articles of association. It is difficult to prove fraud and dishonesty and
rightly so because they are grave charges and imputations. Because they are
difficult to prove that is no reason why the court should take a lenient view
and make that light and easy for which law seeks most satisfactory proof in
order to hold a person guilty of fraud and dishonesty. That proof is absent
here. We were asked to inter fraud in this case from the circumstances which we
have analysed. The circumstances in our opinion are not such that fraud or
dishonesty can safely or reasonably be inferred. They are too remote to prove
fraud or bad faith. It is necessary to say that fraud is not proved by mere
suspicion.
The defendant
company in its written statement has justified refusal to register on the
ground that the transfer deed was not stamped as required by law. Section 34(3)
of the former Companies Act, which governs this case, provides :
“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 scrip.”
Now it is
admitted that the deed of transfer in this case was not duly stamped at the
time when it was delivered to the company. What happened was that he plaintiff
net a cheque for the value of the stamp necessary to be affixed on the transfer
deed to the company. The law however is quit clear that the obligate on is not of
the company but of the transferee to deliver he transfer deed duly stamped and
executed. In a stamp reference the Special Bench of the Bombay High Court
presided over by the learned Chief Justice in In re Jagdish Mills Ltd., came to
the conclusion 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.
That decision is also an authority for the proposition that there is on the
provision in the Companies Act or in the Stamp Act which would make the company
liable for payment of the proper stamp duty and that the liability to pay stamp
duty in the case of an instrument of transfer is upon the executant.
Mr. Gupta
arguing for the appellant submitted that the point that the transfer deed was
not duly stamped was not one of the grounds or reasons in article 52 of the
articles of association of the company on which the company has refused
registration. The main thesis of his argument was that article 52 naturally
operation in a field of discretion, but where the law required the doing of act
it was not a matter of discretion at all but of legal compulsion. As article 52
uses the word “discretion” the legal requirement of stamp cannot come under
article 52 of the articles of association. We are unable to accept this
argument as a sufficient and valid excuse for the plaintiff in this case.
After all this
was plaintiff’s suit against the defendant company for the relief that the
register of the defendant company be rectified by acknowledging the plaintiff
as transferee and owner of the shares. The complaint is against refusal of the
company to register such transfer. If the law prohibits registration without
stamp, then the company is entitled to refuse such registration on that ground
that whether it does so under a particular article, article 52 or not seems to
us to be immaterial. It is quite true that the company informed the plaintiff
that the rejection was under article 52, but that does not carry the plaintiff
further. Assuming that it was only under article 52 that the company head
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 is 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 completed without the stamp. It is unnecessary for us
from that point of view to pronounce on the question of construction of he word
“discretion” in article 52 namely whether the company could refuse to register
shares on the ground that the relative transfer deed was not duly stamped. We
are, however, prepared to hold that if a transfer deed is not duly within the
ambit or meaning of article 52 because, although the article speaks of the
directors’ discretion to register: that only means that it must be discretion
and not whim but a discretion which takes into consideration the legal
requirement nevertheless remains a discretion. To be alive the law is part of
the well-informed discretion which the board of directors are required to
exercise under the article.
In this
connection reference to the decision in Maynard v. Consolidated Kent Collieries
Corporation Ltd., may appropriately be made. There was presented for
registration it was found that the stamp on the transfer, although in
accordance with the consideration stated on the face of it, yet was less than
what it should have been, whereupon the directors refused to register the
transfer. The court came to the conclusion that as a due stamping was a
requirement under the English Stamp Act on a transfer deed the directors were
entitled to refuse to register the transfer and that in determining whether the
transfer was duly stamped they were entitled to go behind what appears on the
face of the document. COLLINS M.R. at page 130 of the report came to the
conclusion :
“It seems to
me that this consideration affords an absolute justification to the directors
in their refusal to register this transfer. It was the duty of the plaintiff to
tender a transfer which was right in all respects in point of law, and that he
never did; and unless he did that the company were under no obligation to put
him on the register.”
because this
conduct of retaining the transfer deed and the cheque is inconsistent with the
plaintiff’s own readiness and willingness. At any rate, as the pleadings do not
proceed on the basis of specific performance this point of the appellant cannot
be sustained.
We, therefor,
hold that the transfer deed in this respect not having been stamped was rightly
refused registration by the defendant company.
We cannot also
shut out eyes to the fact that in the cross- examination of he plaintiff the
fact was brought out that the plaintiff has suffered conviction and
imprisonment for a year for theft of electricity in connection with a cinema
house. As no reason was disclosed by the company for refusing to register the
shares we do not know whether the plaintiff’s conviction with incarceration was
one of the reasons. It would be a valid personal objection against the
plaintiff under article 52 of the articles of association. In fact it is
significant that when Modi said in his evidence that apart from indebtedness of
Hemmad there were other reasons, no cross-examination on behalf of the
plaintiff about such other reasons was made or ventured. Against a possible
personal objection to the plaintiff and when the transfer deed was not stamped
it is impossible for this court to hold that the director’s refusal to register
was fraudulent and dishonest.
Mr. Hazra, the
learned junior counsel for the appellant, in this argument in reply, tried to
salvage the wreck of his client’s case by suggesting that as the defendant
Hemmad has not appeared in this case and as the plaintiff has asked for an
injunction restraining the defendant Hemmad from exercising any right in
respect of these shares, this court should grant him that injunction. Now, the
relief of permanent injunction in suits must be governed by section 54 of the
Specific RElief Act. The requirements of that section are well known. It says
that a perpetual injunction may be granted to prevent the breach of qan
obligation existing in favour of the applicant whether expressly or by
implication. In this connection the material part of section 54 is that when
the defendant invades or threatens to invade the plaintiff;s right to or
enjoyment of property, the court may grant a perpetual injunction. There is,
however, no pleading in the plaint alleging that defendant Hemmad has invaded
or treat to invade the plaintiff’s right to or enjoyment of the shares. Mr.
Hazra tried to induce us to hold that there is a pleading in paragraph 16(i) of
the plaintiff where it is suggested that the dividend in respect of these
shares was wrongfully appropriated by Modi in collusion with the defendant
Hemmad. The charge even there is directed against Modi and not against Hemmad
because if anybody appropriates the dividend it is not alleged that Hemmad is
appropriating the dividend but Modi is. Then Mr. Hazra suggested that an
injunction against the defendant Hemmad would do him no harm. This court has
previously no numerous occasions held that the principle on which it grants
injunction is to that an injunction will not hurt a party against whom it is
granted, but it grants, an injunction on the principle that the applicant for
injunction must satisfy the court that he has made out a case within the law to
be clothed with an order of injunction from this court. We, therefore, reject
Mr. Hazra;s contention.
We affirm the
judgment and decision of the learned trail Judge.
We dismiss
this appeal with costs.
The appeal is
certified fit for the employment of two counsel.
BACHWAT J.-I
agree.
[1971]
41 COMP. CAS. 678 (DEL)
v.
Pramatha Nath Mukherjee
H.R. KHANNA, C.J.
AND VYAS DEV MISRA, J.
LETTERS PATENT APPEAL NO. 116 OF 1970
FEBRUARY 26, 1971
S.C.
Sen, Senior Advocate (P.N. Chatterjee, B. Dutta, Keshav Dayal and Rishi Kesh,
Advocates, with him), for the Appellant.
B.C.
Dutt, Senior Advocate (A.C. Roy and Yogeshwar Dayal, Advocates, with him), for
the Respondents
Khanna,
C.J.—This appeal
under clause 10 of the Letters Patent by the Jalpaiguri Cinema Co. Ltd. is
directed against the judgment of the learned single judge whereby a petition
under articles 226 and 227 of the Constitution of India filed by the appellant
against Pramatha Nath Mukherjee and five others for quashing the order of the
Member, Company Law Board (respondent No. 6), was dismissed.
The
appellant is a public limited company. It was incorporated in 1948 with a share
capital of Rs. 10 lakhs. The company owns a cinema house and is engaged in
exhibition of films. Respondents Nos. 1 to 5 (hereinafter referred to as the
respondents) belong to the Mukherjee family. They purchased shares of the
company from different shareholders. Out of those shares, we are in the present
appeal concerned with the shares of the value of Rs. 1,90,000. When the
respondents approached the appellant company for registration of the transfer of
the shares in question, the board of directors declined to register the
transfer of the said shares in favour of the respondents as per the resolution
dated March 23, 1967. The material part of that resolution reads as under :
"Besides what has been stated above in respect of each of the transfer deeds it further appears that the transferees belong to the same family. The transferee, Shri Monoranjan Mukherjee, is the brother's son of Shri Pramatha Nath Mukherjee. Sri Pronab Kumar Mukherjee is the son of Sri Pramatha Nath Mukherjee. Sri Moni Mohan Mukherjee, Sri Durga Pada Mukherjee, Sri Tara Pada Mukherjee and Sri Pramatha Nath Mukherjee are brothers. The company has never paid dividends since its inception and its property is in the possession of mortgagees. Thus, it is evident that the transferees did not purchase the shares for the purpose of investment but with a view to control the company and thereby to interrupt the smooth running of the company. The transferees in the circumstances are not desirable persons and it is therefore resolved that after having carefully considered the nature and purpose of investment and the defects in the share-transfer deeds, the company is constrained to refuse the registration of the shares in question".
The
respondents filed appeals under sub-section (3) of section 111 of the Companies
Act, 1956, against the above decision of the board of directors. The appeals
were allowed by the Member. Company Law Board, as per order dated December 19,
1969, and the appellant company was directed to register the shares comprised
in the appeals in the names of the respective transferees. The appellant
company thereupon filed the petition under articles 226 and 227 of the
Constitution for quashing the above order.
The
learned single judge dismissed the petition on the ground that under the
articles of association of the company the board of directors had no power in a
case like the present to refuse to register the transfer of shares. The learned
judge declined to accept the contention that if the case was not covered by the
articles of association of the company even then the company could decline to
register the transfer. Argument was also advanced that the company had a lien
on the shares. It was observed in this connection by the learned judge that no
documents had been produced at the time of the hearing of the appeal before the
Company Law Board to substantiate the allegation of lien. Reference was also
made to a concession on behalf of the appellant that the claim for lien could not
be sustained on the basis of certain documents. It was observed that the
company would not be deemed to have given up its lien, if any, because of the
registration of the shares in question.
We
have heard Mr. Sen on behalf of the appellant-company and Mr. Dutt on behalf of
the respondents, and are of the view that there is no merit in the appeal.
Article 42 of the articles of association of the company specifies the
circumstances under which the directors may decline to register the transfer of
shares and reads as under :
"The
directors without assigning any reason for such refusal may decline to register
any transfer of shares or stock upon which the company has a lien, and in case
of shares not being fully paid up may refuse to register a transfer to a transferee
of whom they do not approve".
A
bare perusal of the above goes to show that the directors can decline to
register transfer of shares in either of the two events: (1) where the transfer
relates to shares upon which the company has a lien, or (2) the transfer
relates to shares which are not fully paid up and as such the second of the
above contingencies does not arise. Mr. Sen, on behalf of the
appellant-company, however, urges that it has a lien on the shares in question
and as such the directors were well within their power in declining to register
the transfer of the shares. As against that, the stand taken on behalf of the
respondents is that there is no lien of the appellant-company on the shares in
question and that the claim for the alleged lien is the result of an
after-thought. In this connection we find that in the impugned resolution dated
March 23, 1967, of the board of directors there was no mention of any lien of
the appellant-company over the shares in question. Documents were also not produced
before the Company Law Board to prove the existence of any lien. Reference was
made to two documents before the Board and it was conceded on behalf of the
company that the claim for lien could not be sustained. The learned single
judge took note of the fact that no other documents had been produced before
the board and observed that in view of the concession made on behalf of the
appellant-company the contention about a lien could not be raised. To relieve
the company of the consequences of the stand taken by it before the Company Law
Board the learned judge made it clear that the registration of the transfer
would not affect the claim of the company for its alleged lien.
As
there is no material on the present record to show that the appellant-company
had any lien on the shares in question, we find no cogent ground to interfere
with the order of the learned single judge in this respect. The present is not
a case in which the appellant-company had adduced some prima facie evidence to
show the existence of a lien. Not only no such evidence was produced, but there
was even no reference to the alleged lien, as stated earlier, in the impugned
resolution of the board of directors. In the circumstances, with a view to
safeguard the interests of the company, the learned
single judge made the observation that the registration of the transfer would
not affect the alleged lien of the company over the shares in question.
It may also be observed
that Mr. Dutt on behalf of the respondents has stated at the hearing of the
appeal that though there is no lien of the appellant-company on the shares in
question in case such a claim is proved, the same would not be affected by the
registration of the shares.
Mr. Sen next argues that if
it be assumed that the present case is not covered by article 42 of the
articles of association, even then the board of directors of the company had
the power to decline to register the transfer. It is pointed out that an
allegation was made on behalf of the respondents before the Company Law Board
that the board of directors had acted mala fide in declining to register the
transfer and that the Company Law Board did not go into that allegation. The
failure of the Company Law Board to do so, it is urged by Mr. Sen, vitiated its
order. Without a finding that the impugned resolution was mala fide, the
appeal, Mr. Sen submits, could not be allowed.
The above contention, in
our opinion, is not well founded. According to section 82 of the Companies Act,
the shares or other interests of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company.
Sub-sections (1) and (2) of section 111 read as under :
"(1) Nothing in sections 108, 109 and 110 shall
prejudice any power of the company under its articles to refuse 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.
(2) If a company refuses, whether in pursuance of any power under its
articles or otherwise, to register any such transfer or transmission of right,
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,; the case may be.
If default is made in complying with this
sub-section, the company, and every officer of the company who is in default,
shall be punishable with fine which may extend to fifty rupees for every day
during which the default continues".
Sections 108 and 110
referred to in sub-section (1) of section 111 deal with the technical
formalities which have to be complied with before the transfer of shares can be
registered. Section 109 pertains to transfer by legal representatives. A
perusal of sub-section (1) of section 111 makes it manifest that if the
requisite legal formalities are complied with the power to refuse to register
the transfer of shares can be exercised if such a power is warranted by the
articles of association. If the articles of association restrict the exercise
of such power to two contingencies, it is not open, in our opinion, to the
board of directors to decline to register the transfer of shares in cases not
covered by those two contingencies. The words "or otherwise" in
sub-section (2) of section 111 cannot have the effect of enlarging the power to
refuse to register the transfer of shares as given by subsection (1) of section
111 of the Act, Sub-section (2) prescribes the procedure which has to be
followed by the company in case it refuses to register the transfer of shares.
Provision is also made in that sub-section for the punishment for failure to
comply with that procedure. Sub-section (2) cannot, however, be construed so as
to confer power upon a company to refuse registration of the transfer even
though such a power is not conferred by the articles of association. We may in
this connection refer to the Principles of Modern Company Law by Gower, third
edition wherein it is stated on page 392 ;
"Prima facie,
companies' shares are freely transferable ; as we have seen, it is this feature
which constitutes one of the great advantages of an incorporated company.
Unless the company's regulations provide otherwise, the shareholder is entitled
to transfer to whom he will".
It is further stated on
page 393 :
"(d) If, on the true
construction of the regulations, the directors are only entitled to reject on
certain prescribed grounds and it is proved that they have rejected on others,
the court will interfere".
So far as the contention is
concerned that the Company Law Board should have gone into the question as to
whether the board of directors had acted mala fide in passing the impugned
resolution, we are of the opinion that it would have been necessary to do so if
the board of directors had acted in a manner which was within their discretion.
As in the present case the board of directors had declined to register the
transfer on a ground not allowed by the articles of association, the occasion
of going into the question whether the resolution of the board was passed mala
fide or bona fide did not arise. The two cases, Harinagar Sugar Mills Ltd. v.
Shyam Sundar Jhunjhunwala and Bajaj
Auto Ltd. v. N.K. Firodia, referred to
on behalf of the appellant company, are of no material help to the appellant.
In both these cases the articles of association gave the directors absolute and
uncontrolled discretion to decline to register transfer of shares. In that
context it was held that there should be just and proper consideration of the
proposal on the facts and circumstances of the case. It was futher observed
that the reasons of the directors would have to be tested from three points of view. First,
whether the directors acted in the interest of the company ; secondly, whether
they acted on a wrong principle ; and, thirdly, whether they acted with an
oblique motive or for a collateral purpose. The discretion of the directors,
according to their Lordships, would be nullified if the court was satisfied
that the directors acted oppressively, capriciously, or corruptly, or in some
other way mala fide. In the instant case, as would appear from the above, there
was no discretion in the board of directors to decline to register the transfer.
As such, there was no necessity of going into the mala fide nature of the
impugned resolution.
Reference
has been made on behalf of the appellant to the case of Nandalal Zaver v.
Bombay Life Assurance Co. Ltd. This case
pertained to section 105C of the Companies Act, 1913, relating to allotment of
additional shares to the existing shareholders before offering them to
outsiders. It was held that the directors must exercise the power for the
benefit of the company and if they did so the fact that they had a subsidiary
motive not in any way affecting the company or the interests of the existing
shareholders would not induce the court to interfere. The dictum laid down in
the above case, in our opinion, has no bearing on the present case.
Reference
has also been made by Mr. Sen to observations on pages 520 and 524 of The
Principles of Modern Company Law by Gower, third edition. Those observations
are in the context of the fiduciary duties of the directors and relate to
matters which are intra vires. Indeed, it has been expressly made clear on page
516 that in the following discussion it was assumed that the directors were
acting intra vires—that is, within their powers and those of the company. As
would appear from the above, the board of directors in the present case acted
beyond the scope of their powers. As such, the observations referred to above
cannot be of much avail to the appellant.
Section
155 of the Companies Act was also referred to on behalf of the appellant. The
said section relates to the powers of court to rectify the register of members.
As observed in the case of Harinagar Sugar Mills Ltd. a person
aggrieved by the refusal to register transfer of shares has two remedies under
the Act, viz., (1) to apply to the court for rectification of the register
under section 155, or (2) to prefer an appeal under section 111. In both the
proceedings the matter has to be determined judicially. The Central Government
must, therefore, give reasons while deciding the appeal under section 111. In
case it fails to do so, its decision would be set aside and the case remanded
for rehearing. In the present case the order of the Company Law Board suffers
from no such infirmity as reasons in support of the decision have been given.
Reference
has been made on behalf of the appellant to section 41 of the Companies Act
which defines members of the company, regulation 28 in Schedule I to the Act
which deals with persons becoming entitled to shares by reason of death or
insolvency of the holder, section 247 which provides for investigation of
ownership of company, and section 2(30) of the Act which defines officers of
the company. None of these provisions, in our opinion, has any bearing on the
present case wherein the short question is whether the board of directors can
refuse registration of transfer in case such refusal is not warranted by the
articles of association. The observations about the changing patterns of the
functions, liabilities and duties of the company directors given in The New
Frontiers of Company Law by Mr. S.C. Sen, to which also reference was made, do
not advance the case of the appellant any further, because those observations
are of a general nature and do not deal with the precise question with which we
are concerned in this appeal.
The
appeal consequently fails and is dismissed, but, in the circumstances, without
costs.
Appeal dismissed.
[1998] 93
Comp Cas 433 (Kar)
HIGH COURT OF KARNATAKA
v.
S. Venkatesan
S. Rajendra Babu J.
Writ
petition nos. 6162 to 6178 of 1998
March 22, 1995
S.G. Sunderswamy and Naganand for the Petitioner.
T.K. Seshadri and K.A. Ariga for the Respondent.
S. Rajendra Babu, J.—These petitions are directed against an order
made by the Company Law Board (hereinafter referred to as "the CLB")
in appeals filed before it under section 111 of the Companies Act, 1956 (for
short "the Act"), against the decision of the board of directors of
the petitioner-company (hereinafter referred to as "BODs company")
declining to register certain shares of the company said to have been acquired
by the first respondent in each of these cases.
Before the CLB, the petitioner contended that the appeals filed by the
first respondent in each of these cases before it were barred by limitation, as
the same were not filed within a period of two months from the date of receipt
of the petitioner's letter regarding refusal to transfer shares. On this aspect
of the matter, the Board classified the appeals into three categories :
(i) that there are certain appeals in which
there was no delay at all;
(ii) certain
appeals in which there was delay ; and ,
(iii) certain other appeals
have been forwarded to the Board within the prescribed time, but reached the
Board a little late.
On an overall consideration of the matter it held that in order to avoid
undue hardship to the appellants before it, the CLB was inclined to con done
the. "short delay".
Attacking this finding, learned counsel for the petitioner urged that
there is no specific provision for condonation of delay in the matter of an
appeal filed under section 111 of the Act on any ground including one of
hardship. Elaborating his submission, learned counsel for the petitioner stated
that section 111 provides for power to refuse registration and also the appeal
that could be filed against such refusal. The decision as to refusal of
registration of transfer of any share should be communicated within two months
from the date of delivery of intimation of such refusal and if there is any
default in complying with the aforesaid provision, the company and every
officer of the company would be punishable with fine, which may extend to Rs.
50 per day during the period the default continues. He invited my attention to
section 111(4) thereof. It provides that in case an appeal is filed against
such refusal to transfer the shares, the same should be made within a period of
two months from the date of receipt of the notice of refusal. In the present
case, it is submitted that at the relevant time there was ho provision made in
the rules framed by the Central Government for the conduct of the business of
the CLB empowering them to condone the delay. It is also submitted that under
section 637 of the Act, there should be a specific delegation of powers to the
CLB by the Central Government to exercise such powers. Neither section 111 nor
section 637B is the subject matter of delegation. Rules framed under section
642 do not provide for condonation of such delay. It is, therefore, submitted
that there is no scope for condoning the delay at all in the case of the
appeals which are filed beyond the time fixed in section 111(4) of the Act. He
further contended relying upon a decision of this court in Lingamma v. State of
Karnataka, AIR 1982 Kar 18, that when there is no specific power conferred upon
an authority functioning under a special statute no inherent power is available
for condonation of delay, however hard the circumstances in a given case may
be.
Learned counsel for the first respondent in each of these cases submitted
that this is a case where the CLB had exercised its powers squarely under
section 637B of the Act, which opens with a non obstante clause and has
overriding effect on all other provisions of the Act and that the power that is
exercised by the CLB is that of the Central Government itself in the matter of
entertaining an appeal and, therefore, that provision would be attracted. He
explained that though section 637B of the Act refers to an application it
includes an appeal and for that purpose relied upon a decision in Nagendra Nath
Dey v. Suresh Chandra Dey, AIR 1932 PC 165. He further submitted that there is
only one case in which there is one day's delay, that is Appeal No. 6/SR/86 (M.
Naveen Kumar v. Jaganjiva Hegde) and all appeals were filed in time or
communication in that regard had already been despatched by the party within
the time Prescribed under law and in that context relied upon a decision of
this court in W. A. No. 1335 of 1988, disposed of on January 9, 1991, wherein
this court held that what is required in the relevant provision is to make an
appeal and not actual presentation of an appeal. The moment the party concerned
despatches such an appeal by post, it must be deemed that such an appeal has
been made. Based on that principle enunciated by this court, learned counsel
contended that in these cases there is no difficulty at all in coming to the
conclusion that the appeals had been made within that time.
Since at least in one of the cases I have to decide the question as to
whether an appeal is in time or not, I need not embark upon a discussion on the
aspect as to when an appeal is said to have been filed. I would rest content by
referring to the provisions of the Act to find out in cases of time barred
appeals whether any delay in filing them could be condoned.
Section 111(4) of the Act enables a transferee who has purchased shares
and applies for registration and on intimation of refusal by a company to
prefer an appeal as provided therein within a period of two months thereof.
Such an appeal will have to be filed before the Central Government. At the
relevant time the Central Government delegated the power under section 111 to
be exercised by the CLB subsequently. Hence in these circumstances appeals were
filed before the CLB. Thus, all the
powers which vested with the Central Government in the matter of an appeal
under section 111 of the Act could be exercised by the CLB in that regard.
Therefore, if power under section 657B was available to the Central Government,
the same power was available to the CLB as well. In that view of the matter, I
think there is no substance in the contention urged on behalf of the petitioner
that in these cases section 637B could not be applied. Condonation of delay in
section 637B is with reference to an application. An appeal could be filed by a
memorandum or a petition or an application or in any other manner. If an
application could be understood in a generic sense as a prayer made to an
authority for some relief to set aside an order of another authority and such
an application is under the statute, it would amount to an appeal. The Privy
Council considered this very question as to whether an application could be
understood as an appeal in Nagendra Nath Dey v. Suresh Chandra Dey, AIR 1932 PC
165, and stated that in the absence of definition of an appeal or an
application, there cannot be a doubt that an application would include an
appeal asking the appellate court to set aside an order made by any authority,
and therefore, the ordinary connotation of the expression application would
include an appeal. Hence, I am of the view that section 637B squarely applies
to proceedings before the CLB. If that provision is applicable, the exercise of
discretion by the Board in that regard cannot be interfered with by this court
because it has given certain cogent reasons such as the shortness of delay and
advancing the cause of justice by removing hardship that may arise if the delay is not condoned. I
do not think that such an order could
be interfered with in a proceeding under article 226 of the Constitution.
