1981 (3) TMI 203 - HC - Companies Law

Summary

Issues Involved:

1. Validity of Regulation 24 of the Articles of Association.
2. Exercise of discretion by the directors under Regulation 24.
3. Defective and incomplete transfer deeds.
4. Bona fides of the directors' refusal to register the transfer.
5. Jurisdiction and power of the Company Court under Section 155 of the Companies Act, 1956.

Detailed Analysis:

1. Validity of Regulation 24 of the Articles of Association:

The petitioners contended that Regulation 24, which grants the board of directors absolute discretion to refuse the registration of share transfers without assigning any reason, is invalid as it contravenes the shareholders' rights to freely deal with their shares. However, this point was not pressed during the hearing. The court noted that Regulation 24 is a common provision found in the articles of association of many companies and is binding on the company and its shareholders. The court concluded that Regulation 24 is valid, and the directors have the discretion to refuse registration under this regulation.

2. Exercise of discretion by the directors under Regulation 24:

The court examined whether the discretion exercised by the directors under Regulation 24 could be interfered with in proceedings under Section 155 of the Companies Act. The court referred to the principle that the power to refuse to register a transfer is presumed to be exercised bona fide unless the petitioner proves that the directors acted "oppressively, capriciously or corruptly or in some way mala fide." The court cited the leading case of Gresham Life Assurance Society, In re: Ex parte Penney [1872] 8 Ch App 446, which established that directors are in a fiduciary position to the company and shareholders, and unless breach of trust or corrupt or arbitrary conduct is established, the court has no jurisdiction to sit in appeal over the directors' decision.

3. Defective and incomplete transfer deeds:

The company claimed that some of the transfer deeds were incomplete and defective, as they were not duly stamped within the meaning of Section 108 of the Companies Act, read with Sections 12 and 17 of the Indian Stamp Act. However, the court found the averments in the counter-affidavits to be vague and not specific. The court noted that many of the transfer deeds were complete and without defects, and the petitioners were not given a reasonable opportunity to meet the company's case about incomplete and defective transfer deeds. Therefore, the refusal to register for this reason alone could not be sustained.

4. Bona fides of the directors' refusal to register the transfer:

The court examined whether the directors acted bona fide in refusing to register the transfer. The petitioners alleged that the directors acted maliciously, capriciously, and oppressively, without regard to the interests of the company, and with the intention of purchasing the shares themselves at lower rates. However, the court found that the petitioners failed to provide positive evidence to show that the directors acted corruptly, capriciously, or arbitrarily. The court noted that the presumption of bona fides stands unrebutted, and it was not established that the directors acted on wrong principles or otherwise than in the interests of the company and shareholders.

5. Jurisdiction and power of the Company Court under Section 155 of the Companies Act, 1956:

The court discussed the nature of the company court's jurisdiction in proceedings for rectification under Section 155. The court referred to the decision in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel [1978] 48 Comp. Cas. 438 (Guj.), which held that the jurisdiction conferred by Section 155(3) is wide and comprehensive and not summary. The court also noted that irrespective of the nature of the jurisdiction, courts have been reluctant to interfere with the directors' decision in registering transfers where the articles of association confer absolute discretion on them. The court concluded that in view of Regulation 24, the directors had a right to reject the transfer applications without giving reasons, and the presumption of bona fides could not be displaced without positive evidence.

Conclusion:

The court dismissed the petitions under Section 155 of the Companies Act, 1956, for rectifying the register of members of the company. The court held that Regulation 24 is valid, the directors exercised their discretion bona fide, and the petitioners failed to provide positive evidence to show that the directors acted corruptly, capriciously, or arbitrarily. Consequently, there was no scope for interference under Section 155, and the petitions were dismissed without costs.