Hence, I reject the first contention advanced on behalf of the petitioner.
The next contention urged on behalf of the petitioner is one touching
upon the merits of the matter.
It is the contention of the petitioner that one Ratnavarma Padival had
been making attempts to corner the shares and was offering an exorbitant price
therefor, and, therefore, the company considered after obtaining legal advice
that it was not in the interest of the company to allow the transfer of shares
; that as long as reasons had been assigned by the authority concerned and
those reasons are germane to the refusal of the transfer of the shares and such
exercise of power is bona fide, it would not at all be open to the CLB to
interfere with such a matter and in this context relied upon the following
decisions :
Coalport China Co. (John Rose and Co.) Ltd., In re [1895] All ER 2021
(CA) ;
Weinberger v. Inglis [1918] 1 Ch 133 ;
Smith and Fawcett Ltd., In re [1942] 1 All ER 542 (CA) ;
Charles Forte Investments Ltd.
v. Amanda [1964] 34 Comp Cas 233 (CA) ;
That it was not at all open to the CLB to substitute its view for that of
the BODs of the company who had ample authority under the articles of
association to refuse, to transfer the shares and as long as such power is
exercised by them in a proper manner it could not be interfered with by any
authority ; that the CLB had misdirected itself in wrongly casting the burden
upon the petitioner that it should prove that its decision was valid, while it
should have placed such onus upon the transferee ; that a commercial reality is
within the knowledge of the BODs and not of the CLB ; in this context he
referred to the object behind article 15 of the articles of association, which
restricts the extent of holding of shares in the company and also referred to
section 182 of the Act ; that the CLB could not have ignored the material
placed by them in the matter of non-suitability or desirability of not
transferring the shares in favour of the first respondent in each of these
cases though not disclosed in the resolution, which was not within its purview
at the time when it decided the matter.
Learned counsel for the first respondent in each of these cases submitted
that in the light of the decision of the Supreme Court in Luxmi Tea Company
Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp Cas 518, it is no longer open to any
party to contend that in the matter of transfer of shares of a public limited
company the board of directors could refuse to transfer the shares unless such
power is traced either under the Act or under any particular provision in the
articles of association ; that in the present case, the only provision that
could be pointed out was article 20 of Table-A of the First Schedule to the
Companies Act, 1913, as it was applicable to the company in question when it
was incorporated ; that in a case where shares had been fully paid-up, the
question is only one of want of suitability of the person and no other question
would arise in such a case ; that in a case where lien is held in respect of
shares it is open to the company to refuse to register the shares ; that except
in these two circumstances; in no other circumstances it is open to the BODs of
the company to refuse to transfer the shares. He also explained the scope of
powers of the CLB to refuse to transfer the shares by reference to Bajaj Auto
Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1; AIR 1971 SC 321, and W. P. No. 776
of 1978 and connected matters, disposed of by the Madras High Court, wherein
the situation was almost identical. He further brought to my notice certain
observations made by this court in W. A. No. 1335 of 1988, particularly in the
context of the contention advanced on behalf of the petitioner that one
Ratnavarma Padival wanted to corner all the shares and the transferees are
merely holding those shares benami on his behalf or on. behalf of his
associates. He also pointed out that the only material before the BODs of the
company on the relevant date when they refused to transfer the shares was that
certain shares had been sold at an exorbitant price, but he countered the same
by pointing out that there was enough material to show that the company itself
has sold certain shares at Rs. 1,000 while the shares transferred was only of
the value of Rs. 950 and thus contended that the interference by the CLB in
this regard was perfectly in order.
The CLB in this case after referring to article 20 of Table-A of the
First Schedule to the Companies Act, 1913, held that the petitioner had not
made out a case to establish that the first respondent in each of these cases
are undesirable persons warranting refusal of registration of transfer of
shares in their name. They noticed that the reason given in the letter of
refusal is that the consideration for the transfer is high. They went through
the legal opinion placed" before them also. They were of the opinion that
the high consideration paid for the transfer is not a justifiable ground for
refusing to register the shares. They referred to the forfeited shares having
been issued by the company at a high price of Rs. 1,000 per share and also its
earlier decision in Appeal No. 9 of 1977, that it is not for the company or its
management to sit in judgment as to in the shares of which company and in what
price an investor should vest his funds. The company should not feel aggrieved
because of any particular amount being mentioned as consideration in the
instrument of transfer since such consideration amount is of no significance in
so far as the finances; or the paid-up capital of the company are concerned.
They took the view that there was no material to hold that the first respondent
in each of these cases was acting at the instance of the said Ratnavarma
Padival. That the emphasis in such matter is on the personal objections to the
transferee and not to the transferor on the ground that the transferee is the
nominee of someone whom they consider objectionable. They also referred to
certain legal proceedings between Ratnavarma Padival and others against the
company and the same was found to be irrelevant to the case on hand. They took
note of the scope of article 15 of the articles of association that no member
can hold shares exceeding one-tenth of the total number of shares and the
contention of counsel for the company was on the assumption that the shares
were not held for and on behalf of the said Padival. On that basis they
rejected the stand of the company and allowed the appeals.
The parameters of the powers of a company in the matter of transfer of
shares is available in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 1 ;
AIR 1971 SC 321. The Supreme Court noticed that if the articles permit the
directors to decline to register transfer of shares without stating the
reasons, the court would not draw unfavourable inferences against the directors
because they did not give reasons. On the other hand, the court would assume in
such cases that the directors acted reasonably and bona fide and those who
allege to the contrary would have to prove and establish the same by evidence.
Where however the directors gave reasons the court would consider whether they
were legitimate and whether the directors proceeded on a right or wrong
principle.
Further, I may refer to another decision of the Supreme Court in Luxmi
Tea Company Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp Cas 518, wherein the
entire scope of the provisions relating to transfer of shares in a public
limited company has been considered by the Supreme Court. It was noticed
therein that a shareholder has a right to transfer his share and
correspondingly, in the absence of any impediment in this behalf, the
transferee of a share can get the transfer effected and that right of the
transferee cannot be defeated by the company or by its directors except in
pursuance of power vested in them in this behalf, which is specifically
provided for-it may be residuary, but it should be provided for and traceable
to some provision either in the Act or in the articles of association of the
company. The registration of a transferred share cannot be refused arbitrarily
or for any collateral purpose and can be refused only for a bona fide reason in
the interest of the company and the general interest of the shareholders. If
neither a specific nor residuary power of refusal has been so provided, such
power cannot be exercised on the basis of the so called undeclared inherent
power to refuse registration. In view of the declaration of law made by the
Supreme Court in these cases it is not necessary to refer to the decisions
relied upon by learned counsel for the petitioner in any detail.
In the present case the reasons
given by the BODs is that the shares had been sold at a high price, and
therefore, it would not be in the interest of the company to allow the
transfer. Possibly what lurked in their minds was that Ratnavarma Padival had
been behind the sales but that was not spelt out in any of the resolutions. All
that was stated in the resolutions was that in view of the legal opinion
tendered it would not be appropriate to transfer the shares and the legal
opinion tendered had. been considered in detail by the CLB that the transaction
could not be considered to be genuine in view of the high price paid for the
shares. It was not at all stated that the high price for the shares were given
by Ratnavarma Padival for and on behalf of the transferees and the transferees
were holding the same benami. That was not the case put forth by them at the
time when the BODs passed the resolutions. Therefore, in the present case when
reasons are set out by the company for refusal to transfer the shares, the
question of placing further material before the CLB may Rot arise because reasons
had already been disclosed by them. If reasons had not been disclosed, perhaps
the CLB would have called upon them to disclose the reasons or the company
itself could have disclosed the reasons. However, the material sought to be
placed before the CLB has also been considered by the CLB. Learned counsel for
the petitioner contended that the valuation given by the chartered accountant
on October 3, 1987, should be taken note of. However the said valuation was not
and could have been in the contemplation of the company as it decided to refuse
to grant registration long prior to the date of the said valuation. The CLB
felt, the mere circumstance that the shares are likely to be held benami would
not itself be a circumstance to refuse to transfer the shares. That view finds
support in the decision of this court in W.A. No. 1335 of 1958.
The CLB took note of the following
circumstances :
(1) The shares were fully paid-up.
(2) The price paid by the transferees was not higher than the
price paid in respect of certain forfeited shares.
(3) The payment of a higher price was
not to the detriment of the company.
(4) No material was placed that the transfer of
shares had taken place at the instance of Padival.
(5) Even if it were held that they were
held benami, it could not allow the transaction?
None of these reasons could be
said to be not based on material on record, it is based on irrelevant material
or has any relevant material eschewed from consideration. In that view of the
matter, I do not think learned counsel for the petitioner can contend that the
view taken by the CLB in this regard is in any way is incorrect.
The contention advanced on behalf of the petitioner that the CLB could
not have decided the matter sitting in the arm chair of the BODs of the company
since commercial reality is not within their knowledge, but that of the
company. I do not think this argument has any substance because the CLB
considered the scope of article 20 and was of the view that unless it could
have held that except in case of matters personal to the transferees, on no
other ground could they have refused to transfer the shares, particularly when
there are fully paid-up shares. However, learned counsel for the petitioner
wanted me to read article 20 in a different manner. He wanted me to split the
article into two categories : The directors may decline to register :
(a) any transfer of
shares, not being fully paid shares, to a person to whom they do not approve.
or
(b) any transfer of shares on which the company has a lien.
Contention of this nature is futile. Even on the
basis of the argument of learned counsel, the language of article 20, the
company could not have refused to register transfer of shares, firstly that the
shares are fully paid-up and company has no lien. Thus neither the first para,
nor the second para, is applicable as argued by learned counsel for the
petitioner. In view of the law declared by the Supreme Court in Luxmi Tea
Company Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp Cas 518 and Bajaj Auto Ltd.
v. N.K. Firodia [1971] 41 Comp Cas 1 ; AIR 1971 SC 321, the company could not
exercise any power other than available under the articles or the Act. Neither
the Act nor the articles give any power which is residuary in character. Even
assuming that there is residuary power, when the company finds reasons for its
refusal to register transfer of shares, that reason alone will have to be
examined as good or bad. That is exactly what the CLB has done in this case.
Hence, I find no merit in any of the contentions of learned counsel for the
petitioner.
The other submission raised is that a proceeding arising under the
Companies Act is pending for rectification of register and hence this matter
could not be decided. I do not think I can put off consideration of this matter
for in no proceeding arising under the Companies Act can the correctness of the
order of the CLB be examined. If that is so, it would be proper to decide this
matter now.
Thus, I find no substance in these petitions. The petitions are,
therefore, dismissed. Rule discharged.
In the circumstances, the company will have to comply with the order of the CLB within a period of two weeks from today.
[1998] 17 SCL 223
(SC)
v.
Company Law Board
B.N. KIRPAL AND S.S.
MOHAMMED QUADRI, JJ.
CIVIL APPEAL NOS.
3420 TO 3480 OF 1986
JULY 22, 1998
Section
111 of the Companies Act, 1956, read with sections 2(g) and 20 of Monopolies and Restrictive Trade Practices Act, 1969 -
Transfer of shares -Refusal to register - Appellants held 23.2 per cent shares
of respondent-company - On purchase of further shares of respondent-company
their holding increased to 24.4 per cent - Company refused to register transfer
on grounds that (i) further acquisition if permitted would lead to
inter-connection between transferee-company and
respondent-company attracting section 20 of MRTP Act which was undesirable;
(ii) acquisition was with oblique motive with a view to destablise management;
(iii) to make inroades in company by acquiring large block of shares which was
detrimental to company; (iv) transferees were undesirable persons from point of
view of interest of company; and (v) acquisition was not bona fide investment
since return was not adequate -Whether hostility between transfree-company and
respondent-company itself could be ground to brand transfree as undesirable
person - Held, no - Whether merely because transferee wanted to increase
shareholding could not by itself be ground in law for refusing to transfer of
shares unless and until it could be shown that purchasers were undesirable
persons and after gaining control of company they will act against
company and the shareholders' interest - Held, yes -
Whether since transfer in question would not have resulted in reaching 25 per
cent mark contemplated by MRTP Act and therefore apprehension of
respondent-company that it was likely to get inter-connected with appellant in
event of impugned transfer of shares being allowed, was baseless and/or
ill-founded - Held, yes - Whether inadequate return on shares cannot be ground
to brand purchase of shares as not bona fide investment - Held, yes - Whether
there being nothing on record to show that purchase of shares by transferee was
with ulterior/oblique motives, i.e., to destablise management of company,
refusal to register transfer was not bona fide - Held, yes
The
appellants group were existing shareholders having 23.2 per cent shares of the
respondent, a public limited company. The appellants purchased further shares of
respondent-company through different brokers and sent for transfer, but the
respondent-company rejected the transfer of shares. The grounds for refusal
were (1) further acquisition of shares of the company permitted will lead to
inter-connection between the respondent-company and the Companies of the
appellant group which was not desirable and in the interest of the company; (2)
the appellant group was not
acquiring the shares of the company with a view to or for the purpose of genuine investments but with ulterior and
oblique motives and purposes including the object of destabling the management
of the company; (3) appellant group and the respondent-company were competitors
in business inasmuch as both were manufacturing light commercial vehicles and the
attempt of appellant group to make inroads in the respondent-company by
acquiring large block of shares was to cause detriment and prejudice to the
company; and (4) the transferees in the circumstances were also not desirable
persons from the larger point of view of the interest of the
respondent-company, as a whole. On appeal, the CLB came to the conclusion that
the appellants were not rival in business nor were they undesirable persons.
But, the CLB upheld the decision of the respondent-company on the grounds that
the proposed investment by the appellant was to increase its shareholding and
motivated and the apprehension of respondent-company that it was likely to get
inter-connected with the appellants, in the event of impugned transfer of
shares being allowed, was not baseless or ill-founded.
On appeal to
the Supreme Court:
Where
the directors have give reason while rejecting transfer of shares, the Court will consider whether they are
legitimate and whether the directors have proceeded
on a right or wrong principle. In such a case, the reasons of the directors
have to be decided from three points of view. Firstly, whether the directors
have acted in the interest of the company, secondly, whether they have acted on
a wrong principle and thirdly, whether they have acted with oblique
motive or for a collateral purpose. The power of the board of directors to refuse registration of transfer of shares must
be in the interest of the company and the general body of shareholders. The
board has to act bona fide and not arbitrarily and for the benefit of the
company as a whole. In the case of a public limited company which is listed
with Stock Exchange, an important right of shareholder is to be able to sell
his shares at a favourable price. It is seldom in the interest of the general
body of shareholder that transfer of shares be refused because that will have
an adverse impact on the market price of the shares. This does not mean that if there is a good reason then the board has no power to
refuse to register the transfer of shares. The Court while examining the action
of the board of directors is not expected to exercise original appellate
jurisdiction and sit in appeal on question of fact.
The judicial review while hearing in appeal from the decision of the CLB would
be limited to see whether there was a bona fide exercise of power by the board
of directors while refusing to register the transfer of shares.
The CLB in the instant case
came to the conclusion that at least two of the reason stated by the company while
refusing to register the transfer of share were not correct. It held
that the appellants and respondent-company were not rivals in business and even
though there was hostility between the managements of
the companies but that by itself could not mean that the appellants were
undesirable persons in the matter of transfer of shares. The only two reasons of the directors which found favour
with the CLB were that the appellants were not bona. fide investors and,
secondly there was a genuine apprehension about
inter-connection of respondent-company with the appellants.
In the board resolution
what had been stated was that the appellants were not acquiring the shares with
a view to or for the purpose of genuine investment 'but with ulterior motives
and purposes including with a view to destablise the management of the
company'. The alleged reason, therefore, was that the
shares were being purchased with ulterior motives and purposes and with a view
to destablise the management of the company. The CLB appeared to have
misunderstood the reason and framed the issue as 'whether the purchases of
impugned shares were bona fide investments'. It opined that being an
investment company, it was not convincing that the appellants would prefer to
invest in the shares of the company other than the
respondent-company and the purchases were made so as to increase its
shareholding in the respondent-company and were thus, motivated. It also
observed that the return on the shares of respondent- company did not appear to
be adequate enough warranting successive purchases of its shares and appeared
to be lacking in bona fide. But, this was not a correct approach. Merely
because the appellants wanted to increase the shareholding could not by
itself be a ground in law for refusing to transfer
the shares. Realising this in the resolution of the board of directors it was
alleged that the purchase was not by way of genuine investment but was
made with ulterior/oblique motives and with a view to destablise
the management of the company. There was nothing placed on the record which
could possibly persuade anyone to come to the conclusion that the intention of
the purchase of shares by the appellants was with a view to destablise the
management of the company or with an ulterior/oblique motive. Prima
facie it appeared that even if it was assumed that the appellants were trying
to purchase shares with a view to get a controlling shareholders. Accordingly, its
decision not to register the transfer of shares, was not correct.
Direction
was given to respondent No. 2 to register the shares in question within four
weeks from the date of this judgment.
Bajaj Tempo
Ltd. v. N.K. Firodia 1970 (2) SCC 500 and Harinagar Sugar Mills Ltd v. Shyam
Sundar Jhunjhunwala [1962] 2 SCR 339.
Harish N. Salve, Shanti Bhushan, Sudhir
Chandra Aggarwal, R.F. Nariman, Shailendra Swarup,
Ms. Bindu Saxena, Ms. Leena George, K. Ram Kumar, Ms. Asha G. Nair, C.
Balasubramanian, Y. Subba Rao, Ms. Santi Narayan, Dinesh Mathur, S. Ganesh,
K.J. Desai and E.M.S. Anam for the Appearing parties.
Kirpal, J.—These appeals by special leave
arise from the common order of the CLB (respondent No. 1) which had partly
upheld the decision of Bajaj Tempo Ltd. (respondent No. 2) in declining to register
the transfer of its shares in favour of Bajaj Auto Ltd. which had been
purchased by the appellants. These are essentially two groups of shareholders
which control these companies. While 'Bajaj Group' has the control of the
appellant it is 'Firodia Group'
which controls Bajaj Tempo Ltd.
2. Bajaj Auto Ltd. (appellant in Civil Appeal
No. 3480 of 1986) is the holding company of Bajaj
Auto Holdings Ltd. (appellant in C.A. Nos. 3480 of 1986 & 3420-79 of 1986)
and they, along with other individuals who were members of their group (all of
whom are appellants in these appeals) are existing shareholders of Bajaj Tempo
Ltd. which is a public Ltd. Co. Bajaj Auto Ltd. purchased 50 shares of Bajaj
Tempo Ltd. and Bajaj Auto Holdings Ltd. purchased 13150 shares of the
said company. These purchases were made in the year
1983 through different brokers and they were sent to Bajaj Tempo Ltd. for
transfer of shares in the appellants' names. By three different
resolutions dated 29-8-1983, 27-9-1983 and 19-11-1983, the transfer of shares was rejected by Bajaj Tempo Ltd. The
minutes of the meeting dated 29-8-1983 contained the reasons for refusal
to transfer and the resolution passed thereto. The
relevant portion of the said minutes is as under:
"The
Directors, therefore, after due deliberation and considering all aspects
unanimously resolved not to approve the said transfers and declined to register the said transfers considering the
facts briefly stated above and grounds briefly
summarised as under:
(1) Further acquisition of shares of this
company by Bajaj Group if permitted will lead to interconnection between this
company and the companies of the Bajaj Group which is not desirable in the
interest of this company.
(2) The Bajaj Group is not acquiring the shares
of this company with a view to
or for the purpose of genuine investments but with ulterior and oblique motives and purposes including with a view to
destablise the management of this company.
(3) Bajaj Auto Ltd. and this Company are competitors
in business inasmuch as both the manufacturing Light Commercial Vehicles. The
attempt of Bajaj Group to make inroads in this company by acquiring large block
of shares is to cause detriment and prejudice to the company.
(4) In view of the facts stated above although
absolute discretion is conferred
under Articles of Association of the company, the Board has carefully considered the matter and has decided to refuse
to register the transfers. The Transferees in the circumstances are also
not desirable persons from the larger point of view
of the interest of Bajaj Tempo Ltd., as a whole.
Therefore,
the proposed transfers are not in the interest of the Company.
Resolved
that in pursuance of article No. 52 of the Articles of Association of the
company, the transfer of shares submitted of this meeting and hereinbelow
mentioned be and are hereby not approved and the board of directors do decline to register the said
transfers and the Secretary to give to the parties
notice of this decision refusing the said transfers in the following terms:
I
have to advise that in the meeting of the board of directors held on 29th August, 1983 the Board has decided that it
will not give its approval to the transfer of the following shares. The
transfer forms and share certificates are being
returned under a separate cover." [Emphasis supplied]
3. It is for the same reason as above that the
other transfers were declined by the Resolutions dated 27-9-1983 and
19-11-1983.
4. Appeals were then filed by the appellants
under section 111 of the Companies Act, 1956 ('the
Act') before the CLB. On the basis of the pleadings before it and the
submissions of the counsels for the parties, the CLB
formulated the following five issues for its consideration:
"1. Whether
the appellants and the respondents are rivals in business?
2. Whether
the purchases of impugned shares were bona fide investments?
3. Whether
the appellants can be termed as undesirable persons?
4. Whether apprehension of inter-connection of
respondent-company with Bajaj Group is well-founded and whether it can be a
good ground for refusal to transfer shares?
5. Whether
transfer of 7,600 shares, sought to be transferred by Smt. Suman Jain was
intra-group transfer and if so, whether respondent-company was justified in refusing
transfer of these shares?"
5.
By
a reasoned order, issue Nos. 1, 3 & 5 were decided in favour of the
appellants. It came to the conclusion that the appellants were not rival in
business nor were they undesirable persons and by registering the transfer of
7600 shares, which transfers were intra-group, there would be no change
in the overall holding and, therefore, Bajaj Tempo was not justified in
refusing the said transfer. Issue Nos. 2 & 4 were, however, decided against the appellants and the effect of this was that
refusal to transfer 50 shares in favour of Bajaj Auto Ltd. and 5550
shares in favour of Bajaj Auto Holdings Ltd. was
upheld.
6.
In
deciding Issue No. 2, the CLB came to the conclusion that as Bajaj Auto
Holdings Ltd. was an investment company, it was not convincing that it would invest in the shares of Bajaj Tempo by way of
investment. It further came to the conclusion that the proposed
investment in the shares of the respondent-company by
the appellants was to increase its share holding and was motivated. It also
noted that the return on the shares of the company did not appear to be
adequate enough warranting successive purchases of the shares by the
appellants.
7.
Dealing
with issue No. 4, the CLB noticed that on 29-8-1983, the total holding of the
appellants group was about 23.2 per cent in Bajaj Tempo Ltd. At that time the
inter-connection limit under the Monopolies and Restrictive Trade
Practices Act, 1969 ('MRTP Act') was 331/3% per cent and
the said limit has been reduced to 25% with effect from 1-8-1984 as a result of amendment in the MRTP Act. The CLB was of the opinion
that even though at the time of lodgment of shares the said amendment had not
been made, there was a feeling prevalent in trade and industry that the
inter-connection limit would be reduced to 25% per cent. It then held that the
limit up to which shares may be allowed to be acquired by any group, in the
shareholding of the respondent-company in such circumstances, has to be the
subjective opinion of its board of directors and when the acquisition of the
appellants "had already reached critical limit of over 23 per cent. which
is not widely of the mark of 25 per cent. the apprehension existing in the mind
of the board of directors of the respondent-company cannot be
assailed". It, therefore, concluded that the apprehension of Bajaj Tempo Ltd. that it was likely to get inter-connected with
the appellants, in the event of impugned transfer of shares being
allowed, was not baseless or ill-found.
8.
Assailing
the aforesaid decision of the CLB, Shri Shanti Bhushan and Shri Harish Salve
the learned Counsels for the appellants submitted that the power of the directors to refuse transfer
is by way of an exception to the rule that the share
transfer should generally be accepted by a listed company. Impugning the
findings in connection with Issue Nos. 2 & 4 of the CLB, it was contended
that the conclusion of the Board that the return by way of dividend on the
shares was very low is not the only relevant factor in order to determine
whether the purchase of shares was by way of investment. An important factor
which has been ignored by the Board was that capital appreciation was more than
ample to offset the low dividend return. It was submitted that refusal to
transfer was not in the interest of the company and the non-transfer by
the Firodia Group, which controls Bajaj Tempo, was with a view to protect that
group's personal interest. It was also submitted that
even if the transfers were allowed the shareholding of the appellants would be
below 2596 limit. In this connection, it was submitted that it was in the hand
of the Bajaj Tempo Ltd. to avoid inter-connection if any more transfers of
shares was sought for, if with the said transfer the transferability would
reach the limit of 25 per cent. Our attention was also drawn to the fact that
at the relevant point of time, Bajaj Tempo was already a company to whom the
provisions of Chapter 3 of MRTP Act applied by virtue of the provisions
of section 20(a) of the said Act inasmuch as its
assets exceeded 20 crores and, therefore, inter-connection would not have made
any difference. For the view, we are taking, it is not necessary to
refer to or deal with the other contentions raised by
the learned counsels for the appellants.
9. The crucial question is as to
what is the power and scope of directors to refuse to register the transfer of
shares in the case of a public Ltd. Co. whose shares are listed on the Stock
Exchange. In declining to register the transfer of shares, power is sought to be
derived from article 52 of the Articles of Association of the company which
reads as follows:
"52.
The Board may at its own absolute and uncontrolled discretion decline to register or acknowledge any transfer of
shares, and in particular may so decline in any cases
in which the Company has a lien upon the shares or any of them, or whilst any
moneys in respect of the shares desired to be transferred or any of them
remain unpaid, or unless the transferee is approved by the Board, and such
refusal shall not be affected by the fact that the refused transferee is
already a member. The registration of a transfer shall be conclusive evidence
of the approval of the transferee by the Board:
Provided
that the registration of any transfer shall not be refused on the ground of the
transferor either alone or jointly with any other person or persons indebted to
the Company on any account whatsoever except as stated above."
10. The power of the board of directors to refuse registering the
transfer of shares is now settled when these two adversaries had on earlier
round of litigation culminated
in the decision reported as Bajaj Tempo Ltd. v. N.K. Firodia
1970 (2) SCC 550. That was the case where Firodia Group (who controls Bajaj
Tempo Ltd. had applied to Bajaj Auto Ltd., one of the appellants in this
appeal, for transfer of shares of Bajaj Auto Ltd. which had been purchased by
the Firodia Group. The board of directors of Bajaj Auto Ltd. refused to
register the transfers, inter alia, stating that N.K. Firodia and his representatives
had acted against the interest of the company and that it was in the
interest of Bajaj Auto to refuse the transfer. The CLB directed Bajaj Auto to
register the transfer which led to the filing of the
appeal in this Court. Bajaj Auto had placed reliance on its Article 52 of the
Articles of Association, which was identical to article 52 of Bajaj Tempo, and
it contended that it gave the directors absolute and uncontrolled
discretion to decline to register any transfer of shares. Dealing with the question relating to the discretion of the
directors, it was observed at page 554 as follows:
"Article
52 of the appellant company provided that the Director might at their absolute and uncontrolled discretion
decline to register any transfer of shares. Discretion
does not mean a bare affirmation or negation of a proposal. Discretion implies
just and proper consideration of the proposal in the facts and circumstances of
the case. In the exercise of that discretion the Directors will act for
the paramount interest of the company and for the
general interest of the shareholders because the directors are in a fiduciary
position both towards the company and towards every shareholder. The
Directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive."
This
Court then observed that where the directors give reasons, the Court would
consider whether they were legitimate and whether the directors proceeded on a
right or wrong principle. In such a case, the reasons of the directors have to
be decided from three points of view. Firstly, whether the directors acted in
the interest of the company; secondly, whether they acted on a wrong principle;
and, thirdly, whether they acted with an oblique motive or for a collateral
purpose. In this connection reference was made to the observations of this
Court in Harinagar Sugar Mills Ltd. v. Shyam Sundar JhunJhunwala [1962] 2 SCR 339 where it was observed that "the discretion of the Directors would be nullified if
it were established that the directors acted oppressively, capriciously or
corruptly or in some other way mala fide'. After referring to some
English decisions, this Court in Bajaj Tempo Ltd. 's
case (supra) at page 557 observed thus:
"It
follows that where the Directors have uncontrolled and absolute discretion in
regard to declining registration of transfer of shares, the Court will consider
if the reasons are legitimate or the Directors have acted on a wrong principle or from corrupt motive.
If the Court found that the Directors gave reasons
which were legitimate, the Court would not overrule that decision merely on the
ground that the Court would not have come to the same conclusion."
The Court
then examined the facts of that case dealing with three reasons given by the
Bajaj Auto for refusing to transfer the shares it observed that the directors had a hostile feeling against Firodia and
they had the dominant desire to keep Firodia out of the company. They did not
act in the interest of the company and their discretion was tainted by unfair conduct
and unjustifiable attitude against Firodia. The Court rejected the ostensible reasons which were given for refusing the
transfer of shares and it observed that "the reason given by the directors
was a camouflage to cover their collateral and corrupt motive of preserving the
hegemony of the Bajaj Group. The motive is corrupt because the Bajaj Group
acted for their personal interest and not in the bona fide general interest of
the company". Dealing with the third reason, it was observed as follows:
"The
third reason given by the appellant company was that the shares were being
acquired by the Firodia group not with a view of bona fide investment but with
a mala fide purpose and evil design of obstructing the business of the
appellant company. Acquisition or transfer of shares under the articles of the present case does not
suffer from any restrictive impediment like promotion
or personal objections to the transferees. There is no evidence that the
transferees belonged to a rival concern. Equally, there is no evidence that the
Firodia Group ever obstructed in the Management of the Company. On the
contrary, the Firodia group advanced large sums of
money. Firodia was largely responsible for the gradual growth of the appellant
company and for the prosperity of the company. It was therefore an abuse of the
fiduciary power of the Directors to refuse to register transfer of
shares."
In
the end, this Court noted that the refusal to register the shares was a sequel
to the termination of the appointment of Firodia as Chief Executive and it is manifest that the directors acted
for collateral reasons and in their own interest.
11. The shoe now is
on the other foot. Whereas in the aforesaid case, it is Bajaj Auto which had refused to register the transfer the shares in
favour of N.K. Firodia & Group, in the present case, it is the N.K. Firodia
controlled company namely Bajaj Tempo which has refused to register the transfer
of shares in favour of Bajaj Auto and its subsidiary company. The strained relationship between the groups, and the animosity
among them, has been clearly brought out in the aforesaid judgment of
this Court.
12 Mr. R.F. Nariman, the learned Counsel for
respondent No. 2 however contended that there were no
personal reasons for declining to register the transfer of shares in favour of
the appellants. In this connection, he submitted that during the period
September, 1982 to July 1983, the directors of Bajaj Tempo Ltd. had approved
the registration of as many as 42,350 shares in favour of the appellants. It
was contended that the board of directors of Bajaj Tempo Ltd. had acted in bona
fide and reasonable manner even though the share acquisitions by the appellants
were part of a plan of action on its part to acquire a large block of
shares of Bajaj Tempo Ltd. He submitted that it is
only when the said share acquisitions had crossed the limit of 24 per cent and
a razor thin margin remained before the danger limit of 25 per cent was reached
that the Board decided to draw a line and to put an end to any further share
acquisition by the Bajaj Group, leaving an extremely slender margin of
safety of only about 8.7 per cent. He further submitted that the board of
directors had acted bona fide in rejecting the share
transfer and the Court should not interfere even though it may not agree with
the decision of the Board. There was a genuine apprehension, it was submitted,
that if the appellants were directed to continue to acquire further shares in
Bajaj Tempo Ltd., it might result in the company becoming inter-connected with
the Bajaj Group which would result in highly adverse consequences for the
company.
13. We have to consider whether the said apprehension in the mind of
the board of directors of that company was genuine and was it the real reason
for rejecting to register the transfer of shares. In other words, what has to
be determined, keeping in mind the principles enunciated by this Court in Bajaj
Tempo Ltd. 's case (supra) is whether the board of directors had acted in the
interest of the respondent-company.
14. As we see if the power of the board of directors to refuse
registration of transfer of shares must be in the interest of the company and
the general body of
shareholders. No doubt in the year, 1983, section 82 of the Act provided that the shares or other interest of any
member in the company shall be movable property, transferable in the
manner provided by the articles of the company.
Article 52 sought to give absolute and uncontrolled discretion to the board of
directors to decline to register or acknowledge any transfer of shares. Even
then as already held in Bajaj Tempo Ltd's case (supra), the Board has to act
bona fide, and not arbitrarily and for the benefit of the company as a whole.
In the case of a public Ltd. company which is listed with Stock Exchange, an
important right of shareholder is to be able to sell his shares at a favourable
price. It is seldom in the interest of the general body of shareholders that
transfer of shares be refused because that will have an adverse impact on the
market price of the shares. Free transferability of shares will not
artificially deprive its market price. This does not mean that if there is a
good reason then the Board has no power
to refuse to register the transfer of shares. This Court while examining the
action of the board of directors is not expected to exercise original appellate
jurisdiction and sit in appeal on question of fact. The judicial review while
hearing in appeal from the decision of the CLB would be limited to see whether
there was a bona fide exercise of power by the board of directors while
refusing to register the transfer of shares.
15.
The CLB in the present case came to the
conclusion that at least two of the reasons stated by the company while
refusing to register the transfer of share were not correct. It held that the
appellants and Bajaj Tempo were not rivals in business and even though there
was hostility between the managements of the companies but that by itself could
not mean that the appellants were undesirable persons in the matter of transfer
of shares. The only two reasons of the directors which found favour with the
CLB were that the appellants were not bona fide investors and, secondly there
was a genuine apprehension about inter-connection of respondent-company with the
appellants.
16.
Reverting to issue No. 2, we find that in
the Resolution of 29-8-1983 what had been stated was that the appellants were
not acquiring the shares with a view to or for the purpose of genuine
investment "but with ulterior motives and purposes including with a view
to destabilise the management of this company". The alleged reason,
therefore, was that the shares were being purchased
with ulterior motives and purposes and with a view to destabilise the
management of the company. The CLB appears to have misunderstood this reason
and framed the issue as "whether the purchases of impugned shares
were bona /Reinvestments". It opined that being
an investment company, it was not convincing that the appellants would prefer
to invest in the shares of the company other than the respondent-company and
the purchases were made so as to increase its shareholding in the
respondent-company and are, thus, motivated. It also observed that the return
on the shares of respondent-company did not appear to be adequate enough
warranting successive purchases of its shares and appeared to be lacking in
bona fide. In our opinion, this was not a correct approach. Merely because the
appellants wanted to increase the shareholding cannot by itself be a ground in
law for refusing to transfer the shares. Realising this in the resolution of
the board of directors it was alleged that the purchase was not by way of
genuine investment but was made with ulterior/oblique motives and with a view
to destabilise the management of the company. There is nothing placed on the
record which can possibly persuade anyone to come to the conclusion that the intention of the purchase of
shares by the appellants was with a view to destabilise the management of the company or with an
ulterior/oblique motive. Prima facie it appears to us
that even if it is assuming that the appellants were trying to purchase shares
with a view to get a controlling interest in the company that itself cannot be
a ground for refusing to transfer the shares unless and until it can be shown
that the purchasers were undesirable persons and after gaining control of the
company they will act against the company and the shareholders interest. In the
instant case the appellants would not even have 25 per cent shares of
the company even if the transfer of share was registered and, therefore, the
threat to the management, assuming that could be a
valid reason, could not be regarded as genuine.
17. It was submitted on behalf of the appellants that the CLB
overlooked the fact that the return on the investment of such shares is not
only by reason of dividend which is obtained but the main income which was expected to arise was from the appreciation
in value of the shares. It was submitted by the learned counsel for the
appellants that at the time when the purchases were made, the share price was
around Rs. 145 per share and presently it is around Rs. 210 per share. In our
opinion there is merit in this contention. Price appreciation, which may in
future lead to issuance of bonus shares or right
shares, in the event of increase in capital, is a very valid and good reason
for purchasing shares of reputable companies by an investor. Therefore, the
reason, which is given for refusing to transfer the share namely inadequate
return on shares, cannot be regarded as being bona fide.
18. As regards the fear of being regarded a dominant undertaking, in
the event to their being inter-connection between the appellants and the
respondent-company are concerned, it has been contended on behalf of appellant
that the sections pertaining to concentration of economic power in Chapter III of MRTP Act ie., sections 25
and 26 have been omitted with effect from 27-9-1991
and, therefore, as on today it would make no difference and the said reason
cannot be regarded as valid. While it is true that
the fear of respondent-company being regarded as a dominant undertaking as on
today may not arise but what has to be seen is as to whether this could be a
genuine apprehension in the mind of board of directors when in 1983 they
had declined to register the transfer of shares. The admitted fact is that as
on that date, inter-connection could have been established only if the
appellants had acquired 331/3 per cent shares of the respondent-company. But, it is contended that in view of
Sachar Committee's Report, the company apprehended that the Act would be
amended so that instead of 331/3
per cent shares, it should be 25 per cent. We would, therefore, proceed on the
assumption that the figure of 25 per cent had to be avoided by the
respondent-company.
19. It is an admitted
fact that even if the purchase of the shares was registered,
the total percentage of the holding of the appellants group would be short of 25
per cent. The existing shareholding, at that time, was 23.232 per cent had the
transfer of shares been registered then, according to the figures supplied by
Mr. Nariman at the time of hearing, the percentage of the holding of the
appellants group would have risen to only 23.408 per cent. The learned counsels
for the appellants are right in contending that if fear of the inter-connection
was the real reason in refusing to register the transfer then such a reason
could not exist at that moment because even with the registration of the
transfer the total mark of 25 per cent would not be
reached. We are in agreement with the appellants' submission and are of the
opinion that if the number of shares which were purchased had been such that
the total mark of 25 per cent could be reached then the action of the board of
directors could not have been faulted. But with the registration of the
transfer of shares in question that danger mark would
not have been reached. We are unable to accept as correct the appellants
contention that because the total holding of the appellants group would then
become 'dangerously close' to 25 per cent it was a good enough reason to refuse
transfer. There may not have been anything to prevent the company if,
after the shares in question had been registered, any
further purchase of shares was made which would have the effect to push the
holding of the appellants to 25 per cent mark, to reject those subsequent
transfers. As the transfers in question would not have resulted in reaching the
25 per cent mark that cannot be regarded as a valid reason or consideration for
refusing the registration of transfer of shares.
20. Faced with this, Mr.
Nariman, the learned counsel, however, contended that
because of the provisions of MRTP Act in determining the interconnection, the
shares held by a financial institution are required to be excluded. He
submitted that even if the appellants did not purchase any further shares but
further purchase by financial institutions of more shares could possibly lead
to the same result namely of the percentage of holding of the appellants group
going beyond 25 per cent. While it is true that the shareholding of the
financial institutions is not to be taken into account in determining whether
or not two or more bodies corporate are under the same management
because of Explanation IV to section 2(g) of MRTP Act, we find that if the
shares in question had been registered, and existing shareholding of the financial institutions
excluded, then the total percentage of shares of the appellants group would
come to only 24.405 per cent. For this percentage to push up to 25 per cent.
the financial institutions, would have to acquire approximately 27740
additional shares of Bajaj Tempo Ltd., which may not be very likely. In any case,
if such a situation did arise namely Financial Institutions purchasing more
shares which would result in danger mark of 25 per cent to reach, there is
nothing in law which would then prevent the board of directors of Bajaj Tempo
Ltd. to refuse the registration of transfer in favour of Financial
Institutions. In other words just as the directors can refuse to register
transfer of shares in the appellants name in order to avoid inter-connection
similarly, and for the same
reason, they could refuse to register transfer of such further purchases by
financial institutions if such purchase would have had the effect of making the
appellants inter-connected with Bajaj Tempo Ltd. The CLB was therefore, wrong
in rejecting a contention of the appellants that the
apprehension of the respondent-company that it was likely to get
inter-connected with the appellants in the event of the impugned transfer of shares
being allowed was baseless and/or ill-founded.
21. In order to see
whether the board of directors had acted in furtherance of a personal interest or in the interest of company, the resolution
dated 29-8-1983 should be read as a whole. It is apparent that being
aware of the state of law, every possible reason was
stated in this resolution which could justify the directors in refusing to
register a transfer. Of the four reasons given by the Board, two of them were
rejected by the CLB, namely that the appellants were competitors of Bajaj Tempo
Ltd. and that the transferees were not desirable persons from the larger point
of view of interest of Bajaj Tempo Ltd. There is also nothing on record to show
that the purchase of shares by the appellants was with ulterior/oblique motives
and purposes and with a view to destabilise the management of the company.
Lastly, we find that the acquisition in question would not have led to the
inter-connection between the companies and it was not a bona fide exercise of
power by the directors to take into account 'further acquisition of shares' of
Bajaj Tempo Ltd. which may take place in future which may then lead to
inter-connection. It is the extent of shareholding at that point of time which
had to be taken into consideration and not future acquisition which may or may
not take place. It was submitted by the appellants counsel that because
of the provisions of section 108A of the Act as it
stood at that time, further acquisitions could not take place so as to bring up
the shareholding to 25 per cent without first getting Central Government
approval. We, however, need not examine this aspect because, in our opinion, on
the facts which existed on the record, we are satisfied that the
exercise of discretion by the board of directors in refusing to register the shares in the name of the appellants was not
bona fide or in the interest of the company or general body of shareholders.
Accordingly, its decision not to register the transfer of shares was not
correct.
22. For the aforesaid reasons, the
appeals are allowed. The impugned order dated 28-7-1986 of the CLB is set aside and the Resolutions dated
29-8-1983,27-9-1983 and 19-11-1983 of Bajaj Tempo Ltd. are set aside and as a consequence thereof, direction is given to respondent No. 2
to register the shares in question within four weeks from the date of this
judgment. The appellants will be entitled to cost.
[1947] 17 COMP
CAS 182 (LAHORE)
HIGH COURT OF LAHORE
v.
Wahid Bus & Mailsi Transport Co.
TEJA SINGH, J.
Civil Case-No. 17 of 1946
FEBRUARY 25,
1947
JUDGMENT
Teja Singh, J.—One Zaffarullah Khan had a number of fully paid-up
shares, in the Wahid Bus and Mailsi Transport Company Limited, Multan. Out of
these, eighty shares were attached by a firm called Narankari Motor Company,
Multan, in execution of a money decree that the said Motor Company had obtained
against Ch. Zaffarullah Khan. The shares were auctioned on 20th August, 1945,
and were bought by the Motor Company itself. After the sale had been
sanctioned, the Motor Company wrote to the Transport Company for registration
of their name in the register of the shareholders in respect of the eighty
shares sold to them. The Transport Company wrote back to the Motor Company that
the board of directors had permitted the transfer of the shares in question in
their name, but later on, refused to register its name. The Motor Company,
which shall hereafter be described as the petitioner has now made an
application under Section 38 of the Companies Act for rectification of the
register of members of the respondent company.
The defence is that the respondent
company being a private limited concern, under the articles of association, the
directors have an absolute and uncontrolled discretion to register any proposed
transfer of shares and the fact that the petitioner have bought the shares in
an auction sale under the orders of a Court does not make any difference. The
following issue Was framed by Munir, J.:—
"Is the petitioner entitled
to have his name substituted for that of Chaudhri Zaffarullah Khan in the
register of members in respect of eighty shares."
The fact that Ch. Zaffarullah Khan
was a shareholder in the respond ent company is not denied. That out of his
shares, eighty shares were attached and sold by public auction to the
petitioner under the orders of the Subordinate Judge, 2nd Class, Multan, is
proved by the evidence of Diwan Ram Chand, Court t Auctioneer (P.W. 1), and
Sarup Singh, one of the partners of the petitioner company (P.W. 2), and the
copy of the Subordinate Judge's order dated the 7th December, 1945, (Ex. P/D).
It is also clear from Ex. P/D that after the sale had been sanctioned by the
petitioner in its favour the Subordinate Judge executed such a deed under Order
21, Rule 80; of the Civil Procedure Code.
'Now tire question is whether the
petitioner can insist that its name must be brought on the register of members
and the respondent company had no option in the matter. On behalf of the
respondent my attention is drawn to article 20 of the articles of association
which lays down that the directors may in their absolute and uncontrolled
discretion refuse to register any proposed transfer of shares and learned
Counsel argued before me that the word "transfer" referred to in the
articles includes a transfer by order of a Court. In support of his contention
the Counsel cited Manilal Brijlal v. Gordhan Spinning, Weaving and
Manufacturing Co. Ltd., in which
it was held that a purchaser of shares of a limited company at Court sale is
not entitled as of right to have his name entered in the register of the
company as a shareholder and that he is subject to the same rules as a private
purchaser is. While pointing out that in principle there can be no distinction
between a voluntary transfer and a transfer under the orders of a Court the
following observations were made by Bachelor, Ag., CJ.:—
"But the appellant here
contends and must contend that when he purchased from the Court, he purchased,
over and above the share, the absolute right of forcing the directors to register
his name. But that is a right which ex-hypothesi the Court never had to sell. I
infer that the appellant never bought it. This conclusion seems to me to be
reinforced by the consideration to which the learned Judge has referred, the
consideration namely that upon the case for the appellant nothing would be
easier than to override that part of the memorandum of association which
invests the directors with a discretion to refuse to admit undesirable
candidates. For, if the appellant is right, then a person whose professed
object might be to wreck or damage the company could nevertheless oust the
directors' discretion, and compel them to register him, by the simple process
of purchasing through the Court after a collusive decree."
A different view was, however,
taken by a Division Bench of the Madras High Court consisting of Srinivasa
Ayyangar and Ananthakrishna Ayyar, JJ., in Mohideen Pichai v. Tinnevelly Mills
Co.
Manilal Brijlal v. Gordhan Spinning, Weaving and Manufacturing Co. was
cited. Srinivasa Ayyangar, J., did not follow it while the order learned Judge
distinguished it. Articles 19 to 27 of the articles of association of the
company, to which that case related, were under the heading "shares
transfer" and articles 28 to 30 were under the heading "shares
transmission." Relying on articles 20 to 23, the lower Court had held that
it was open to the directors of the company to refuse to register the transfer
even by operation of law. The High Court held that the finding of the lower
Court on this point was wrong. This is what Ananthakrishna Ayyar, J.,
observed:—
"It seems to me that the
lower Courts were wrong in not keeping the distinction between the transfer and
transmission of shares, which are two quite different matters. Transfer is by
the voluntary act of parties, whereas transmission is by operation of law. The
distinction is well pointed out in the case of In re Benthan and Spinning Mill
Company.
James, L.J., observed as follows:—
'In Table A the word transmission
is put in, in contradistinction to the word transfer by the act of parties, the
other means transmission by devolution of law.' "
The learned Judge further observed
that articles 20 to 23 and the other rules under the heading
"transfer" did not apply to the case of Court sale. It may here be
pointed out that in the articles of association of the present company,
articles 18 to 25 appear under the heading "transfer" and
"transmission of shares." Articles 18 to 21(a) relate to transfers
and Articles 20 to 24 to transmission, though the word transmission does not occur
therein. Article 25 is a general article laying down that except as hereinafter
provided no shares in the company shall be transferred to the non-members and
providing the procedure to be followed where such a transfer is sought to be
made. The words of the article are:—
"Every member who intends to
sell his share shall notify his intention to do so to the board and the board
shall sell those shares as his agent to any member at a price to be agreed to
between the vendor and the intending purchaser and in default of agreement, at
the market value of the shares to be fixed by the board. In case the board is
unable to sell those shares within a month of the receipt of the notice, the
vendor, after the expiry of one month may sell the shares not sold to any
person subject to articles 20 and 21 at any price."
It will be seen that though the
articles relating to transfer and transmission do not appear under separate
headings, the framers or the articles of association intended to deal with them
separately, and my opinion is that on the principle enunciated in the Madras
case, the operation of article 20 and other articles dealing with transfers
should be confined to voluntary transfers. I would also like to state that any
other construction would lead to difficult and even absurd results.
According to Order 21, Rule 79, of
the Civil Procedure Code which deals with delivery of movable property sold in
execution of a decree, where the property is a share in a corporation the
delivery thereof shall be made by a written order of the Court 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. It is laid down in Rule 80 that 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 of endorsement by the party. In the present case as I
have already mentioned the Subordinate Judge under whose order the shares were
sold to the petitioner has already executed a document transferring the shares
in the petitioner's favour. There can, therefore, be no doubt that the shares
no longer belong to Ch. Zaffarullah Khan and the title in them has passed to
the petitioner. Evidently, this must have resulted in the satisfaction of the extent
of the amount for which the sale of shares was knocked down in the petitioner's
name. Under the circumstances, to hold that the directors of the company were
competent to ignore the sale and to retain the name of Ch. Zaffarullah Khan in
the register of shares as a shareholder in respect of the shares in question,
would be to contravene the express provisions of the Civil Procedure Code and
to make the orders of the executing Court, which have otherwise become final,
nugatory, and what would be the effect of holding that the directors possess
such powers? Zaffarullah Khan cannot, transfer the shares to any one, nor can
the company pay dividend etc. to him-They are both bound by the prohibitory
orders of the Sub-Judge. The auction sale cannot be undone by them. The case of
the voluntary transfer is quite different, because the intending transferee
before entering into the bargain is expected to find out the real position and
if the articles of association provide that the directors can refuse to register
a transfer, he buys at his own risk. These conditions do not apply to a
purchaser at a Court auction, at least where the articles do not expressly vest
the directors with the power to refuse to recognise a Court sale.
Before turning to the other
points, I would like to say a word regarding the contention that if the word
transfer is interpreted to mean only a voluntary transfer it would be open to
the shareholders to avoid the operation of article 20 by resorting to collusive
and fraudulent decrees and execution sales. A similar argument found favour
with the learned Judges in the Bombay case relied upon by the respondent's
Counsel. My reply to this argument is that fraud and collusion, if pleaded and
proved would cut away the entire ground out of the feet of the auction
purchaser and no Court would recognise such a sale. Moreover, it will always be
open to the directors and shareholders of a company to set at naught all
attempts at collusion and fraud by coming forward to bid at the Court sale. In
this case, it is significant to note that there was not even a suggestion that
the decree, in execution of which Ch. Zaffarullah Khan's shares were sold, was
collusive or any kind of fraud was practised upon the respondent company. On
the other hand, it is proved that the managing director of the company was
present on both the occasions when the auction took place and even attested the
auctioneer's report. On the first occasion no one came forward to bid and the
result was that no sale could take place. By the time of the second auction,
the petitioner company had obtained permission to bid and it being the highest
bidder the sale was knocked down in its favour. No objection of any kind
appears to have been raised on behalf of the respondent company. The perusal of
Ex. P/D further shows that before executing the deed of transfer, the
Subordinate Judge gave the respondent company an opportunity to raise
objections if it had any but it did not even appear in spite of service.
Assuming for the sake of argument
that the word transfer in article 20 is wide enough to cover a Court sale, the
question is whether the directors of the respondent company availed of the
discretion they possessed under that article. The article has to be read along
with article 21(a) which reads follows:—
"If the directors refuse to
register a transfer of any shares, they shall within two months after the date
on which the transfer was lodged with the company send to the transferee and
transferor notice of the refusal."
The following resolution was passed
by the board of directors in their meeting of the 30th November, 1945:—
"Considered the prohibitory
order issued by the Court directing the transfer of eighty shares of Ch.
Zaffarullah Khan in favour of Narankari Motor Company. It is unanimously resolved
that in accordance with the orders of the Court, eighty shares be transferred
to the Narankari Motor Company, but we should seek a remedy so that the
Narankari Motor Company may not become shareholder of our company. (The exact
translation of the last sentence of the resolution which is in Urdu is '
Narankari Motor Company should not become the shareholder of our company).'
"
There is not a word in this
resolution which can be interpreted to mean that the board of directors refused
to accept the Court sale or they declined to register the transfer in favour of
the Narankari Motor Company. On the other hand, it amounts to acceptance of the
transfer. No doubt, they thought of seeking some remedy, but that remedy was
probably by way of putting objections in Court and not the exercise of
discretion, which we are told, vested in them according to article 20. It is
admitted that no objections were filed in Court and even if it be assumed that
the resolution amounted to refusal within the meaning of article 20, no
intimation of it was given either to the petitioner or to Ch. Zaffarullah Khan.
On the other hand, the following letter was addressed by the respondent company
to the petitioner on 5th December, 1945:—
"We hereby inform you that
under the orders of the Court of law the board of directors of the company has
permitted to transfer 80 shares to your name from the total shares of Ch.
Zaffarullah Khan.
A share transfer application is
enclosed herewith. Please get the signatures of the transferors and after affixing
the due stamps it may be returned.
After getting a complete form we
will be able to put your name in our register."
The last part of the resolution
was deliberately suppressed, probably because the respondent company did not
like to give the petitioner an impression that there was the remotest
possibility of the sale of shares in their favour not being registered. In
compliance with this letter the petitioner despatched to the respondent company
a share transfer application duly filled and signed by Lala Radha Kishan,
Subordinate Judge, Multan, on behalf of Ch. Zaffarullah Khan with a covering
letter, dated the 10th December, 1945. In reply to this letter, the respondent
company wrote to the petitioner on 14th December, 1945 (Ex. P/H), that its application
for the transfer of shares was not in proper form and asked it to send another
application.
The letter shows that by then the
respondent company had begun to think of going back upon its previous decision.
The following passage taken from their letter is significant: —
"You should kindly get duly
filled in whereas we will again reconsider your case in our board of directors
as you have failed to put in the proper transfer application.
We are constrained to point out
that our previous letter No. 747, dated 5th December, 1946, should be
considered as cancelled.
Transfer application form sent by
you is being returned.
Note.—It is well settled law that
if the shares are purchased at a Court auction, it does not entitle the
purchaser to be registered as a member as of right. Such a transfer too is
subject to the provisions of company's articles."
The petitioner wrote to the
respondent company in reply that the transfer in its favour was not a voluntary
one and it being an auction purchaser at a Court sale, the assignment by the
Court was the proper form. It, however, added that if in the opinion of the
respondent company some other form should be used, the same be supplied to it
and it would be making another application as desired. After the exchange of a
few more letters, the directors of the respondent company passed the following
resolution in their meeting of the 29th December, 1945:—
"Resolution No. 6 of 30th
November came up for reconsideration. It was unanimously resolved that the
shares should not be transferred in favour of Narankari Motor Company in any
case, because the transfer of such shares is not in the interest of the
company. The secretary has taken the opinion of the legal adviser as well as of
the auditor and both these gentlemen are of opinion that the Subordinate Judge
had no power to issue the order that he did."
This is no doubt a clear refusal
on the part of the respondent company to register the sale in the petitioner's
favour but, I am afraid, it was too late. Even on the supposition that their
powers in the matter were unfettered, the directors should have exercised them
at the earliest opportunity. But when they once accepted the transfer and
agreed to register it and even communicated their acceptance to the petitioner,
they had no power to change that decision.
It was also urged by the
petitioner's counsel that the reasons given by the respondent company for their
subsequent refusal to recognise the auction sale were invalid and unsound and the
Court can pronounced them to be so. In view however, of what I have said above
on other points I do not think it is necessary for me to go into this matter.
In the result the petition is
allowed and it is ordered that the respondent company do enter the name of the
petitioner company as holders of eighty shares that were previously held by Ch.
Zaffarullah Khan. The respondent shall pay the petitioner's costs.
[1934] 4 COMP.
CAS .166 (MAD.)
HIGH COURT OF MADRAS
v.
P. & O. Banking Corpn. Ltd.
BEASLEY, C.J.
AND PANDRANG ROW, J.
O.S.A. NO. 71 OF 1933
FEBRUARY 2, 1934.
S. Duraiswami Iyer and V. Balaraman, for the Appellant.
Nugent Grant and O.T.G. Nambiar for the Respondents.
Beasley, C.J.—This is
an appeal from an order of Stone, J., and arises out of the liquidation of the
Madras Cloth Market Ltd. The Managing Directors of the Company were the firm of
Callianjee & Sons, whose sole proprietor was Ramjee Callianjee. He held
5000 fully paid up shares in the company in his own name. On the 10th
September, 1924 he, being on that date indebted to the company to the extent of
Rs. 36,000, borrowed Rs. 2,00,000 from the P. & O. Bank and gave them an
equitable mortgage of some of his immovable property and the 5000 shares already
referred to as security for the loan. In 1925 the Bank filed a suit (C.S. No.
283 of 1925) against Callianjee & Sons on the equitable mortgage obtaining
a preliminary decree for sale on the 4th September, 1925, and a final decree on
the 9th October of the same year. On the 22nd February, 1926, the liquidation
of the Madras Cloth Market Ltd. was ordered by the High Court. Up to this time
no notice of the equitable mortgage had been given by the Bank to the company.
Such a notice was given after the company went into liquidation. On the 7th
October, 1929, Callianjee & Sons became insolvents and the assets of that
firm became vested in the Official Assignee of Madras. In the course of the
winding-up the liquidator got in the assets of the company and collected and
discharged debts; and he has paid Re. 1 per share to the contributories of the
company except Ramjee Callianjee or the Bank which got the equitable mortgage
over Ramjee Callianjee's shares. The P. & O. Bank, as equitable mortgagees,
applied to the liquidator for the 5000 shares covered by the equitable
mortgage. The Official Liquidator contended, and contends here, that the Bank
are not entitled to be paid the value of those shares because the company are
entitled to set off these shares of Ramjee Callianjee against the Rs. 36,000
owing to the company by Ramjee Callianjee. It is admitted that the Official
Liquidator has a sufficient fund out of which to pay the Bank's claim, should
this appeal be dismissed. Stone, J., held that the company in liquidation had
no lien on these shares of right, to set off Ramjee Callianjee's debt to them
against those shares and that the Bank were entitled to the shares by reason of
the equitable assignment of the shares to them by Ramjee Callianjee. He
expressed some doubt as to whether the case was within the principle enunciated
in In re Peruvian Railway Construction Co., Ltd., and held that that case did
not govern this. Mr. Grant on behalf of the respondents stated here that he did
not base his claim on that case at all and that it need not be considered. We
have had some difficulty in this case because there is nothing but the briefest
order to help us but, as I understand it the learned trial Judge has allowed
the Bank's claim because the equitable assignment was prior in date to the
liquidation. The case has been argued before us as if it were in the Court of
first instance and unquestionably the point raised here is one of very
considerable importance. It is necessary to refer to the material articles of
association of the company. The first of them is Article 20 which gives the
company a first and paramount lien upon all the shares other than fully paid up
shares registered in the name of each member whether solely or jointly with
others for moneys from time to time due or payable on any account whatever to
the company. It is conceded by the appellant that the company could not under
this article claim a lien on Ramjee Callianjee's shares because those are fully
paid up shares whereas Article 20 deals only with partly paid shares. The
Article 22 says that the company shall not be bound to recognise any equitable
interest in shares other than that of a registered holder. Then Article 28,
which is the important article here, gives the Board power to refuse to register
or acknowledge any transfer of shares whilst the shareholder executing the
transfer is indebted to the company on any account whatsover. In the present
case, Ramjee Callianjee's indebtedness of Rs. 36,000 was not one in respect of
his shares but on an entirely independent account; and it is clear from Ex
parte Stringer that a company which has an article of association similarly
worded would be entitled to decline to register a transfer if the member is
indebted to them on any account whatsoever, and that this power is not limited
to an indebtedness for calls and indeed that point is not contested here by
the respondents. One of the contentions put forward by the appellants here,
and indeed it was put in the forefront of their case, was that the proceeding,
in which the Bank's claim to the shares and the company's claim to set off
against those shares Ramjee Callianjee's debt to them should be settled, was
the adjustment of rights of contributories under Section 192 of the Indian
Companies Act (VII of 1913) which corresponds to Section 211 of the English
Companies Act of 1929 which is the same as Section 170 of the Act of 1901. It
is contended that the Bank are not contributories because the transfer to them
by Ramjee Callianjee of his shares was never registered and no application for
registration was ever made and, if it had been, the company would have been
entitled to refuse to register the transfer by reason of Article 28 of the
articles of association, because Ramjee Callianjee was indebted to them to the
extent of Rs. 36,000. The respondents, besides contesting the argument that
this is a matter arising out of Section 192 of the Indian Companies Act, argue
that Ramjee Callianjee is not a contributory because he is the holder of fully
paid up shares. This argument, however, appears to me not to be correct because
in Buckley on the Companies Act, 10th Edition, in the notes to Section 170 of
that Act at page 401 it is stated:
"A holder of fully paid shares is a contributory
within the meaning of the Act; when all debts have been paid, a call may be
made upon the partly paid shareholders to adjust the rights between them and
the fully paid shareholders,"
and the case referred to in support of that statement is In re Anglesea Colliery Company,
2 Equity Cases, 379. Mr. Grant contends that
on the particular facts of that case fully paid shareholders were held to be
contributories but it is quite clear that in the opinion of the learned author
of Buckley on the Companies Act fully paid shareholders are contributories
without any qualification. This point was definitely raised in the argument of
Counsel in the case referred to as appears from page 385 of the report, and at
page 388 Vice-Chancellor Wood in his judgment says;
"No doubt the argument is a fair one, "you who
have fully paid up your shares are not contributories, and therefore your
rights cannot be required to be adjusted; you have paid your £5 per share, and
having fully paid up the amount, it is unnecessary to adjust your rights;
although if there are any shareholders who have paid only £4-19-6 they will in
that state of circumstances, have a claim to have their rights adjusted."
The result would be that those who have paid in full would have no voice or
controlling power in disposing of the assets; and these being distributed, the
company is dissolved. They would therefore have no remedy whatever. I think
that is not the scope of the Act. It appears to me that the sound construction
of the Act requires that there should be given to that word "contributors"
the effect of providing for the final adjustment of the rights of all persons,
who, if their shares were not paid up, would be in the position of contributing
members."
On appeal in In re Anglesea
Colliery Company [[1865-66] 1 Ch. Appeal Cases
555], Lord Justice Turner expressed the same opinion at page 560. He there
says:
"Now it seems to me to be clear, beyond all doubt,
that the purpose of the Act is, inter alia, to adjust the rights of all the members
of companies which should be wound up under it. Indeed, I do not see how the
rights of those members who have not paid up in full could be adjusted without
the rights of those members who have paid up in full being taken into
account."
The proceedings before us were clearly an adjustment of the
rights of the contributories but the Bank are not contributories because they
are not the registered holders of these shares and up to the date of this
application in the trial Courts I understand it had not applied to have the
transfer of these shares to them registered. But it seems that a suggestion was
made that they should apply for a rectification of the register by getting the
transfer of the shares registered; it is argued by the appellants that the Bank
are not entitled to have the transfer registered. That they must become the
registered holders of the shares is clear beyond all question. They cannot be
recognised as owners unless they are registered as such. (In re Perkins, Ex
parte Mexican Santa
Barbara Mining Company and New London and Brazilian
Bank v. Brocklebank. It is, therefore, important to see whether the company
would be entitled to refuse to register the transfer of the shares to the Bank.
For the appellants it is contended that, as Ramjee Callianjee was indebted to the company
on the date of the transfer of the shares by him to the Bank, the company
could, under Article 28 of the articles of association, decline to register the
transfer. Against this there is the contention that the company would be only
entitled to do so provided they had a first and paramount lien upon these
shares. In support of the appellants' contention that the company were entitled
to refuse to register the transfer of the shares the case of Ex parte Harrison,
In re Cannock and Rugeley Colliery Company was
relied upon. There, by Article 17 of the articles of association of the company
the directors might decline to register a transfer of any share or shares
whilst the member making the transfer was either alone or jointly with any
other person indebted to the company on any account whatsoever or if they
should consider that the transferee or transferees was or were an irresponsible
person or irresponsible persons. The company refused to register a transfer
made by a shareholder to the nominees of a bank as a security for advances on
the ground that the transferor was indebted to the company. Subsequently, the
transferor filed a liquidation petition and a trustee in liquidation was duly
appointed. The trustee with the consent of the bank and their nominees applied
to the directors of the company to be registered as the owner of the shares.
This application was refused. This case was really a question as between the
transferees and the trustee and, the transfer not having been registered, it
was held that the trustee was not entitled to be registered as the title of the
transferees was subject to the right of the company under Article 17 which was
to refuse to transfer on account of the indebtedness to them of the shareholder-transferor.
On page 369 Earl of Selborne, Lord Chancellor, stated:
"The 17th article of association says that the
directors may decline to register a transfer if the member making the same is
indebted to the company, or if they shall consider that the transferee is an
irresponsible person. The two cases thereby provided for are, to my mind,
essentially different. The first case is that in which the transferor is
indebted to the company. That provision is made for the company's benefit. I
do not think that the declining to register under that provision is a
non-approval of the transfer in the sense in which the term
"non-approval" is used in a subsequent article. The Company only
decline to register so as not to lose the right they have against the registered
owner in respect of their debt. That refusal might be put an end to at any
moment by payment of the debt."
In the course of the argument the Earl of Selborne, L.C,
asked the question "would not the bank's nominees (transferees) be
entitled to be registered on satisfying the company's claim?" and on page
370 the consent of the bank to the proposal registration of these shares in
the name of the trustee in liquidation is stated by the Earl of Selborne to
have been in order to get rid of the right of the company to a set-off in
respect of their claim. This case certainly supports the appellants'
contention. But it must be observed that there were there no articles of
association giving the company a lien on shares on account of the shareholder's
indebtedness to the company. The position in that case was that as between the
transferee and the trustee in liquidation the former was the true owner but as
between the transferee and the company the transferee could only become the
registered owner of the shares on paying off the transferor's debt to the
company. On the other side, there is a decision ten years earlier in date,
namely, In re Stockton Malleable Iron Company where it was held by Jessel,
M.R., that a company could only refuse to register a transfer of shares
belonging to a debtor-shareholder in cases where under the articles they have a
lien on those shares by reason of that indebtedness. Two articles of
association were in question there. The 7th article gave the company a first
and paramount lien on all shares of any member for any monies due to the
company etc., and Article 16 enabled the company to decline to register any
transfer of shares whilst the member making the transfer was indebted to the
company on any account whatever. It was held that these two articles related to
the same subject-matter and that the 16th article was a mere supplement to the
7th and not independent in the sense that the members whose shares could be
dealt with under the 7th were different from the members whose shares could be
dealt with under the 16th. On page 103 Jessel, M.R., says:
"Then, as I read the 16th article, it is that they may
decline to register that for which they have a lieu under the 7th article. The
16th article says they may decline to register any transfer of shares by a man
who is indebted to them. Why may they decline to register? Because they have a
lien. That seems to me the only reason why they may decline to register. It is
against the interest of companies to fetter transfers. The more free the
companies make the transfers the better for them, and the better for their
shareholders, and therefore the only object of fettering the transfer is to
secure the lien of the company."
Where that case differs from the present one is that the
7th article gives the company a lien on all shares and the 16th article speaks
clearly of shares and therefore the same class of shares as in the earlier
article. In the present case Article 20 gives a lien only on partly paid-up
shares, whereas in Article 28, the refusal to register transfers article,
merely shares are mentioned; and in Bradford Banking Company v. Briggs under
the articles the company was given a first and permanent lien and charge upon
every share. The question in that case was whether the company which had under
Article 103 of its articles of association a first and permanent lien and
charge available in law and in equity on every share for all debts due from the
shareholder to the company, could claim priority over the bankers who held the
shares deposited with them as security for the balance due from the shareholder
on current account even in respect of money which became due from the
shareholder to the company after notice of the deposit had been given to the
company. It was held that the company could not claim such priority but could
only do so by reason of their lien in respect of debts due to them before
notice of the deposit. There was no question in that case as to the company's
right to refuse to register transfers and there was no article similar to
Article 28 in the present case although Article 100 of the articles of
association of the company provided that no transfer of shares could take place
without the approval of the Board of Directors. The appellants there claimed in
the suit (1) an account of what was due to them for principal, interest and
costs on the securities and to have their securities realised by foreclosure
and sale and (2) a declaration that the securities had priority over all lien
(if any) of the respondent company on the shares created by their articles of
association or otherwise. The point established was that a creditor cannot give
credit on the security of property belonging to the debtor after he has notice
that the property has so far been parted with by the debtor. If the creditor
does so, his claim cannot prevail against the earlier claim. If in the present
case the appellants had a lien on their shares by reason of the indebtedness of
Ramjee Callianjee to them, then, as that indebtedness was prior in date to the
equitable mortgage of the shares with the respondents and further as no notice
of that deposit was given, they would be entitled clearly to priority over the
respondents. But it is clear that under the articles of association no lien is
given to them over fully paid shares and it is conceded by Mr. S. Doraiswamy
Ayyar that the appellants do not claim to refuse to register the transfer by
reason of any lien but it is because Article 28 gives them a right to set off
Ramjee Callianjee's indebtedness to them against his shares and Lord Selborne's
observations in the course of his judgment in Ex parte Harrison, In re Cannock and
Rugeley Colliery Company (28 Ch. D. 363 at
page 370) do describe the right of the company under the articles as a right to
set off their claim. The difficulty in this case is caused by the use of the
description in Article 20 of shares not fully paid up and in Article 28 of
shares merely; but I think that it cannot have been intended to give the
company any right to refuse to register a transfer of shares unless the company
had a lien on those shares and it is only because of that right that the
company would be entitled to refuse to register a transfer as was stated by
Jessel, M.R., in In re Stockton Malleable Iron Company. If this is the correct
view, then the respondents are entitled to have the transfer to them of the
shares registered and their claim to them recognised and the company having no
lien are not entitled to set up Ramjee Callianjee's indebtedness to them in
priority to the claim of the respondents. Therefore the learned trial Judge
arrives at the correct result and this appeal must be dismissed with costs.
Certify for two counsel on both sides. The Official Liquidator
will take his costs out of the estate as provided for in Order 6 Rule 19 of the
High Court Fees Rules 1933.
Pandrang Row, J.—I agree.
[1980] 50 COMP. CAS. 365 (GUJ.)
HIGH COURT OF GUJARAT
v.
Dharamdas Hargovandas Mehta
B.J. DIVAN, C.J.
AND S.B. MAJUMDAR, J.
O.J. APPEAL NO. 14 OF 1978 WITH CIVIL APPLICATION NO. 48 OF
1978 IN COMPANY PETITION NO. 19 OF 1978
DECEMBER 20, 21, 1978
I.M.
Nanavati for the Appellant.
K.H.
Bhabha, M.I. Hava, Bhaishankar Kanga and Girdharlal for the Respondent.
Divan
C.J.—This appeal
has been filed against the judgment and order of our learned brother, S.H.
Sheth J., in Company Petition No. 19 of 1978. By his judgment and order, our
learned brother allowed the petition and directed the present appellant to
rectify its register of shareholders by entering therein the name of the second
respondent in this appeal as a member of the appellant-company in respect of
shares held by respondent No. 2 and listed para. 3 of the petition. The
appellant-company was to file the notice of rectification with the Registrar of
Companies within thirty days from the date of the order in Form No. 21 in App.
I to the Companies Act, 1956. The appellant-company was directed to pay the
costs of the petition to the respondents herein. Thereafter, the present appeal
was filed, and pending the appeal, the operation of the order of the learned
judge regarding rectification of the register of shareholders was not required
to be stayed because Mr. Hava for the respondents stated that his clients would
not press for implementation of rectification of the register of shareholders.
Facts
giving rise to this litigation are that respondent No. 1 herein is a
shareholder of the appellant-company, Master Silk Mills Private Ltd.,
hereinafter referred to as the "Master Mills". Respondent No. 1 was
the registered holder of 260 equity shares, 136 first preference shares and 36
second preference shares of the Master Mills. On February 15, 1976, the first
respondent entered into an agreement with respondent No. 2 herein, New Mahalaxmi
Silk Mills Private Ltd., hereinafter referred to as "New Mahalaxmi
Mills". The first respondent is the chairman of the New Mahalaxmi Mills.
The agreement was to transfer all the shares of Master Mills held by the first
respondent. On 10th March, 1976, the first respondent wrote three letters to
the board of directors of the Master Mills. In one letter, he mentioned his
desire to transfer 260 equity shares of Master Mills to any prospective buyer
who was a shareholder of Master Mills. He further stated that he was prepared
to do so at the latest break-up value of Rs. 737 per share. He requested the
board of directors of the respondent-company to circulate his offer to the
existing shareholders and let him know whether any one was willing to buy those
shares at the value of Rs. 737 per share. He also stated in his letter that he
would wait for four calendar months from the date of the said letter for
receiving the reply to his letter. By his second letter of the same date, he
stated that he was desirous of transferring 138 first preference shares of the
face value of Rs. 500 each to any existing shareholder and requested the board
of directors to circulate his offer to the existing shareholders. The break-up
of each share was Rs. 312.50 and he laid down similar condition about four
months' notice and waiting for a period of four months for reply to his offer.
By the third letter, he expressed his desire of transferring 36 second
preference shares of the face value of Rs. 500 each at the break-up value of
Rs. 281.25. The board of directors were asked to circulate all these three
offers regarding equity shares, first preference shares and the second
preference shares to the existing shareholders and ascertain their wishes. On
29th March, 1976, Master Mills wrote to their auditors to determine the fair
market value of the shares held by respondent No. 1 because the directors felt
that the price quoted by the first respondent were far in excess of the fair
value. On 12th March, 1976, respondent No. 1 wrote to the auditors that so far
as the break-up value of the shares held by him was concerned, it had been
worked out on the basis of balance-sheets of Master Mills for the year ending
31st December, 1974, and that he had been taxed on the basis of such break-up
value under the W.T. Act. He further stated that the break-up value, being
written down value, was very much on the lower side of the market value. On May
13, 1976, respondent No. 1 wrote to the auditors a letter in which he stated
that pursuant to art. 73 of the articles of association of the Master Mills,
transfer of shares could be effected at a price which the auditors of the
company would testify to be the fair market price as between a willing seller
and a willing purchaser or at a price which could be agreed upon between the
vendor and the Board. Respondent No. 1 further stated that he had a willing
purchaser for his shares at the price stated in the transfer notice, dated 10th
March, 1976. He, therefore, requested the auditors to take note of that fact
while fixing the fair value of his shares. On July 9, 1976, the managing
director of Master Mills sent a circular letter to all shareholders of the
company in which he stated that a shareholder of that company had offered 260
equity shares, 136 first preference shares and 36 second preference shares for
sale at the fair value of these shares as fixed by the auditor, which were also
mentioned in that circular letter. With these details, the managing director
invited the existing shareholders to purchase the shares offered by respondent
No. 1 if any one of them was interested in those shares. On August 7, 1976, the
managing director of Master Mills wrote to respondent No. 1 that the company
had circulated his offer for sale of shares to the existing shareholders and
that no offer was received from any existing shareholder to purchase the
shares. He, therefore, stated in that letter that respondent No. 1 was entitled
to transfer his shares to any purchaser subject to the provisions of the
articles of association of Master Mills.
On
August 21, 1976, on behalf of respondent No. 1 three letters were written to
the managing director of Master Mills. By the first letter, he intimated to
Master Mills that he was transferring to New Mahalaxmi Mills all his equity shares
at the fair price fixed by the auditors of Master Mills. By the second letter,
he intimated that he was transferring to New Mahalaxmi Mills all his first
preference shares at the fair price fixed by the auditors and, similarly, by
the third letter, he intimated to Master Mills that he was transferring to New
Mahalaxmi Mills all his second preference shares at the fair price fixed by the
auditors of the company. Along with the three letters, respondent No. 1 sent
three transfer deeds duly stamped and executed by him as transferor and by New
Mahalaxmi Mills as transferees. On December 23, 1976, Master Mills wrote to
respondent No. 1 that the board of directors of Master Mills at a meeting held
on that very day had unanimously decided to refuse registration of the said
transfer. The transfer deeds and the relevant share certificates were,
therefore, returned to respondent No. 1. By this letter, Master Mills did not
disclose any reason why the registration of the transfer of shares was refused.
Against this decision of the board of directors, an appeal was preferred by
respondent No. 1 to the Central Government, purporting to be an appeal under s.
111 of the Companies Act, 1956. The appeal was preferred on 9th August, 1977.
On December 20, 1977, the Under Secretary to the Company Law Board informed the
attorney of the respondent No. 1 that the Central Government had no inherent
powers under s. 111(5) of the Companies Act and that the Central Government did
not have any jurisdiction to entertain the appeal filed by respondent No. 1. It
was also intimated in that letter that respondent No. 1, if he so thought fit,
might apply to the court under s. 155 of the Companies Act for the necessary
relief.
Thereafter,
respondent No. 1 and New Mahalaxmi Mills filed Company Petition No. 19 of 1978
and sought relief under s. 155 of the Companies Act. Various contentions were
urged before our learned brother, but out of those several contentions, ultimately at the stage of appeal, Mr.
Nanavati on behalf of the appellant, Master Mills, has confined his argument
only to two main contentions. His contention is that under article 76 of the
articles of association of Master Mills, any transfer by a member to an
outsider is subject to the approval of the board of directors and since the
board of directors did not approve of the transferee, namely, New Mahalaxmi
Mills, rectification of the register could not be granted. He urged in this
connection that, unlike a public limited company, a private limited company is
more in the nature of a partnership concern where there should be mutual
confidence amongst the shareholders and, in the instant case, New Mahalaxmi
Mills was a rival company engaged in more or less similar line of business as
that of the petitioner-company and, therefore, the board of directors had
justifiable reasons in refusing to register the transfer of shares from
respondent No. 1 to New Mahalaxmi Mills. In this connection, Mr. Nanavati for
the appellant urged that a private company is in the nature of a partnership of
persons with mutual confidence in each other and the articles of private
companies place positive restrictions on absolute transfer of shares and, in
the instant case, the articles permit unrestricted transfer from member to
member or to an outsider if approved by the directors or to lineal descendants
or relatives of existing members. According to him, the principle laid down by
the Supreme Court in Bajaj Auto Ltd. v. N.K. Firodia, [1971] 41 Comp Cas 1; AIR
1971 SC 321, for guidance of courts exercising powers under s. 155 of the
Companies Act do not apply to the case of a private limited company because a
private limited company functions in the context of different provisions of law
altogether. He further contends that even if the procedure laid down in the
articles has been followed by the intending transferor and the intending
transferee, ipso facto no right is created empowering the intending transferor
to transfer the shares to a non-member unless the proposed transfer is approved
by the board of directors. He contended in this connection that even if s. 155
of the Companies Act is couched in a wider language, jurisdictional fetter
should be put on those powers in the case of a private company ; if the private
company points out compliance with the articles as a matter of principle, the
court should not interfere with the exercise of discretion of the board of
directors if they function within the four corners of the provisions of the
articles of association. He further contended that the question of testing the
bona fides of the directors in disapproving the proposed transfer has to be
circumscribed by the object with which the company was registered as a private
company instead of as a public company and he contended that the reasons given
by the directors for rejecting the transfer are germane to the interest of the
company as distinguished from the interest of the transferor and cannot be
described as mala fide.
Before
dealing with the legal position, it may be pointed out that the total number of
equity shares issued by Master Mills is 1920 and, in the instant case, we are
concerned with a dispute regarding transfer of 260 equity shares held by
respondent No. 1. It has been found by our learned brother, S.H. Sheth, J., on
the materials before him that, though Master Mills and New Mahalaxmi Mills are
both manufacturers of art silk, the position regarding their manufacturing
activities is not on the same lines. Master Mills purchase art silk yarn and
manufactures art silk cloth. This constitutes more than ninety per cent, of its
business. It also carries on, to an insignificant extent, business of
production of art silk cloth. So far as New Mahalaxmi Mills is concerned, the
manufacture of art silk cloth consists of eight per cent, of its business while
ninety-two per cent, of its business consists of processing art silk cloth. It
is thus clear that what constitutes the major part of the business of one
company constitutes an insignificantly small part of the business of the other
company. Moreover, Mr. Bhabha pointed out from the affidavits in the case that
whereas Master Mills is carrying on its activities at Bhavnagar, New Mahalaxmi
Mills carries on its activities in Bombay. Secondly, even as regards weaving of
art silk cloth or manufacture of art silk cloth by New Mahalaxmi Mills, it is
more like a job work where yarn supplied by customers is woven by New Mahalaxmi
Mills and cloth thus prepared is given back to the customers at appropriate
adjustment of rates. Thus, the principal activity of New Mahalaxmi Mills is
that of processing cloth or processing yarn into cloth for its customers,
whereas Master Mills of Bhavnagar is essentially a manufacturing concern with
the processing of art silk cloth only and insignificant manufacturing activity.
Under these circumstances, the very basis of Mr. Nanavati's argument that New
Mahalaxmi Mills is a rival concern is not tenable. In this connection, we may
point out that, under s. 155(4) of the Companies Act, an appeal lies against a
decision of the trial court under s. 155 under the following circumstances :
"155.
(4) From any order passed by the Court on the application, or on any issue
raised therein and tried separately, an appeal shall lie on the grounds
mentioned in section 100 of the Code of Civil Procedure, 1908, (V of 1908)—
(a) if
the order be passed by a District Court, to the High Court;
(b) if the order be passed by a single judge of
a High Court consisting of three or more judges, to a Bench of that High
Court."
We
will proceed in this case on the footing that the Code of Civil Procedure,
1908, prior to its amendment in 1976, will apply to the instant case. As
pointed out by the Andhra Pradesh High Court in Abdul Karim Babu Khan v. Sirpur
Paper Mills Ltd. [1969] 39 Comp Cas 33, a finding of fact arrived at by a
company judge is conclusive and cannot be challenged in appeal under s. 155(4)
of the Companies Act, except on the grounds mentioned in s. 100, Civil
Procedure Code, 1908, viz., where a decision is contrary to law or where the
decision has failed to determine some material issue of law or where there is
substantial error or defect in procedure provided by the Code or any law in
force. It is clear that the finding that New Mahalaxmi Mills was not a rival
company and that there was no competition in business between Master Mills and
New Mahalaxmi Mills, is a finding of fact and that finding of fact can only be
disturbed on a point of law, not otherwise. No appeal lies regarding that
particular finding of fact.
Mr.
Bhabha for the respondents drew our attention to the affidavits filed in this
case and pointed out to us that the case set out in the affidavit filed on
behalf of the respondent, namely, that there has not been a single instance of
competition in the past, has not been controverted in the subsequent affidavit
filed on behalf of Master Mills by the managing director or by the principal
officer, Thakar, of Master Mills. In our opinion, the finding of fact that
there was no rivalry, between Master Mills and New Mahalaxmi Mills cannot be
disturbed, but Mr. Nanavati is right when he contends that it is not a finding
of fact given by a court of law that would matter but what would matter is the
opinion of the board of directors of Master Mills regarding the possibility of
rivalry between the two concerns. In our opinion, the real crux of the matter
is as to what transpired at the meeting of the board of directors held on
December 23, 1976. English translation of the extract from the minutes of the
meeting held on December 23, 1976, is Annex. I to the affidavit of B.K. Thakar,
principal officer of Master Mills, and according to that extract of the
minutes, the managing director of Master Mills informed the board of directors
that if these shares were transferred to New Mahalaxmi Mills, the same company
would have a holding of 14 per cent of share capital in Master Mills. At
present, under the provisions of s. 43A of the Companies Act, if a body
corporate held 25 per cent, of shares of a private company, the said company is
to be deemed to be a public company, but if there is any change in the
provisions of the Companies Act and the percentage is reduced below 14, there
would be difficulties for Master Mills. Moreover, New Mahalaxmi Mills is having
the same business as Master Mills and thus it could be considered as a rival
company. The minutes proceed :
"The
managing director also appealed to the directors to decide the matter keeping
in view the past of the directors of the said company vis-avis our company.
Thereafter, there was some discussion amongst the directors and Shri Trikamlal
B. Shah proposed the following resolution :
Resolved that taking into
consideration the circumstances as a whole, it is not in the interest of the
company to transfer the shares as per transfer deeds submitted by Shri
Dharamdas Hargovandas as stated by the managing director and therefore his
application for transfer of shares is hereby rejected."
Dharamdas Hargovandas is
the first respondent in the present appeal.
On June 24, 1978, Ramniklal
B. Shah, managing director of Master Mills, also swore to an affidavit and in
para. 4 of that affidavit, it has been stated :
"I say and submit that
the only consideration which weighed with the board of directors at the time of
considering the impugned transfer of shares of petitioner No. 1 in favour of
petitioner No. 2, was the desirability of permitting a corporate body to become
the shareholder of the respondent-company, which is a private limited company.
Since the total membership of the respondent-company is of 48 members,
permitting any corporate body to become the member of the respondent-company
even if it is a private limited company, would attract the provisions of s.
43A. It was also considered that if petitioner No. 2 company becomes the member
of the respondent-company it would immediately be a member holding more than
14% of the shares of the respondent-company and, in view of art. 71 of the
articles of association of the respondent-company, the petitioner No. 2 company
would be entitled to purchase directly from other members of the
respondent-company shares to any extent and get them transferred to its name
without any restriction whatsoever. In that event, the respondent-company will
be left to the mercy of petitioner No. 1 company for continuing its character
as a private limited company."
In para 6, it is once again
reiterated :
"In these
circumstances, the board of directors thought it desirable, in the interest of
the respondent-company, that no corporate body should be permitted to become a
member of the respondent-company and only with that consideration, petitioner
No. 2 was not approved by the proposed transferee to become a member of the
respondent-company."
It is thus clear that the
only consideration which weighed with the board of directors of Master Mills in
not approving New Mahalaxmi Mills was the consideration that a corporate body
should not be permitted to become a member of Master Mills. That and that was
the only factor which weighed with the board of directors in rejecting the
application for registration of transfer. The question will have now to be
examined whether this was a relevant and germane factor for the consideration
of the directors while considering the question of approval of the transfer.
Articles 71 to 76 of the
articles of association of Master Mills are relevant for this purpose. Article
71 deals with transfer of shares by a member to any other member and is not,
strictly speaking, relevant for our purposes. Article 72 deals with transfer of
shares by one member to his wife and other relations and, again, it is not
strictly germane to our purpose except explaining the scheme of these articles.
Under arts. 73, 74 and 75, procedure is laid down when a member intends to
transfer shares to an outsider, that is, neither to a member under art. 71 nor
to a member of his family under art. 72. Transfers under arts. 71 and 72 are
not required to be approved by the board of directors. Under art. 76, in the
event of the whole of the said shares not being sold under the articles, the
vendor may at any time within three calendar months after the expiration of the
said 21 days, transfer the shares not sold to any person at the price so fixed
as aforesaid, and the concluding words of art. 76 are :
"But the directors may,
in their absolute discretion and without assigning any reasons, decline to
register any such transfer of shares if the purchaser be a person of whom they
do not approve."
In art. 59 of the articles,
it has been provided :
"The directors may at
any time in their absolute discretion without assigning any reasons decline to
register any proposed transfer of shares. The directors shall so decline to
effect registration of transfer if the provisions of art. 3 hereof would be
contravened thereby."
Mr. Nanavati has drawn our
attention to the passages from Palmer's Company Law, 22nd Edn., pp. 393-396 and
arts. 40-12 and 40-15 on those pages. He has also drawn our attention to
Gore-Brown on Companies, 43rd Edn., paras. 16.2 and 16.3. Ultimately, these
passages in the standard text books by Palmer and Gore-Brown are based on two
decisions of the courts in England. The first of these decisions is of the
Court of Appeal in England in In re Bede Steam Shipping Company Ltd. [1917] 1
Ch 123. It must be pointed out that it was a case of a public company as
distinguished from a private company and the head-note of the case says :
"A power for directors
to refuse to register transfers of shares if 'in their opinion it is contrary
to the interests of the company that the proposed transferee should be a member
thereof' only justifies a refusal to register upon grounds personal to the
proposed transferee. It does not justify refusal to register transfers of
single shares or shares in small numbers because the directors do not think it
desirable to increase the number of shareholders, or because they think that
the transfer is not bona fide, but that the transferee is the mere nominee of
the transferor, and the transfer is made to increase the number of shareholders
who will support him in a policy which the directors disapprove."
Lord Cozens-Hardy M.R.
observed at page 133 of the report :
"In the case of Ex
parte Penney [1872] LR 8 Ch App 446 that great judge, Mellish L.J., says : 'The
directors have no right to say, "We will force a particular shareholder to
continue a shareholder, and we will not allow him to transfer his shares at
all." That would be an abuse of their power. In the same way it would be
an abuse of this power to object, on any ground not applying personally to the
transferee, to say, for instance, that a particular shareholder should not
transfer his shares till he had given security for the calls.' That lays down a
principle which seems to me to be perfectly sound and a principle which has
been followed, so far as I am aware, for at least forty years, and I should be
very sorry in any way to infringe upon it. The point which is taken by Mallish
L.J. is this : You may look and see personally who the transferee is. There may
be personal objections to him ; it may be because he is a quarrelsome person,
it may be because he is an uncertain person, or it may be that he is acting in
the interests of a rival company, or something of that kind. All those things
are fairly included in the word 'personal'; but to seek to say 'We will not
accept any transfer of a single share from a particular shareholder who holds a
large number, is, it seems to me, an abuse of the power which was conferred by
the clause in the articles."
Similarly,
Warrington L.J. has observed at page 136 :
"The directors
refused, on that view, to register this transfer ; they thereby deprived the
transferee of his right to be a member of the company ; they deprived their
fellow-shareholder of the right to sell his share and to retain the
purchase-money, which, as I understand, he had actually received from the
transferee. Was that justified by the articles? The article gives them one
ground, and one ground only, for refusing to register the transfer of a
fully-paid share, namely, that in their opinion it is contrary to the interests
of the company that the proposed transferee should be a member. I agree that,
if they had simply expressed their opinion and we knew nothing more about it,
it would not be for us to examine or to inquire into the ground on which they
had formed that opinion ; but in the present case we know on the facts that
they formed no such opinion at all, but the opinion they really formed was that
it was contrary to the interests of the company that Mr. B.S. Elder should be
allowed to transfer his shares singly or in small lots. That seems to me to be
a ground not provided for by the articles. What the directors have done is in
fact an attempt to give themselves the power, or to assert that they possess
the power, to refuse to allow a transfer of shares in order that they may carry
out some line of policy or assert some principle for the carrying out of which,
or the assertion of which, the articles do not provide."
The next case from England
in this connection is the decision in In re Smith and Fawcett Ltd. [1942] Ch
304 (CA). This was the case of a private company. Article 10 of the articles of association of the
private company provided :
"The
directors may at any time in their absolute and uncontrolled discretion refuse
to register any transfer of shares, and cl. 19 of Table A shall be modified
accordingly."
The
issued capital of the company consisted of 8,002 ordinary shares, of which the
two directors of the company, J.F. and N.S. held 4,001 each. J.F. died, and his
son as his executor applied to have the testator's shares registered in his
name. N.S. refused to consent to the registration, but offered to register
2,001 shares and to buy 2,000 at a fixed price. The executor applied to the
court by way of motion that the register of members of the company might be
rectified by inserting his name as the holder of the 4,001 shares. The Court of
Appeal held that art. 10 gave the directors the widest powers to refuse to
register a transfer, and that, while such powers were not of a fiduciary nature
and must be exercised in the interests of the company, there was nothing to
show that they had been otherwise exercised. In connection with the decision in
In re Bede Steam Shipping Co. Ltd. [1917] 1 Ch 123 (CA), Lord Greene M.R.
observed at page 307 (of [1942] Ch):
"It
is perfectly clear from that observation that the court was not laying down a
general rule to be applied to all forms of article, but was coming to a
decision on the particular article before it, the future of which was such as
to confine the directors to the consideration of one particular matter.
There
is nothing, in my opinion, in principle or in authority to make it impossible
to draft such a wide and comprehensive power to directors to refuse to transfer
as to enable them to take into account any matter which they conceive to be in
the interests of the company, and thereby to admit or not to admit a particular
person and to allow or not to allow a particular transfer for reasons not
personal to the transferee but bearing on the general interests of the company
as a whole such matters, for instance, as whether by their passing a particular
transfer the transferee would obtain too great a weight in the councils of the
company or might even perhaps obtain control. The question, therefore, simply
is whether on the true construction of the particular article the directors are
limited by anything except their bona fide view as to the interests of the
company."
It
must be pointed out that the interests of the company, even when the article
confers absolute discretion on the directors, is the guiding principle for the
exercise of discretion of the directors in deciding to refuse or not to refuse
a proposed transfer. Moreover, since the company before us is a private limited
company, and in the nature of a corporate partnership or, what is classed as a
close corporation in the U.S.A., it is but natural
that the directors should approve of the purchaser to transfer shares in his
favour who, on such transfer, will become a member of the company and it is for
that purpose that art. 76 provides that the directors may, in their absolute
discretion and without assigning any reasons, decline to register any such
transfer of shares if the purchaser be a person of whom they do not approve.
But such approval, by the very nature of things, must be personal to the
particular transferee in whose favour the transfer is proposed. It cannot be an
absolute ban, as seems to be the case in the instant case, of not approving any
transfer in favour of any corporate body. All corporate bodies cannot be bad
and it is not open to the board of directors to say that they would not approve
of any transfer in favour of any corporate body. Section 43A of the Companies
Act was not going to be followed in the instant case because that section
provides for a private limited company to be treated as a public limited
company only if not less than 25 per cent, of the paid-up share capital is held
by one or more bodies corporate. If that is the position, a private limited
company shall, on the very day on which the aforesaid percentage is held by
bodies corporate, become, by virtue of the section, a public company. It is
true that at one stage there was a proposal that this percentage of 25 should
be reduced to 10. The report of the Companies Act Amendment Committee proposed
that the percentage should be reduced from 25 to 10. However, the Joint
Committee of Parliament ruled otherwise and it observed :
"The Committee also
consider it unnecessary to require a private company which has become a public
company to pass a resolution for the change of its name."
The view of the Committee
was that "reduction of the percentage of shareholding from twenty-five to
ten is likely to hamper the formation and growth of private limited companies
in the small scale sector, especially in the rural areas and, therefore, the
provisions of s. 43A(1) should not be disturbed" (vide Ramaiya's Guide to
the Companies Act, 8th Edn. p. 128). Whatever the position might have been
prior to 1974, at least in December, 1976, when the board of directors held
their meeting on 23rd December, 1976, there was no ground for apprehending that
the requirement of 25 per cent, of shares referred to in s. 43A(1) was going to
be reduced below 14, and therefore, there was no possibility on the part of the
board of directors that by virtue of the deeming provision of s. 43A(1) of the
Companies Act, this private company would be treated as a public company with
all the concomitants of the requirements of the company law regarding a public
company. As the managing director in his affidavit dated June 24, 1978, has
pointed out, the only consideration which weighed with the board of directors
was that no corporate body should be permitted to become a member of the
respondent-company, and as set out in para. 4 of the affidavit of the managing
director, it was because of a possibility of the percentage in s. 43A being
reduced below 14 that they had arrived at this conclusion. There was nothing
personal against New Mahalaxmi Mills as transferees, that weighed with them and
the approval in this case was rejected, not because they had found anything
wrong personally with New Mahalaxmi Mills, but what they found wrong was that
it was a corporate body and they did not want any corporate body to become a
shareholder of Master Mills. That consideration which was the only
consideration which weighed with the board of directors was not germane to the
exercise of the powers under art. 76 of the articles of association of Master
Mills. Approval of the transferee means approval of the transferee personally
as distinguished from laying down a rule that no corporate body would be
allowed to join the company. Master Mills, as a shareholder. Under these
circumstances, the board of directors have exceeded the powers conferred upon
them by art. 76. Though the words purport to convey absolute discretion, it
must be in the interest of the company and secondly, the words "approval
of the transferee" mean approval of a particular transferee as
distinguished from laying down a broad line of policy so to say that they would
not approve of any such transfer in favour of a corporate body.
In this connection, we may
point out that after the matter was argued before our learned brother S.H.
Sheth J. about the policy decision taken about non-approval of transfers in
favour of corporate bodies, our learned brother has observed "The second
reason which has been advanced on behalf of the respondent-company (Master
Mills) is that it is the policy of the respondent-company not to admit any
other private limited company to its membership." He has further observed:
"Reference to the policy decision and reference to past decision are not
borne out by any evidence. Mr. K.S. Nanavati has, therefore, very rightly told
me that he did not press these two grounds in support of the impugned decision
or resolution, However, though he did not press it in support of the impugned
resolution, it cannot be gainsaid that the impugned resolution was passed under
circumstances which indicated one and only one state of affairs, namely,
non-application of mind."
Then, our learned brother
Sheth J. also came to the conclusion that the impugned resolution was passed by
the directors in circumstances which indicated only one state of affairs that
prevailed with the directors, namely, that it was a policy of the
respondent-company not to admit any other private limited company or other body
to its membership. Now, this sort of blanket decision does not mean that there
was non-approval of the particular individual transferee and the articles
required that the directors can refuse to register a transfer in the name of
the purchaser if the purchaser was a person of whom they do not approve.
In Bajaj Auto Ltd's case
[1971] 41 Comp Cas 1; AIR 1971 SC 321 the Supreme Court considered the
decisions, in In re Smith and Fawcett Ltd. [1942] Ch 304 (CA) and in In re Bede
Steam Shipping Co. Ltd. [1917] 1 Ch 123 (CA) and also took into consideration
several other decisions bearing on the subject, and came to the conclusion (per
Head Note of AIR):
"Where the directors
under the articles of company have uncontrolled and absolute discretion in
regard to declining registration of transfer of shares, discretion does not
mean a bare affirmation of negation of a proposal. Discretion implies just and
proper consideration of the proposal in the facts and circumstances of the
case. In the exercise of that discretion the directors will act for the
paramount interest of the company and for the general interest of the
shareholders because the directors are in a fiduciary position both towards the
company and towards every shareholder. The directors are therefore required to
act bona fide and not arbitrarily and not for any collateral motive."
At page 330 of the report,
Roy J., as he then was, has summed up the position as follows (in para. 34):
"The discretion of the
directors is to be tested as the opinion of fair and sensible men in the
interest of the company." It was also pointed out (at p. 9 of 41 Comp Cas
; in para. 22, at p. 327 of AIR) :
"...where the
directors have uncontrolled and absolute discretion in regard to declining
registration of transfer of shares, the court will consider if the reasons are
legitimate if the directors have acted on a wrong principle or from corrupt motive.
If the Court found that the directors gave reasons which were legitimate, the
court would not overrule that decision merely on the ground that the court
would not have come to the same conclusion."
In para. 25, they have
referred to a decision of the Allahabad High Court in Muir Mills Co. Ltd. v.
T.H. Condon, [1900] ILR 22 All 410, and there also the question was the
absolute power of the Directors to refuse registration of transfer of shares on
personal objections to the transferee. The Muir Mills in that case disallowed
the transfers on the ground that the transferees were subordinates of McRobert,
the managing director of Cawnpore Mills, There was personal animosity between
Hohnson, the managing director of the Muir Mills and McRobert. The directors of
the Muir Mills came to a conclusion that McRobert should not add to his voting
power and "harass the management". This was found to be an abuse of
the fiduciary discretionary power of the directors when they wanted to
safeguard the director's personal interest against McRobert.
It is true that the case of
Bajaj Auto Ltd. v. N.K. Firodia, [1971] 41 Comp Cas 1 (SC) was a case of a
public company whereas the company before us is a private limited company, but
the general principles under s. 155 are the same and s. 155 itself makes no
distinction between a public company and a private company. All that we have to
bear in mind is that when we are considering exercise of discretion by the
directors of a private company, some more leeway should be given to them in
view of the fact that a private limited company is a corporate firm or a
partnership or more or less of that natnre. So far as private limited companies
are concerned, Palmer has pointed out in para 40-12 at p. 393 in Palmer's
Company Law, 22nd Edn.:
"A private company is
normally what the Americans call a 'close corporation' ; this means that its
members are connected by bonds of kinship, friendship or similar close ties and
that the instruction of a stranger as shareholder would be felt to be undesirable
unless his admission is accepted by those for the time being interested in the
company."
Even bearing this principle
of a close corporation in mind, we have to see to it that the right of a
shareholder to transfer his shares is not unduly restricted or is not fettered
by the exercise of discretion by the board of directors of the private company
for reasons which are not germane to the exercise of that power. The power is
to be exercised against a transferee in the light of art. 72. "If the directors
do not approve of the purchaser", these words upon the question of
approval put a limitation on the power of the directors while exercising power
under art. 76 and the limitation is that there must be something personal to
the purchaser which prompts the directors not to approve of that particular
purchaser. Therefore, what the directors were required to consider was whether
New Mahalaxmi Mills was a purchaser of whom they disapproved on some personal
grounds, that is, grounds personal to the transferee. However, we find from the
affidavit of the managing director that the only consideration which weighed
with the directors was the question of a possible infringement of s. 43A if
that section of the Companies Act came to be amended and the possibility of the
company being deemed to be a public company under the provisions of s. 43A in
that eventuality. The total number of issued shares being 1920, the limit of 25
per cent, would be reached if one or more bodies corporate were to hold more
than 480 shares. However, the question before the directors was of 260 equity
shares only and there is nothing on the record to show whether any other shares
of Master Mills were held at the relevant date by any other body corporate. We
are informed by Mr. Nanavati at the Bar that eight shares of Master Mills are
held by Bank of Baroda, a corporate body. Even if those shares were to be taken
into consideration, the total would be 268 shares being held by bodies
corporate and, therefore,
they would be far short of 480 shares which is the critical figure for the
purpose of s. 43A.
Under
the circumstances, we hold that the directors took into consideration a factor
which was not at all germane to the requirement of art. 76 and, therefore, they
have misapplied their mind and failed to apply their mind to the relevant
factor which is required to be considered under art. 76, namely, whether there
was anything personally wrong with New Mahalaxmi Mills which prompted the
directors of Master Mills not to approve of New Mahalaxmi Mills as transferee.
Under
these circumstances, our conclusion is that the refusal to register the
transfer on the part of the directors was not in proper exercise of the powers
conferred upon them by art. 76 of the articles of association. Our conclusion
is, therefore, identical with that of our learned brother Sheth J., and the
line of reasoning which has appealed to Sheth J. has also appealed to us. This
appeal, therefore, fails and is dismissed with costs. In view of the orders in
the main appeal, no further orders are necessary on the Civil Application.
[1966] 36 COMP. CAS. 592
(SC)
SUPREME COURT OF INDIA
v.
J
R MUDHOLKAR, R S BACHAWAT AND RAGHUBAR DAYAL, JJ.
CIVIL
APPEAL NO. 303 OF 1963
MAY
5, 1966
JUDGMENT
BACHAWAT,
J.- On November 29, 1947,
the Indian Chemical Products Ltd., a limited company, was incorporated having
its registered offices in Baripada, Mayurbhanj, and in the town of Calcutta.
Its authorised capital is Rs. 25 lakhs divided into 25,000 shares of Rs. 100
each. The company has seven shareholders. The Maharaja of Mayurbhanj subscribed
and paid for 7,500 shares. The remaining six shareholders hold 150 shares only.
All the shareholders are signatories to the memorandum of association of the
company. The State of Orissa claims that by reason of the constitutional
changes since the declaration of independence, all the shares held by the
Maharaja of Mayurbhanj have now vested in it by operation of law. The state
also based its claim to the shares on a formal instrument of transfer executed
by the Maharaja. On March 16,1950, the Government of Orissa lodged the share
scrip and the transfer deed with the company, and requested it to make the
necessary changes in the share register. The Government as also the Maharaja,
through his agent, the Imperial Bank of India, repeatedly requested the company
to register the secretary to the Government of Orissa, Finance Department, as
the holder of the shares in place of the Maharaja. There was protracted
correspondence in the matter for over three years and eventually on May 16,
1953, the board of directors of the company refused to register the transfer.
On December 1, 1953, Sri S.K. Mandal, attorney for the State of Orissa,
requested the company to record the name of the State as the owner of the
shares in the share register, but the company declined to do so. On February 9,
1955, the State of Orissa filed an application under section 38 of the Indian
Companies Act, 1913, in the High Court of Orissa asking for rectification of
the share register by inserting its name as the holder of the shares in place
of the Maharaja. The company and the Maharaja were impleaded as respondents.
The application was contested by the company only. On November 22, 1956, Ray J.
allowed the application. On September 13, 1957, he passed a supplemental order
directing the filing of the notice of rectification with the Registrar within a
fortnight. On September 5, 1960, a Division Bench of the High Court dismissed
the appeal preferred by the company. The company now appeals to this court on a
certificate granted by the High Court.
Both courts
concurrently held that (1) the title to the shares vested in the State of
Orissa by operation of law; (2) the refusal of the board of directors to
register the transfer was mala fide; (3) the State of Orissa was entitled to
rectification of the share register and a proper case for the exercise to the
court's jurisdiction under section 38 of the Indian Companies Act, 1913, had
been made out; (4) the petition was not liable to be dismissed on the ground
that the State had asked the company to register the name of the Secretary to
the Government of Orissa as the shareholder in place of the Maharaja. The
appellate court also held that under the articles of association of the company
the board of directors had no power to refuse registration of a transfer where
the transfer was operation of law. The appellant challenges the correctness of
these findings.
The courts
below concurrently found that the 7,500 shares were held by the Maharaja in his
capacity as Ruler of the State of Mayurbhanj. This finding is amply supported
by the documentary evidence on the record and is no longer challenged. The
State of Mayurbhanj was one of the feudatory State of Orissa under the suzerainty
of the British Crown. As from August 15, 1947, with the declaration of
independence the paramountcy of the British Crown lapsed. Thereafter, steps
were taken for the integration of the State with the Dominion of India. On
October 17, 1948, the Maharaja of Mayurbhanj signed an agreement for the merger
of the State with the Dominion. By article 1 of this agreement, the Maharaja
completely ceded to the Dominion his sovereignty over the State of Mayurbhanj
as from November 9, 1948. Article 4 of the agreement allowed the Maharaja to
retain the ownership of his private properties only as distinct from the State
properties. On and from November 9, 1948, as a necessary consequence of the
cesser of sovereignty all the public properties of the State including the
7,500 shares in the company vested in the Dominion. By operation of law in
consequence of the change of sovereignty, all the public properties of the
State which were vested in the Maharaja as the sovereign ruler devolved on the
Dominion as the succeeding sovereign.
As from
January 1, 1949, the Government of India in exercise of its powers under
section 3(2) of the Extra Provincial Jurisdiction Act, 1947 (47 of 1947),
delegated to the Government of Orissa the power to administer the territories
of the merged State. On August 1, 1949, the States Merger (Governor's
Provinces) Order, 1949, came into force, and in consequence of section 5(1) of
the Order, all property vested in the Dominion Government for purposes of
governance of the merged State become from that date vested in the Government
of Orissa, unless the purposes for which the property was held were central
purposes. By a certificate dated November 10, 1953, the Government of India
declared that the 7,500 shares were not held for central purposes. Under the
Constitution, which came into force on January 26, 1950, the territories of the
merged State were included in the State of Orissa. By reason of these
successive constitutional changes, the shares, became vested in the State of
Orissa. The State is now the legal owner of the shares and the directors of the
company are bound to enter its name in the register of members, unless there is
some restrictive provision in the articles authorising them to refuse the
registration.
The company
contends that under its articles the directors have the power to refuse the
registration. It relies on article 11, which reads:
" The
board of directors shall have full right to refuse to register the transfer of
any share or shares to any person without showing any cause or sending any
notice to the transferee or transferor.
The board
may refuse to register any transfer of shares on which the company has
lien."
Article 1A
attracts the regulations in Table A of the First Schedule to the Indian
Companies Act, 1913, so far as they are applicable to private companies and are
not inconsistent with the articles. The regulations in Table A make a
distinction between transfer and transmission of shares. In respect of
transfer, they require that the instrument of transfer shall be executed both
by the transferor and the transferee. A transmission by operation of law is not
such a transfer. In In re Bentham Mills Spinning Companies (1879) 11 Ch. D 900,
904, James L.J. said: " In Table A the word ‘transmission’ is put in contradistinction
to the word transfer'. One means a transfer by the act of the partners, the
other means transmission by devolution of law". Article 11 refers to
transfers. A devolution of title by operation of law in not within its purview.
Being a restrictive provision, the article must be strictly construed. In the
instant case, the title to the shares vested in the State of Orissa by
operation of law, and the State did not require an instrument of transfer from
the Maharaja to complete its title. Article 11 does not confer upon the board
of directors a power to refuse recognition of such a devolution of title. We
may add that we express no opinion on the question whether such an article
applies to an involuntary transfer of shares by a court sale having regard to
the provisions of Order 21, rule 80, of the Code of Civil Procedure, with
regard to the execution of necessary documents of transfer.
Clause 22 of
the regulations in Table A read with article 1A confers power upon the board of
directors to decline registration of transmission of title in consequence of
the death or insolvency of member. In the instant case, there is no
transmission of title in consequence of death or insolvency, and clause 22 has
no application. Under the articles, the directors had, therefore, no power to
refuse registration of the devolution of title on the State of Orissa by
operation of law in consequence of the constitutional changes.
Though the
State of Orissa had acquired title to the shares by operation of law, by way of
abundant caution it obtained a deed of transfer and lodged it with the company
together with the share scrip. The transfer deed was duly stamped and complied
with all the formalities required by law. The claim of the State of Orissa
based upon the transfer deed was within the purview of article 11. Even with
regard to this claim, the courts below concurrently held that the board of
directors acted mala fide in refusing to register the transfer. That finding is
amply supported by the materials on the record. In spite of the fact that the
State had filed with the company a certificate of the Collector of Stamp
Revenue, West Bengal, that no stamp duty was payable on the transfer, the
company raised the objection that the transfer deed must be stamped. To avoid this
objection, the Government stamped the deed and `again lodged it with the
company. For over three years, the directors delayed registration of the
transfer on frivolous pretexts. On May 16, 1953, the directors without
assigning any reason declined to register the transfer. Before the High Court,
the company asserted that the registration was refused because the Maharaja of
Mayurbhanj was under an obligation to execute an agreement conferring valuable
rights on the company and the State of Orissa had failed to honour this
obligation. Reliance was placed on clause 6 of the company's memorandum of
association, which stated that the company and the Maharaja proposed to enter
into an agreement and a copy of the proposed agreement was annexed. Clause 6
shows that there was a proposal between the parties to enter into an agreement,
but there was no concluded agreement between them, nor was there any binding
obligation on the Maharaja to execute an agreement. The directors could not use
their power of declining to register the transfer under article 11 for the
purpose of forcing the State of Orissa to enter into the proposed agreement.
Actually, the reason given at the trail was an afterthought. The Imperial Bank
of India representing the Maharaja was pressing for registration of the
transfer. By its letter dated March 17, 1953, the company assured the bank that
the registration would be effected shortly. Nevertheless, on may 16, 1953, the
directors capriciously refused to register the transfer.
The power
under article 11 to refuse registration of the transfer is a discretionary
power. The directors must exercise this power reasonably and in good faith. The
court can control their discretion if they act capriciously or in bad faith.
The directors cannot refuse to register the transfer because the transferee
will not enter into an agreement which the directors conceive it to be for the
interests of the company.
We cannot
accept the contention that the petition was liable to be dismissed because the
State of Orissa had asked for registration in the name of the Secretary,
Finance Department. No such objection was taken by the company, although it had
taken numerous other objections. Moreover, by letter dated December 1, 1953,
Shri S.K. Mandal, the attorney for the State of Orissa, had definitely called
upon the company to record the name of the State as the owner of the shares in
the share register. In spite of this letter, the company refused to make the
necessary registration.
The Maharaja
of Mayurbhanj has ceased to be the owner of the shares. The State of Orissa is
now their owner, and has the legal right to be a member of the company and is
entitled to say that the company should recognise its membership and make an
entry on the register of the fact of its becoming a member and its predecessor
in title having ceased to be a member. The name of the State of Orissa has,
without sufficient reason, been omitted from the register and there is default
in not entering on the register the fact of the Maharaja having ceased to be a
member. The court's jurisdiction under section 38 is, therefore, attracted. The
High Court rightly ordered the rectification in the exercise of its summary
powers under section 38. The jurisdiction created by section 38 is very
beneficial and should be liberally exercised. We see no reason why the court
should deny the applicant relief under section 38. The directors of the
appellant company on the most frivolous of objections have prevented the State
of Orissa from becoming a member for the last 16 years. It is a matter of
regret that justice has been obstructed so long. There is no merit in this
appeal.
The appeal is
dismissed with costs. The appellant company do forthwith carry out the order of
rectification passed by the courts below, in case the order has not been
carried out yet.
Appeal
dismissed.
[1955] 25 COMP CAS 283 (MAD)
HIGH COURT OF
MADRAS
v.
Salem Rajendra Mills
Ltd.
RAJAMANNAR, C.J.,
AND SOMASUNDARAM, J.
O.
S. NO. 54 OF 1946
APRIL 22, 1955
R. Gopalaswami Ayyangar and R. Sundaralingam, for the Appellant.
V. Thyagarajan, K. Subramaniam and Alladi Kuppuswami, for the Respondent.
Somasundaram, J.—This is an appeal by the plaintiff against the dismissal of his suit by the Subordinate Judge of Salem.
The plaintiff purchased 2,030 shares of the Salem Rajendra Mills Ltd. (the first defendant in the suit and respondent herein) and applied to have the same transferred in his name. As the transfer was refused, the plaintiff filed the suit for a declaration that he is entitled to have his name entered in the books of the company as transferee of the above shares and also asked for a mandatory injunction directing the first defendant to enter his name in the books of the company. The plaintiff purchased the shares from defendants 2 and 3 and therefore they were also added as parties. The other defendants were added as pro forma parties. This appeal is only against the first defendant in the suit.
The circumstances which led to the refusal of the transfer and which resulted in the suit are these. The plaintiff and one Karimuthu Thyagaraja Chettiar entered into a partnership in 1939 for the purpose of carrying on business as the managing agents of textile mills at Coimbatore and later took up the managing agency of the respondent-company, the Rajendra Mills at Salem, by entering into an agreement with the Salem Balasubramaniam and Co., who were then the managing agents of the Rajendra Mills at Salem. In connection with the managing agency of Rajendra Mills, with which alone we are concerned in this appeal, both the plaintiff and Thyagaraja Chettiar incurred certain financial responsibilities. In 1941, in consequence of a letter written by the plaintiff to Thyagaraja Chettiar stating that he has nothing to do with the Rajendra Mills and that Thyagaraja Chettiar alone is responsible for the debts and liabilities of the business and that he can do what he likes without the plaintiff's connection, there was an agreement between the plaintiff and Thyagaraja Chettiar by which the plaintiff was relieved of all his financial responsibilities in respect of the managing agency of the Rajendra Mills. Thyagaraja Chettiar then called upon the plaintiff to transfer the 100 shares of Balasubramaniam and Co., which the plaintiff had taken; and he also called upon the plaintiff to execute an agreement to evidence the severance of his connection with the managing agency of Rajendra Mills. After the plaintiff was relieved of his financial responsibilities in respect of the managing agency of Rajendra Mills in pursuance of the agreement, the plaintiff changed his mind and refused to do what he was called upon to do by Thyagaraja Chettiar. Consequently misunderstandings arose between them resulting in several suits being filed by the plaintiff against the respondent-company. The suits relating to the Rajendra Mills alone will be referred to here.
The plaintiff filed 0. S. No. 128 of 1942, in the District Munsif’s Court, Salem, for a permanent injunction restraining Thyagaraja Chettiar from holding a certain meeting by Balasubramaniam and Co., to consider a special resolution for allotting "the unallotted shares of Balasubramaniam and Co., to Manickavachakam Chettiar, a divided son of Thyagaraja Chettiar. As the proposed meeting was not held and the proposed allotment of the shares was dropped, the suit became infructuous and was dismissed on 31st July, 1943, by the Sub-Court to which Court the suit was transferred to be tried along with another suit. In that suit Thyagaraja Chettiar filed a written statement alleging that there was an arrangement between himself and the plaintiff, according to which the plaintiff had severed his connection with the managing agency of the Rajendra Mills and therefore the plaintiff had no longer any interest in the same. The plaintiff thereupon filed 0. S. No. 26 of 1942, in the Sub-Court, Salem, for a declaration of his status as a subsisting partner owning a half share in the managing agency of the Rajendra Mills. On the same day, he filed O.S. No. 34 of 1942 in the same Court for a decree directing rectification of the share register of Balasubramaniam and Co., by deleting there from the name of one Sundaram Chettiar, another divided son of Thyagaraja Chettiar, O.S. No. 26 of 1942, when it came up for hearing on 31st July, 1943, along with 0. S. No. 128 of 1942, was withdrawn by the plaintiff as some difficulty was felt in getting the reliefs claimed by him, since the partnership had not been registered under the Partnership Act. In O.S. No. 34 of 1942, the Court found that the plaintiff had severed his connection with Balasubramaniam and Co., on 17th May, 1941, and that he was therefore not entitled to question any acts done by Thyagaraja Chettiar after that date. The suit was therefore dismissed on 20th March, 1944. This was taken up in appeal to this Court and it was heard by a Bench of this Court. The learned Judges confirmed the finding of the lower Court and held that the plaintiff's "repudiation of the agreement was certainly open to grave criticism."
The O.S. No. 55 of 1942 was filed by Thyagaraja Chettiar, in the Sub-Court, Madurai, for declaring that the plaintiff had no manner of interest in the managing agency of Rajendra Mills and for directing him to execute a transfer deed in respect of the 100 shares standing in his name in the books of Salem Balasubramaniam and Co. Though the trial Court did not give a decree, in the appeal, the District Judge upheld the plea of Thyagaraja Chettiar and directed the plaintiff to execute the transfer deed in respect of the 100 shares standing in his name in favour of Thyagaraja Chettiar. The second appeal preferred by the plaintiff resulted in its dismissal. Certain other suits were filed by the plaintiff against Saroja Mills at Coimbatore, all of which were dismissed and he was ultimately turned out of the managing agency of both the Rajendra Mills as well as the Saroja Mills.
It was after these proceedings, in all of which he was worsted, the plaintiff started purchasing shares of Rajendra Mills. The shares in question, the subject-matter of this case, were purchased on 31st January, 1944. On 19th June, 1944, he applied to the company for registration of the transfers in his name. As the transfer deeds were not stamped they were returned on 3rd July, 1944. On 31st August, 1944, the plaintiff re-presented the application with a cheque for Rs. 500 for the purpose of purchasing stamps. On 8th September, 1944, the Secretary of the company informed the plaintiff of the insufficiency of stamps and asked for a further sum to cover the transfer fees and stamp fees. That was sent on 12th September, 1944. On 15th September, 1944 the plaintiff was informed that the application would be placed before the Board of Directors for their consideration. The Board met on 22nd September, 1944, considered the application and refused to register the shares in the plaintiff's name, without giving any reasons. The resolution of the Board was communicated to the plaintiff on 27th September, 1944. The plaintiff protested against this by his letter dated 31st May, 1945. The suit itself was filed only on 30th March, 1946, nearly one and a half years after the communication to the plaintiff about the refusal to register. The plaintiff asked for certain other reliefs against defendants 2 and 3, but we are not concerned with them in this appeal as the appeal is preferred only against the first defendant.
The plaintiff alleges that the Board of Directors acted mala fide in refusing to register the transfer of his shares in his name and that under the Articles of Association they have no power to so refuse.
The respondent-company in their written statement denied that they ever acted mala fide in refusing to register the plaintiff's name. They stated that under the Articles the Board of Directors has absolute discretion in the matter of refusal of registration of the transfer of shares and that the discretion of the Board cannot be questioned either by the transferor or the transferee. They also stated that under the Articles of Association the Board need not give any reasons for their refusal. The case of the defendants is that the Board was acting with the best of motives and in the interests of the company and that the refusal was for good and sufficient reasons. The first defendant company, though they stated that they need not give any reason for refusing to register the transfer, still in the written statement gave the reasons and set out the circumstances relied on by them to show that the plaintiff is a cantankerous litigant and an undesirable person and that it was in the best interests of the company that the application was rejected. The fact of the purchase of the shares by the plaintiff and the refusal by the first defendant to register were not disputed.
The lower court, after considering the evidence and the law on the subject, found that the plaintiff cannot be called a cantankerous litigant merely from the circumstances of the number of suits filed by the plaintiff, almost all of which being decided against him. It held that it was not unusual for partners to fall out and seek their remedies in a court of law in respect of rights arising from the partnership. The lower court, however, held that the decision of the Board had been arrived at in the best interests of the company, as the plaintiff is an undesirable person and the refusal was justifiable on that ground. The suit was, therefore, dismissed.
In appeal the only question is whether the first defendant was justified in refusing to register the transfer. Article 56 of the Articles of Association on which the respondent relies for the exercise of its power is as follows :
"If there be any mortgage on the share, or if there be any dues in respect of the instalments of share amounts, instalment amount, interest, or any other dues in respect of the share, or if any amount whatever is due from that member (either severally or jointly along with others) or if the transferee of the share is not approved, the Board of directors may without assigning any reason whatever for their refusal, refuse to register the share in the exercise of their discretion and independence……Board of Directors may refuse to register the transfer even without giving any reason therefor."
It is clear from the above article that it mentions certain grounds on which the transfer may be refused. One of the grounds is ' if the transferee of the share is not approved '. The articles also give a power to the Board of directors to refuse to register the transfer even without giving any reasons therefor. The first respondent though they take their stand under the article that they need not give any reason for the refusal, still in the written statement, have come out with the reasons for refusal. The question is whether the defendant can refuse to register without giving reasons and when they give reasons in court, it is open to the court to find that they are legitimate or not.
Under the Articles of Association that a discretion is given to the Directors to refuse to register the transfer cannot be disputed. It is well-settled that " if a discretion as to registering transfers is given by the articles to the Directors, the court will not control the exercise of such discretion unless it is proved that the directors are not exercising it bona fide or are acting in other ways oppressively, capriciously or corruptly or in some way mala fide." (Vide Palmer's Company Law, 19th Edn. page 109).
In In re Gresham Life Assurance Society, ex parte Penny, James L.J. states the position as follows at page 450:
"I cannot conceive that any director would choose to accept office, or exercise the power entrusted to him if he were liable to be called upon to say what the particular reasons were or the particular motive was which influenced him in coming to the conclusion that any person was not eligible as a shareholder."
Earlier at page 449, the learned Judge says:
"No doubt the directors are in a fiduciary position both towards the company and towards every shareholder in it. It is very easy to conceive cases such as those cases to which we have been referred, in which this court would interfere with any violation of the fiduciary duty so reposed in the directors. But in order to interfere upon this ground it must be made out that the directors have been acting from some improper motive, or arbitrarily or capriciously."
Mellish L.J. who concurred with James L.J. observed as follows at page 451:
"It appears to me that it is very important that directors should be able to exercise the power in a perfectly uncontrollable manner for the benefit of the shareholders; but it is impossible that they could fairly and properly exercise it if they were compelled to give the reason why they rejected a particular individual."
And then he points out how in certain circumstances the directors will be perfectly entitled and justified to refuse to register and adds finally:
"I am, therefore, of opinion that in order to preserve to the company the right which is given by the articles a shareholder is not to be put upon the register if the board of directors do not assent to him, and it is absolutely necessary that they should not be bound to give their reasons, although I perfectly agree that if it can be shown affirmatively that they are exercising their power capriciously and wantonly that may be ground for the court interfering."
The above decision is also an authority for the position that:
"Where the articles authorise the directors to reject transfers to transferees of whom they do not approve, the directors must, before rejecting a proposed transferee, fairly consider the question at board meeting. Provided that if they do so, however, they are not bound to disclose their reasons for rejecting any particular individual, as to compel them to do so would be to deprive the power of half its efficacy." (Vide Buckley on the Companies Act, 12th Edn. page 175).
It
is also well-settled that the court will not draw an unfavourable inference
against the directors because they did not give their reasons for refusing to
pass a particular transfer ; for they are under no obligation to disclose their
reasons either in court or out of court. It is enough that they in fact
considered the transfer but that in exercise of the discretion given to them by
the articles they have not passed it.
In In re Coalpott China Co., Lindley L. J. observed as follows:
“Under the articles the directors have a power to refuse a transfer. I will not say at present for what reasons; I will allude to them presently. They do refuse a transfer they do not say why. The argument is, and the view taken by the learned Judge is, that it is for them to justify their conduct. Now, that appears to me to be wrong. It is for those who say that the directors have exercised their power improperly to give some evidence to that effect."
The other two Judges concurred with Lindley L.J. and Rigby L.J. added:
"The fact that they have resolved must be taken, in the absence of positive evidence sufficient to satisfy the court to the contrary, to mean that they have resolved within their jurisdiction and for right reasons."
It is thus clear from the above decisions that if the Articles of Association give power—and in this case Article 56 undoubtedly gives such a power—the respondent is not bound to give any reasons for not registering the transfer. That the Board considered the application at its meeting on 22nd September, 1944, is not disputed. As already stated, though the respondent did not give any reasons at the time of the refusal and took the stand that they are not bound to give any reasons, they have, however, in the written statement, come forward with the reasons for refusing. Now the question is whether the reasons given by the respondent are legitimate or not.
It has been held that:
"If the directors do give their reasons, the court will then consider whether they are legitimate or not, i.e., whether the directors have proceeded on a right or wrong principle, and will overrule their decision if their reasons are not legitimate, but not if they are legitimate, merely because the court would not have come to the same conclusion."
(See Buckley on Companies Act, page 175).
In In re Bell Bros. Ltd.; Ex parte Hodgson, Chitty J. states the law as follows:
"The discretionary power is of a fiduciary nature, and must be exercised in good faith; that is, legitimately for the purpose for which it is conferred. It must not be exercised corruptly, or fraudulently, or arbitrarily or capriciously or wantonly. It may not be exercised for a collateral purpose. In exercising it, the directors must act in good faith in the interest of the company and with due regard to the shareholder's right to transfer his shares, and they must fairly consider the question of the transferee's fitness at a board meeting. When the court once arrives at the conclusion that the directors have in good faith rejected a transfer on the ground that the transferee is not a fit person to become a member of the company, it will not review the directors' decision. The directors are not bound out of court to assign their reasons for disapproving. If they decline to do so, or if their decision is challenged in court and they refrain from giving evidence, upon which a cross-examination may take place as to their reasons, or if, giving such evidence, they refrain from stating their reasons, the court will not, merely on that account, draw unfavourable inferences against them. In these articles there is an express provision protecting the directors against any liability to disclose their reasons. They are, however, at liberty, if they think fit, to disclose them, and if they do, the court must consider the reasons assigned with a view to ascertain whether they are legitimate or not; or in other words, to ascertain whether the directors have proceeded on a right or wrong principle. If the reasons assigned are legitimate, the court will not overrule the directors' decision merely because the court itself would not have come to the same conclusion. But if they are not legitimate, as, for instance, if the directors state that they rejected the transfer because the transferor's object was to increase the voting power in respect of his shares by splitting them among his nominees, the court would hold that the power had not been duly exercised. So, also if the reason assigned is that the transferee's name is Smith, or is not Bell. Whether the directors do not assign any reason, it is still competent for those who seek to have the transfer registered to show affirmatively, if they can, by proper evidence that the directors have not duly exercised their power. These principles are deducible from the authorities, among which the more important are In re Gresham Life Assurance Co.; ex parte Penny and Moffat v. Farquhar”.
It is clear from the above decision that if the reasons are not given, the court will not merely on that account draw an unfavourable inference against the Board. They are, however, at liberty to disclose the reasons, and if they do, the Court must consider the reasons assigned with a view to find out whether the defendants acted on a right or wrong principle. The learned advocate relies on the decision in support of his contention that the defendants acted on a wrong principle and the only object of refusing was that the plaintiff would oppose the domination of Thyagaraja Chettiar in the mills. The learned advocate also relied on the decision in Muir Mills Co., Ltd., of Cawnpore v. T.H. Condon and I.A. Butterworth, and Kaikhosro Muncherji Heerama-neck v. The Coorla Spinning and Weaving Co. There is no doubt that in In re Bell Brothers Ltd.; ex parte Hodgson the reason for opposing the registration had nothing to do with the person, but it was for some other reason, namely, to increase the voting power in his own hands. In the Muir Mills Co. Ltd. of Cawnpore v. T.H. Condon and A. Butterworth, also the real objections were not against the transferees as such but their connection as employees of some other mills and the desire of the Directors was that the person concerned should not add to his voting power at the meetings of the company. The learned Judges held that as the objections were not personal to the transferees they did not constitute legitimate reasons for refusing to transfer. In Kaikhosro Muncherji Heeramanneck v. The Coorla Spinning and Weaving Co. also there was no objection to the person and as it was for other reasons the transfer was ordered.
In this case the facts set out earlier and the evidence show that the plaintiff after expressing his desire to have no share whatsoever in the company filed several suits in all of which he was worsted and the finding, as already stated, is that his conduct is "open to grave criticism." It is in evidence that he went about purchasing shares at thrice the value of the shares and when it would fetch only 6 per cent at face value, he had paid for his share three times the face value, which would give him only two per cent. This is certainly not for investment. There must be some other ulterior object. According to the evidence of D.W. 1, the secretary, the various cases filed by the plaintiff affected the Rajendra Mills, and the managing agency could not raise funds for financing the mills. D.W. 1 says that the shareholders of the mills lost confidence in the mills and wanted to sell their shares. Many of the prominent directors sold their shares, and the number of directors was reduced; and it was because the directors said that the plaintiff was a litigous and quarrelsome person, that he would discredit and obstruct the management and create factions among the shareholders and act against the interests of the company, the directors decided not to have him and invite trouble. The lower court has dismissed the suit, holding that the decision of the Board had been arrived at in the best interests of the company and that the refusal to recognise the assignment on the ground that the plaintiff is an undesirable person is valid.
In Moffat v. Farquhar, Malins V. C. observed as follows at page 605;
"In my opinion, therefore, it is perfectly clear there can be no justification for refusing the transfer unless they have an objection to the person of the transferee. That they should have such a power seems reasonable; because, this being a limited company, and it being very desirable that they should have respectable men and solvent men as members, and persons who would be able to pay the calls which should be made, it is reasonable that they would have the power of objecting to the person, and not have introduced among them insolvent persons, or it might be, if you like, disagreeable persons who would throw them into confusion, and therefore the directors have the power of objecting to the person". (italics is ours).
This shows that if a person is of such a character as to throw their company into confusion and if he was not a desirable one, then the Board of Directors would certainly be acting in the best interests of the company in refusing to register the shares in his name and such a reason is quite a valid reason. The evidence justifies the finding of the lower court, and it cannot be said that the directors did not act bona fide or that they acted arbitrarily or capriciously.
In our opinion no case has been made out for interference in appeal. The appeal, therefore, fails and is dismissed with costs.
[1998] 16 SCL 1 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
Deccan Enterprises (P.) Ltd.
G. BIKSHAPATHY, J.
COMPANY PETITION NO. 27 OF 1987
SEPTEMBER 29,1997
Section
53(2) of the Companies Act, 1956 - Service on documents on members by company -
Whether presumption of service of notice contemplated under section 53(2)
cannot be said to be absolute or irrebuttable but burden is on party alleging
that he did not receive notice - Held, yes
Section
286 of the Companies Act, 1956 - Board meetings - Notice of - Whether
telephonic invitation/oral invitation could amount to notice within meaning of
section 286 - Held, no - Whether convening of meetings and taking decisions in
board meetings and sending intimations to shareholders is a purely in-house
procedure regulated by articles of association of company and it would not be
proper for courts to interfere with internal administration of company, unless
contrary is established including contravention of articles of association or
statutory provisions - Held, yes
Section
81 of the Companies Act, 1956 - Further issue of capital - Whether if member
did not respond to offers made by company, it has to be necessarily held that
he was not inclined to subscribe to additional shares, thereby impliedly
consenting for allotment of shares to others - Held, yes - Whether enhancement
of capital is a purely an internal administration of company and courts do not
interfere in normal course - Held, yes
Section
397/398 of the Companies Act, 1956 - Oppression and mismanagement - Whether if
it is found that apparent structure of company is not real structure and it is
in substance a partnership, principle of dissolution of partnership may be
applied in adjudicating petition - Held, yes - Whether shareholding pattern in
another company (sister concern) can form basis for determination of
shareholding in company which is subject matter of petition under section
397/398 for purpose of application of principles of partnership - Held, no
-Whether oppression is core element to be proved and nature of oppression is to
be tested in context of 'cause of winding up' - Held, yes - Whether word
'oppression' is a chamelionic word and it changes its colour, content and form
from time to time, place to place, event to event, depending on circumstances
of case - Held, yes - Whether where a petitioner has alleged that he was
subjected to oppression not in his capacity as a shareholder but as director of
company it could be said there was oppression within meaning of section 397
-Held, no - Petitioner alleged non-invitation for board meetings and allotment
of additional shares by respondent to themselves without offer to petitioner
-Facts on record revealed that notices for board meetings were sent by
certificate of posting and in fact opportunity to subscribe additional shares
was given to petitioner - Whether though case of oppression and mismanagement
was not made out but on facts, petitioner could be directed to sell shares to
respondent and on failure of respondent to purchase he could be directed to
sell his shares to petitioners in interest of company - Held, yes
Section 398 of the Companies Act, 1956 - Mismanagement - Whether relief under section 398 is geared to save the company and it is in the interest of the company alone and not to any particular member/members - Held, yes -Whether section 398 aims at maintaining public interest and interest of company unlike section 397 which protects interest of shareholders - Held, yes - Whether in case of private limited company, public interest may not fall for consideration under section 398/397 - Held, yes - Whether there need be any oppression under section 398 - Held, no
It was the case of the petitioners that P-1 and R-9 conceived the idea of setting up of a personal business as a partnership in recognition of their close and cardial relation with a view to provide opportunity to their children and accordingly the R-1, the company, was promoted. R-3, the brother of R-9, was brought on the board for looking after the affairs of the company. The proportion of shareholdings in the company was in the ratio of one-third and two-third in between 'K' group (belonging to P-1) and T group belonging to R-9. The company also acquired joint venture project in ARIL in Saudi Arabia where P-3, son of P, became General Manager who worked there upto 1982. He was expecting to be associated with the management of R-1 company. But in 1985 he was removed from the board of joint venture company. Against this P-1 filed a suit in the Calcutta High Court. It was the case of the petitioners that R-1 company stopped sending the monthly reports, statement of affairs, notices, minutes of the meetings and AGM from 1983. P-1 also did not receive the notice of any board meeting in the year 1984-85 or AGM.
The allegations of the petitioners were that, (z) no notices for board meetings were sent to him from the year 1983 onwards, (ii) K group was not given chance to subscribe to the further issue of share capital which itself was a decision taken in board meeting to which no notice was given to the petitioners and R-3 surreptitiously got allotted the entire further issue in the names of J group, (iii) decision to subscribe the additional share capital by meeting of the board of directors was not necessary as the company was having tremendous reserves and the additional share capital was brought into books only for the purpose of converting the minority shareholders represented by R-3 into majority shareholders; and (iv) that though there was no partnership firm earlier to the incorporation of the company, but if the corporate veil was pierced the company was in substance a partnership. Thus alleging that K group was oppressed by J group and the company was being mismanaged by R-3, the petitioners filed the petition under sections 397 and 398. R-9 supported the case of the petitioners.
R-9 and P-1 had been stating that no formal notices were sent and meetings were being held on informal intimation being neighbours. Their case was that notices were never sent by post much less under certificate of posting. On the other hand R-3 stated that notices for all the meetings were invariably sent along with agenda by post under certificate of posting and they were sent under registered post after specific instructions from R-9 and P-1. Section 286 mandates sending of notices in writing and omission attracts penalty. Article 49 of articles of association of the company clearly stipulated that the notices for the meetings shall be in writing. Even though P-1 and R-9 stated that there was no practice of sending the notices, yet the practice could not be in violation of statutory provision and articles of association. Such a practice even assuming was in existence, would be illegal Section 286 read with section 53 and article 67 leads to inevitable conclusion that the notices shall be in writing. Therefore, it had to be held that R-1 company had issued notices in writing in respect of all the meetings.
It was the case of R-1 company that prior to 1982 the notices were being sent under ordinary post, but after 1982, when a decision was taken to maintain the minutes of the board in Loose Leaf Papers, R-3 as a managing director took a decision to send the letters thereafter under certificate of posting. It was only on 25-3-1985, P-1 for the first time wrote a letter to R-1 company, stating that for the last 18 months, he did not receive any notices or agendas or invitations for any of the meetings. On the very same day he also addressed a letter to R-9 stating that he came to know that the board resolution withdrawing (P-3) his son's nomination to ARIL Board In the said letter there was no mention about the non-receipt of any notices for the last 18 months as mentioned in the letter on 25-3-1985. From letter dated 25-3-1985, it implied that P-1 knew that the meetings were held The articles of association also said that the Board meeting should be held once in a three months. It was not as if he was not aware of this position. No reasons were forthcoming as to why he kept quite beyond 3 months when he did not receive any notice after March, 1983. It was beyond any body's comprehension that a person of his status possessing vast knowledge of Corporate Law, could have kept quiet for such a long time. It was also not understood as to why he did not take up the matter with R-9 when he did not receive the minutes of various board meetings. When it was brought to his notice by R-3 that system of circulating the minutes was dispensed with P-1 did not take up the issue with R-9 and no information was forthcoming fromP-1 in this regard It was also worth-noticing that P-1 also wrote to R-9 on the same day, i.e., 25-3-1985. It was the case of R-9 that on 16-8-1985 he had sent two letters one relating to despatch of the minutes from 20-7-1983 to 8-7-1985 duly initialled by him and other relating to request to give minimum 10 days' notice for holding Board meeting. However, it is the case of P-1 that they never received letter dated 16-8-1985 sending the minutes of the Board meeting, but only a letter dated 16-8-1985 was received to the effect that the notices should be sent in advance. But, it was curious to note that R-9 did not file two registered postal receipts in which the 16th August letter for sending the notices in advance and also returning the photo copies of minutes initialled by him separately were sent. He also did not file the two acknowledgements in respect of two registered letters. The reasons for asking the minutes also were not explained in the evidence by R-9. Moreover, R-9 being a director, it could have been open for him to seek inspection of the records instead of indulging in correspondence. It was in he counter that in July 1985 K, the then General Manager had informed him that the R-3 was planning to issue and allot the unissued capital to himself and he nominees and thereby convert him and the petitioners from majority to minority. Therefore, he requested R-1 to send the certified true copies of the minutes of the Board meetings of the company. In pursuance of he request, R-2 sent him the unsigned minutes of the copies of the 12 Board meetings of the company held between 20-7-1983 to 8-7-1985 and that by letter dated 16-8-1985 he drew the attention of R-2 that these minutes were not certified by him and he sent photostat copies of the minutes duly initialled by him. As could be seen from letter dated 16-8-1985 R-9 earlier sent the letter requesting for furnishing certified copies of the Board meeting, but that crucial letter referred in the said letter was not forthcoming. Even the office copy covering letter dated 16-8-1985 alleged to have been sent to R-1 had not been filed by R-9 and only a true copy was filed When he said that he had sent two letters on 16-8-1985 he should have office copies of such letters. None of the office copies of these letters were filed by R-9. He also did not file the office copy of letter dated 16-8-1985 requesting for sending notice 10 days in advance. On the other hand it was the evidence of R-2 that they received the letter dated 16-8-1985 to the effect that the notices should be sent much in advance. Though R-9 submitted that this was referred to in letter dated 21-10-1985 and the said letter of dated 21-10-1985 was received by the Secretary, no objection was raised as to non-receipt of the alleged initialled minutes, but at the same time, it had to be seen that the non-mention will not ratify the action of R-9. It was for R-9 to establish that he had sent the letter dated 16-8-1985 which he failed to do so. There were number of inconsistencies in his statement and, therefore, his version that he had received the minutes of only 12 Board meetings could hardly be believed Further, when he received definite information from K that the plans were being moved by R-3 to allot the unsubscribed capital to his own persons, there was no reason why R-9 did not take steps to verify by taking inspection of records. Even P-1 in his letter dated 17-12-1985 stated that he apprehended on the basis of information received by him that the J group was attempting to change the pattern by unwarrantedly issuing the unsubscribed capital of the company and allotting it to the nominees of the J group. It was not known why P-1 resorted to brow beating instead of straightaway asking for the information about the issue of unsubscribed capital Even R-3 also could not be said to be plain. He also equally tried to shield the information. Obviously, everybody wanted to indulge in shadow fighting. It was also seen that the suit challenging the withdrawal of the nomination of P-3 from the Board of A.R.I.L. was filed in Calcutta High Court in May, 1985 and the correspondence started between P-1 and R-3 only in March, 1985. Thus, it showed that the entire gamut of litigation only started after/around March, 1985 and around that period the suit was filed in Calcutta High Court by P-1. The dates of some of the letters of P-1 and R-9 also strengthen the suspiciously collusive nature of litigation. On 16-8-1985 P-1 wrote letter to R-3. On the same day R-9 was alleged to have sent a letter R-2 to R-3 returning the minutes of meetings. There was no reason why P-1 did not endorse all copies of correspondence entered with R-1/R-2/R-3. Similarly R-9 could have endorsed the copies of letters exchanged by him with R 1/R-2/R-3 to P-1. The intention obviously appeared to keep the matters in haze. R-9 apparently tried to buttress the case of P-1 by means of invincible conduct, but when the veil was removed the very first document which he tried to introduce had shaken the entire edifice of his stand. Under these circumstances, letter dated 16-8-1985 suffered from inextricable disabilities and the efforts of R-9 to salvage the document to his advantage went in vain. Consequently, his evidence was not worth consideration being incredible. Accordingly, it must be held that the said letter of 16-8-1985 was not a genuine document.
The only requirement under section 53 and also the articles of association of the company is that the notice in writing may be given either personally or sent by post. There is a statutory presumption under section 53(2)(b) of the Act that the service is deemed to have been effected under certain conditions stipulated therein.
The presumption arises when the condition laid down in section 53(2) are complied with. Even the articles of association was to the same effect. If the facts establish the service of notice, then the question of drawing presumption does not arise. Thus, the presumption of service of notice as contemplated under section 53(2) cannot be said to be absolute or irrebuttable as there may be cases where the parties may collude with the postal authorities for procuring postal seals. But, at the same time the burden is on the party alleging that he did not receive the notice to rebut the presumption by adducing satisfactory evidence. Such issue has to be decided keeping in view the facts and circumstances of each case.
It was in evidence that the notices in writing were sent for various board meetings and also general meetings. Right from 1982, the notices issued for the board meetings, agendas and certificate of postings and also the minutes were filed on behalf of R-1 company. While it was the case of R-9 that he did not attend certain meetings and in respect of certain meetings, minutes were not properly recorded, it was the case of the P-1 that no notices were ever received by him at all It was also the case of P-1 and R-9 that the notices for the meetings and the certificate of postings were manipulated with a view to justify the validity of resolutions and consequential actions in conformity with the statutory procedures. As noticed from the minutes of the meetings, P-1 did not attend the meeting after 31-3-1983. The reasons for absence were non-receipt of the notices. On the other hand, R-9 attended most of the meetings. However, it was denied that two meetings dated 26-11-1984 and 5-1-1985 had taken place. It was also the case of R-9 that he attended meeting on 3-11-1985 and 25-2-1985 and the resolutions were not passed as reflected in the minutes produced by R-3 and they were approved as contained in the letter on 16-8-1985 sent by R-9 to R-1, which as held earlier was not a genuine document. The initial burden lay on the company to establish that the notices were sent in accordance with the articles of association keeping in view the statutory provision. Even though, R-9 and P-1 categorically stated that no notices were sent and the certificate of postings were fabricated, but at the same time, it had to be tested from the angle of statutory provision. Inasmuch as the notices have been sent, and the certificate of postings have been marked on behalf of the company, the presumption under section 53 comes into play and the said presumption is rebuttable. The onus thereafter fell on P-1 andR-9 to establish that the notices were never posted and that the certificate of postings were procured Except stating that they did not receive any notices no other evidence was forthcoming from P-1 and his supporters, R-9 and his family members. It was also in the evidence that when P-1 and R-9 gave specific instructions to send the notices under registered post, they were complied with and R-1 company had filed number of documents marking the postal registrations and other documents.
It was curious that P-1 being a person in a highly placed position could have kept quite if really he had not received the notices for board meetings. It was more so when he was sailing with R-9 in the company petition, who was his immediate neighbour. It was not the case of P-1 that R-9 was not in talking terms. On the other hand upto February, 1985, they were working in the same company ML in top, executive position-R-9 was President and P-1 was Vice-President. If the notices in fact had not been sent to any person, then R-9 also could not have attended any of meetings at all The fact that R-9 attended and participated in the meetings of course with certain objections in respect of minutes of certain meetings, would only go to establish that the notices were sent and it was also the case of R-3 that decision was taken by him as managing director to sent the notice under certificate of posting in 1982 when the board passed resolution to maintain the minutes of the board meetings in Loose Leaf Folders. It was also not understood as to why P-1 kept quite for nearly 18 months when he did not receive any notices or agendas, for board meetings or AGM. It was also not his case that he asked R-1 at any time during 1983 and 1984 that he was not receiving the notices for the board meetings, which should have been normal reaction of a human being in the ordinary course of events. It was also beyond anybody's comprehension that R-9 could not have inquired the P-1 for not attending the various meetings.
The contention of P-1 that R-1 company did not discharge the burden to prove that the notices were properly sent and it had filed only notices and certificate of postings and the connected postage stamp account were not filed This submission could not be accepted for the reason that R-1 company discharged the burden of proof placed on it, namely, sending of notices and the postal certificate of posting. When R-3 and R-2 were in witness box and subjected to cross-examination at length, it was not suggested that R-1 company did not file the postage account. It was also not the case of P-1 andR-9 that the addresses in the certificate of posting were incorrect and there were any other irregularity. The witnesses were offered for cross-examination only for the purpose of bringing out important and crucial matters which could be only ascertained by means of effective cross- examination. Except stating that these letters were not posted and the certificate of postings were manipulated, no other evidence worth considering had been brought on record. The conduct of the parties and the status held by them was also very relevant for the purpose of ascertaining whether they had acted in a bona fide manner or with an ulterior motive. The version of R-9 relating to letter dated 16-8-1985 was not accepted and as regards P-1, even though he had stated that he did not receive any notices for general meetings and the board of directors meetings, it could not be believed for the simple reason that out of two directors who were to participate in the meetings, R-9 had already attended number of meetings. If the notices had not been sent at all, then R-9 could not have also attended any meetings and chaired the meetings and it was also not possible to perceive that R-9 might not have brought to the notice of P-1 about these meetings. Moreover the trouble started not on account of non-receipt of the notices and minutes, but due to other reason i.e., scheme of J group to the total ouster of the K group which allegedly came to the knowledge of the K group in 1985.
The silence on the part of P-1 for such a long time without making any objection with regard to the notices of various meetings from 1983 till 1985, only established that he had notice of the meetings and that he deliberately did not attend the meetings for the reason that his son was not properly accommodated in R-1 company. He only initiated the correspondence in March 1985, but however, he did not proceed further. Then he filed a suit in May, 1985 in the Calcutta High Court challenging the withdrawal of nomination of his son on the Board of A.R.I.L. Again he took up the matter with R-1 company in August 1985 which also coincided with the initiation of correspondence by R-9. Further the 1st letter dated 16-8-1985 alleged to have been written by R-9 to R-1 company was not a genuine document. It was hard to believe that R-2 and R-3 had manipulated all the notices, agendas and minutes and also the certificate of postings from March 1983 to June 1985. But, coming to conduct of P-1, the grievance also did not appear to be not that of non-receipt of the notices of meetings, but the withdrawal of the nomination of his son from A.R.I.L. Board A person of a status of P-1 could not be expected to be non-vigilant. More especially when he had pursued the matter with R-1 company so vigorously after 16-8-1985. A person who is not vigilant cannot have any right to claim equity before the Court. The equity comes to the aid of the vigilant and not the slumbering (Vigilanti bus non dormienti bus Jura subveniunt). Therefore, theP-1 having remained intentionally dormant for a considerable length of time, could not complain that he had not received the notices. Further, he was a neighbour and it could not be said that the neighbours cannot have this information, more especially when they were very cordial and P-1 himself had categorically stated that R-9 was also being kept aloof by R-3 from the affairs of the company and that there were strained relations between R-3 and R-9. Therefore, it had to be presumed that the neighbour knows the neighbourhood as the maxim goes Vicini vicini-ora prae prae sammantur scire (neighbours are presumed to know things of the neighbourhood).
Admittedly, R-1 was a private limited company consisting of P-1, R-3 and R-9, with their respective members and they being immediate neighbours and it was beyond the comprehension of any person of ordinary prudence that P-J and R-9 were not aware of the meetings and minutes. It was also pertinent to note that statutory provision requires that the notice should be sent in writing either personally or by post. There is no provision for intimating on telephone. Therefore, the stand of the R-9 that he used to attend the meetings on telephonic information would not stand When the statute requires certain thing to be done in certain manner, it has to be presumed that the acts were done in furtherance of that statutory provision, unless it is proved to the contrary. Moreover, there was ample evidence that notices were sent to the parties under certificate of posting right from 1983 onwards.
Under these circumstances, it was to be held that notices were issued to the directors in the case of Board meetings and the shareholders in case of AGM in accordance with the statutory provisions and accordingly it was to be that P-1 and R-9 had received the notices for the board and general meetings.
The consequential crucial question that arose for consideration was whether any offer was made to P-1, R-9 or any other persons on their behalf and as alleged by R-3 whether they consented to the allotment of additional shares to other persons and if any had not consented to the above, whether allotment of shares as alleged by the petitioners was an act of oppression attracting the action under sections 397 and 398.
In pursuance of the decision taken in the minutes dated 26-11-1984, the company sent letters to all the shareholders on 26-11-1984 offering the additional shares. The said letter was sent by post under certificate of posting on 26-11-1984. There was no definite and specific pleading by P-1 in the company application to the effect the additional shares were issued without his knowledge and if any shares were issued that should be treated as illegal and invalid Thus, the P-1 was not at all sure of additional share capital and he had beer taking shelter by making general pleading that no notices were being sent and, therefore, he was not in a position to attend any meetings. In the instant case, the question of consent could not be directly established and only the circumstantial evidence had to be scrutinised meticulously. The main contention of P-1 was that he never received any notices, while the stand of R-9 was that he attended the meeting on 28-2-1985 and that he had no notice of Board meetings of 26-11 -1984 and 5-1-1985. As already held the company did issue the notices for various meetings. Therefore, it had to be necessarily held that the notices for the meetings dated 26-11-1984, 5-1-1985 and 28-2-1985 were issued to the directors. With regard to the offer made by R-1 company to the shareholders, it was in evidence that the letters were sent on 26-11-1984 and 5-1-1985 offering the additional shares to the shareholders and there was no response except from few. The parties tried to level allegations against each other stating that fraud was played and forged documents were pressed into service and that manipulations were made with regard to Certificate of Postings and postal registration receipts. But to ascertain whether they had consented for issue of additional shares, it was necessary to establish whether any notice was sent offering the shares. Though R-9 and P-1 in so many words stated that they had not received any notices, but except denying the receipt of the letters of offer, they did not lead any evidence on this aspect. The burden lay on P-1 to establish that he did not receive the notices at all, except making a bold statement to that effect. Equally the burden lay on R-9 to establish that the notices were not sent for the board meeting on 26-11-1984 and 5-1-1985 and that he attended the meeting on 28-2-1985 and that the minutes were not properly recorded on 28-2-1985. It was curious to note that in the letter dated 16-8-1985 Ex-R-2, he only referred to various Board meetings as having attended including 28-2-1985, but however, there was no mention about 16-11-1984 and 5-1-1985. In the said two meetings crucial decision was taken to subscribe to the additional share capital and now R-9 was coming out with his version that there was no meeting on 26-11-1984 and 5-1-1985 which version of R-9 could not be believed
When once it was held that proper notices were issued and the procedure as contemplated had been followed, it was not open for P-1 and R-9 to contend that no meetings took place. As already held that when R-9 attended number of meetings, of course excluding the Board meetings on 26-11-1984 and 5-1-1985, the contention of P-1 that he did not receive notices at all could not be believed P-1 and R-9 for the reasons best known did not elicit any information with regard to the postage account maintained by R-1 company nor was there any cross examination by R-9 in respect of the meeting which was held on 26-11-1984 and 5-1 -1985 wherein the leave of absence was granted to R-8 and R-9. He did not even elicit either from R-2 or R-3 that he did not make any request for leave of absence and that there was no evidence before R-1 company to that effect and the entry in the minutes that leave of absence was granted was false.
It is well established rule of evidence that a party should put to each of his opponent's witness so much of his case as concerns that particular witness. If no such questions are put the Court may presume that the witness's version has been accepted If it is in tended to suggest that a witness was not speaking the truth upon a particular point, his attention must first be directed to the fact by cross-examination, so that he may have an opportunity to give an explanation. It is also beyond controversy that if the witness is offered for cross examination, he should be cross examined on material point. Failure to cross-examine witness on certain points amounts to acceptance of truth of his testimony, except when the testimony itself is inherently improbable and incredible. Therefore, cross examination is powerful and valuable weapon for the purpose of testing the veracity of a witness and the accuracy and completeness of this story. Hence, when the witness was not tested by cross-examination, his evidence may be accepted subject to the above exception.
There was no cross-examination on this point. There was also no suggestion. Therefore, it had to be concluded that R-9 did seek for leave of absence, thereby establishing that he had the notice of meeting. Any resolutions passed in such meeting were valid unless properly challenged
According to P-1 and R-9 the burden placed on them was discharged by stating that they did not receive any notices and the burden shifted to R-3 to establish that notices were sent. In this regard it had to be noted that proof of burden on the respective parties paled into insignificance when they adduced the evidence at length. Yet, if they failed to elicit the necessary information, then it had to be taken note of. Suffice it to say that if the notices were issued properly and they failed to attend the meetings, the consequential resolutions passed in the said meetings could not be challenged nor could it be said that the minutes were manipulated. It is duty cast on the party to put his case in the cross-examination of the witnesses of the opposite party. This rule is of essential justice, not merely a technical one. The contention that the notices for offering the additional shares was never issued and certificate of postings produced by R-3 could not also be accepted, because in pursuance of the orders of the Court, an Advocate-Commissioner was appointed to take charge of the documents of the company and in pursuance of the said order, various documents were taken charge of by the Advocate-Commissioner by putting her initials on each and every document on 11-7-1987. The notice issued for the meetings dated 26-11-1984, 5-1-1985 and 28-2-1985 bore the signature of the Advocate-Commissioner and the certificate of postings also bore the signature of the Commissioner. That went to establish that these documents were in the files of the company as on the said date and it could not be said that they were manufactured or fabricated subsequently. It was also one of the circumstances which went to show that these documents were maintained during the course of the company's business.
For all these reasons, it must be held that proper notices were issued for the meetings dated 26-11 -1984, 5-1-1985 and 28-2-1985 and the minutes were recorded in those meetings could not be said to be irregular or manipulated When once it was found that the offers were made to all the shareholders if they did not respond to the offers it had to be necessarily held that they did not consent for subscribing to the additional shares.
In this regard, it has to be noted that convening of meetings and taking decisions in the Board meetings and sending intimations to the shareholders is a purely a in-house procedure regulated by the articles of association of the company and it would not be proper for the Courts to interfere with the internal administration of the company, unless the contrary is established including the contravention of the articles of association or the statutory provisions as contained in the Act.
So long as the company functions in accordance with the statutory provisions, its activities need not be probed further. Therefore, when R-9 andP-1 with their respective members did not respond to the offers made by R-1 company, it had to be necessarily held that they were not inclined to subscribe to the additional shares, thereby impliedly consenting for allotment of shares to the others.
AS REGARD'S BINDING NATURE OF FINDING IN INTERLOCUTORY APPLICATION FOR GRANTING INTERIM RELIEF
The finding in interlocutory application for interim relief as to genuineness of issue of additional share could not be binding on the Court while adjudicating the issue on merit.
The principle of res judicata is conceived in the larger public interest which requires that all litigation must sooner than later, come to an end The principle is also founded on basis of justice and good conscience, which require that a party which once succeeded on an issue should not be permitted to be harassed by a multiplicity of proceedings involving determination of the same issue. However, it is not in dispute that the finality of orders and their binding nature depends on the type of orders passed and the nature of relief granted in interlocutory orders.
In the instant case, the Company Application No. 184of 1988 were made by R-9 seeking reconstitution of the board represented by R-9 and P-1, for appointment of joint managing director, for declaring proceedings of AGM dated 5- 7-1985 for carrying out of the functions of joint managing director and managing director for conducting fresh audit. The Single Judge very clearly stated in the order on the interlocutory application that the examination of material was for appreciating the controversy raised for ascertaining the prima facie and balance of convenience for the purpose of interlocutory applications. Therefore, the Single Judge on the basis of such examination came to a prima facie conclusion. Even the Division Bench also confirmed the order of the Single Judge. It only establishes that the prima facie findings for this purpose of balance of convenience for appropriate orders shall be deemed to have confirmed The prima facie finding rendered by the Single Judge for purpose of granting interim relief could not be said to be binding in subsequent proceedings in the same case. Thus, any findings recorded by the Single Judge in the interlocutory application, could not be treated as res judicata in subsequent proceedings. In fact the Judge himself proceeded with the matter for ascertaining the existence of a prima facie case and balance of convenience. Therefore, findings given in that proceedings could not come in way of decision of the main petition.
AS REGARDS APPLICATION OF PRINCIPLES OF PARTNERSHIP
It is well within the competence of the Court to determine
the real structure of the company. It is open for the Court to pierce the veil
for such determination. If it is found that the apparent structure of the
company is not real structure and it is in substance a partnership the
principle of dissolution of the partnership may be applied in adjudicating the
petition for winding up.
In order to determine whether the company though incorporated under the Act, yet in substance it is a partnership, the following norms may create a possible inferential circumstances:
(a).
There should have been pre-existing
business of partnership.
(b). An understanding to
convert the partnership into a limited company to be run on the same terms and
pattern as that of partnership.
(c). It should have been
formed among the relations or close friends with an understanding to run the
company with joint participation on the basis of personal relationship coupled
with mutual trust and confidence.
(d). An agreement and
understanding that all or some of the shareholders will physically participate
in the conduct of the business.
(e). There should have been
an understanding that the persons investing in shares in the company would be
appropriately remunerated by way of salary and perquisites with a right to
participate in the management of the company.
(f)
The members should hold some
proprietary right,
(g) Shareholding should be equal with minor variation.
(h) A clause or clauses in the articles of association of the company signifying either expressly or impliedly that the business is run on the lines of partnership.
(i) Complete restriction on transfer of shares to outsiders to indicate the continuity of trust and confidence among the shareholders.
(j) To appoint the directors on the basis of shareholdings of members of each family or set of associates.
These are only illustrative and not exhaustive. The Court has to decide the matter on the particular facts and circumstances of each case.
There was no dispute that the company was found by the members of J and K families. The shareholding was not equal between J and K. As already noticed there was a split in the J group and R-3 stated that there was no partners hip formula in the instant case. It was only when the shareholding was equal, a possible inference could be drawn that there were symptoms of partnership. Further, it was not the case where prior to the incorporation of the company, the business was run on partnership basis. It was for the first time, the company was incorporated straightaway under the provisions of the Act nor it was the case of the parties that any of the parties were conducting the business analogous to the business of the R-1 company prior to the incorporation. Altogether it was a new business, not undertaken by any of the members previously. It was only established for the purpose of supply of rubber rings to HIL which was the main principal component for manufacture of A.C. Pressure Pipes. There was also no agreement which was forthcoming between the parties to the effect that the business shall be conducted on the lines of the partnership and no such understanding could be culled out from the facts of the instant case. The memorandum of articles of association of the company did not contain any clauses suggestive inference of partnership. Even the directors were not elected on the basis of shareholdings. Initially there was five directors out of which only one director was from K group. Even in 1987 when there were six, P-1 was only the director on behalf of K group. All that could be said was that the members of two families formed the private limited company. There was also no stipulation with regard to the representation of the directors from each family. Even in the articles of association, no such understanding was contained nor could it be inferred from the reading of the various clauses of the articles of association. Clause 9 of the articles of association empowered the board absolute and uncontrolled discretion to refuse to register any transfer of the shares and it shall not be required to give any reasons. Further under clause 10 any share may be transferred by any member to any other member or his wife or husband of another member, etc., by which it only went to show that a member was free to transfer the shares of any member or the relations of the members as stipulated therein and in such cases of transfer, the power of refusal given to the board under article 9 shall apply to any of such transfer. Therefore, even if a member wished to transfer his shares to other members, the decision of the board was final and uncontrolled discretion was vested with the company to refuse to register the transfer without giving any reasons. Under clause 7, the number of directors of the company shall not be less than two, not more than nine. Thus, it was seen that the power of a transfer by a member was not automatic and that there was no stipulation in the articles of association that a director should be appointed from K Group or J Group. There was also no stipulation with regard to the participation in the management of the company by the members of both families. Though, P-1 and R-9 were submitting that it was a partnership concern having joint participation in the management, no such evidence was forthcoming except stating that P-1 and R-9 used to guide the management of R-1 company and decisions were being taken after consulting them. P-1 and R-9 were the directors apart from the other directors. It was sought to be contended that there was always an implied understanding that the shareholding of K and J family should be in the ratio of one-third and two-third In the absence of any positive evidence, it was not possible to hold that the shareholding was in the ratio of one-third and two-third Of course, in the evidence, it was brought out that whenever the share capital was raised the shares were allotted in the ratio in which they were holding earlier, but that could not be construed as a determinative factor for treating R-1 company as a partnership firm. Evidence was also adduced to say that even other companies established by the K and J family, the shareholding was in the ratio of one-third and two-third; however, that could not be taken into consideration inasmuch as the holding in other companies could not form basis for the holding in the present company. Moreover, the evidence adduced on behalf of P-1 and R-9 did not indicate that there was an understanding or agreement to the effect that the shareholding of K should always be one-third at the level of incorporation and also at the points when the shareholdings were increased from time to time. Even assuming that the shareholding of the K family and J family was 30 per cent above and 60 per cent above respectively, that situation by itself was not a conclusive proof that it was a partnership concern. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 3 98. The powers which are now exercised under section 402 of the Act were hitherto being exercised by the Courts and now they are being exercised by the CLB. Therefore, applying the principles settled in catena of decisions, the plea of the P-1 that the company was ostensibly incorporated under the provisions of the Company Law and that in substance it was a partnership, had to be rejected
AS REGARDS OPPRESSION/MISMANAGEMENT
The oppression is the core element to be proved and the nature of oppression to be tested in the context of 'cause for winding up'. But it has to be remembered that the provision is intended to avoid winding up and to mitigate and alleviate oppression. The relief under section 397 is geared to help the members who were oppressed The relief under section 398 is geared to save the company and it is in the interest of the company alone and not to any particular member/members. The right of members to apply under sections 397 and 398 is hedged in with certain restrictive conditions. This is to avoid frivolous applications from dissatisfied members approaching the Court (now the CLB). The provision regarding member/members having one-tenth share capital of the company alone can file applications under sections 397 and 398 is intended to avoid frivolous petitions. Of course, under section 399(4), it is provided that the Central Government may authorise any member or members of the company to apply to the CLB for relief, if in its opinion circumstances exist which make it just and equitable to do so.
The expression 'oppression' and 'mismanagement' which are the basic and foundational concepts in the section are left by the Parliament without defining them. When once it is left without definition, the task of the Court is difficult and more responsible. The word 'oppression' is a chamelionic word and it changes its colour, content and form from time to time, place to place, event to event, depending on the circumstances of the case. Therefore, no general frame can be made to this word confining its limits. Hence, the oppression has to be made out on the facts and circumstances of each case. The word 'oppression' denotes the exercise of authority or power in a burden-some, harsh and wrongful manner, or unjust, cruel treatment or the imposition of unreasonable or unjust burdens, in the circumstances, which would almost always entails some impropriety on the part of oppressor. Naturally, the Court will always incline to wade through precedents to find out and to assign the correct meaning of these two words 'oppression 'and 'mismanagement' in the context in which they are used Certainly, the Courts have to decide on the facts of each case as to whether there is a real cause of action under sections 397 and 398.
Under section 397, the court has to be satisfied that the affairs of the company are being conducted in a manner oppressive to any member or members. Therefore, the acts of oppression have not only to be alleged with sufficient precision, but they must be proved to the satisfaction of the Court. In a petition under sections 397 and 398, it is to be specifically pleaded and established by the party not only the existence of circumstances warranting winding up of the company under the 'just and equitable' clause, but also it should be further established that winding up order if passed would act adverse to the interest of the shareholders. Further, when this clause is invoked, there must be material to show that it is just and equitable not only for the persons applying for winding up but also to the company and all its shareholders. Even in certain cases, violation of statutory provisions was held to be not oppressive act warranting interference under section 402. In the instant case, it was already found that P-1 had notice of meetings, but deliberately he failed to attend the meetings. Therefore, the contention that P-1 had an interest in the company and that he was willing to purchase the shares had the offer for additional share issue had been made to him, could not be accepted R-9 did participate in the meetings and he was aware of the increase of the share capital and intentionally did not contribute. R-9 also accepted that after resignation from H.I.L. he started devoting his time for Nucon as it was in losses. It was also noticed that various powers were given to R-9 in respect of Nucon Company and also the documents and records were handed over after he took over. Even though his disinterestedness was not directly established, the fact remained that the decision for additional share capital was taken in the meeting held on 26-11-1985 and other meetings, he failed to respond Therefore, it was to be only presumed that he was not interested Moreover, the way in which he initiated the litigative process from the alleged letter dated 16-8-1985 it was established that he was not coming with true facts. Hence, the contention that R-9 would have purchased the additional shares had he been offered could not be swallowed with confidence.
Further enhancement of capital is a purely an internal administration of the company and Courts do not interfere in the normal course. When the resolution was held to be valid, it would not be in the fitness of things to construe that there was no genuine requirement. It could not also be said that R-1 company could have taken a decision to go for loan from the financial institutions or sold some of its assets rather than increasing the capital because, the decision vested with the board of directors which could not be scrutinised when it was found that valid resolution was passed in accordance with the provisions of the Companies Act and also the articles of association. It was found that proper notices were given for Board meetings and minutes were properly drafted. When there was no response for the offer for additional shares from P-1 andR-9, the shares were allotted to R-3 and his family members. Therefore it could not be said that subscription of additional capital was mala fide. According to, P-1 and R-9 that whatever was brought by R-3 as an additional share-capital did not remain with the company for two days and the amount came back to their hands within two days of the transaction. It was also their case that extention of time granted to the shareholders to subscribe to the additional share capital upto 15-12-1984 was only imaginary as by 1-12-1984 R-3 and his family members had already sent the cheques for Rs. 5 lakhs for additional shares and the amount was brought into the accounts of R-1 company and the amount was also paid to D.P.P.L. for purchase of machinery and part of amount was also sent to the bank towards the liquidation of the over-draft amount.
It was not in dispute that R-3 and his family members had paid the amount of Rs. 5 lakhs which he obtained from Poddar Company and it came to the records of R-1 company on 30th November and again on 1st/2nd December, cheques were issued to R-3, and his family members on the directions of D.P.P.L. It was also in evidence that R.M. Trading Company wanted to advance the amount to R-3 and since they had no account in Hyderabad, it requested D.P.P.L. to advance the money as D.P.P.L. had to receive the amounts from R-1 company, it directed the R-1 company to issue cheques in favour of R-3 and his family members and finally it was in evidence that the amount was also paid by R.M. Trading Company to D.P.P.L. company and R-3 and his family members also paid to R.M. Trading Company. By this transaction, P-1 and R-9 tried to submit that it was purely a bogus transaction and the company did not receive any physical benefit and it was only a paper transaction. Though the contention appeared to be appealing at the first blush, but a deeper scrutiny would reveal that the contention had no merits. It had been the case of R-3 throughout that the amount brought in by him towards the share capital was most insufficient for purchasing the various machineries. Only part of the share capital was paid to D.P.P.L. towards the purchase of Extruder, etc. But on the other hand, the machineries were more than Rs. 15 to 20 lakhs were purchased from other companies in the country. It was his case that machinery worth more than Rs. 20 lakhs was purchased during that period This statement was never contradicted by P-1 or R-9. Thus, it was to be held that not only the machinery from D.P.P.L. was purchased, but also various other machineries was purchased from outside agencies with the funds raised by R-3. Therefore, it was not as if only one transaction of purchase was made from D.P.P.L., but the several other transactions were made with regard to the purchase of machinery from other companies. Therefore, it could not be heard to say that the capital alleged to have been brought by R-3 was only on paper and there was no real transaction in substance. It was also the case of P-1 and R-9 that when once the company had already been contributed by R-3 and his family members, there was no necessity to extend the date in the guise of extended offer dated 5-1-1985 to the shareholders and it made a belief that arrangement was purely planned by R-3.
The contention that since the capital had already been subscribed by R-3 and his family members, by 30-11-1984 and the same was utilised, there could not have been any further offer to any other member, could not be accepted In fact, in spite of another offer given to the members and in the absence of response the decision was taken on 24-2-1984 only to allot the shares to R-3. The contention on behalf of R-3 was that if there had been any subscription of the capital by P-1 or R-9 and their respective family members, then the value of the shares that would have been purchased by P-1 and R-9 could have been returnedtoR-3. The other contention was also raised to the effect that the alleged family settlement was a farce and no such family settlement had taken place and the documents were introduced by R-3 in a most suspicious circumstances and that R-3 had manipulated these documents to suit his convenience. It was true that number of documents were introduced by R-3 stating that there was a family settlement and that P-3 also had written to P-1 for settlement of the accounts and that there was private agreement between P-3 andR-9 to the effect that K Group will support R-9 in their efforts to fight against R-3. One thing was clear, that P-1 had reconciled to settle his accounts and P-1 and J family submitted to the mediation and arbitration of KT. It was also evident from the letter of KT that a settlement was arrived and payment schedule was to be finalised At this point of time, entire exercise was blown off. Therefore, it had to be seen that there was some steps towards the settlement of the accounts between K and J families. But, that was not a much relevant factor for deciding the issue. Therefore, in view of the findings recorded above, it could not be said that R-3 acted in a manner oppressive to other shareholders. Normally oppression is alleged against majority shareholders by the minority shareholders. But, in the instant case it was turned to be otherwise. The oppression was now being alleged by majority shareholders (prior to additional share capital) namely P-1 andR-9. As already stated the genesis appeared to be not that the meetings were not being conducted, notices were not being issued, but P-3 was not properly accommodated after his return in 1982 from Saudi Arabia. Even this was confirmed by R-9.
The company had been running right from 1987 after the company petition had been filed and the issue of lack of probity had not been established by any proper evidence. It was also not established that the company had been not functioning in accordance with the provisions of the Companies Act and that the situation warranted the winding up of the Company on just and equitable ground It is not open for the court to interfere with the management and administration of the company in each and every issue, but it could only interfere when the company has been acting to the detriment of the interest of the shareholders in general Further, it had to be seen whether R-3 had acted in a manner detriment to the interest of the other shareholders or he changed the set up of administration after he became the majority shareholder. Admittedly, P-1 andR-9 continued to be the directors even after the majority shareholders and they were being invited to participate in all the meetings and affairs of the company. It was not as if they were completely excluded from the management of the company. On the other hand, P-1 never attended meetings after 31-3-1983. Therefore, even after the additional allotment of shares in favour of R-3, it could be said that the position of P-1 and R-3 changed in a manner prejudicial to their interest or their members. The genesis took place when P-3 was not properly accommodated in 1982 when he returned back from Saudi Arabia and the crisis which was brewing from 1982 took its deep route in 1985 when P-3 was withdrawn from the Board of A.R.I.L. This lead to the filing of the suit by P-1 and exchange of letters between P-1 and R-3 and simultaneously the correspondence was started by R-9 with R-3. Even though the additional issue was never focal issue, yet it was made the basic issue in the Company Petition, for sustaining the alleged acts of oppression. Even otherwise what was sought to be established was that P-1 and R-9 in their capacities as directors and not as shareholders were subjected to oppression. That is not the requirement of law. Hence grounds urged for establishing oppression on the part of R-3 had not been made out. AS REGARDS WHETHER AFFAIRS OF THE COMPANY WERE CONDUCTED IN A MANNER PREJUDICIAL TO THE INTEREST OF THE COMPANY.