1987 (4) TMI 421 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles, Transfer to Shares Power to refuse registration and appeal against refusal, Power of court to rectify register of members, Power to make rules

Summary

Issues Involved:
1. Validity of Regulation 24 of the Articles of Association under Section 82 of the Companies Act, 1956.
2. Compliance with Rule 19(3)(e) of the Securities Contracts (Regulation) Rules, 1957, regarding the period for disposing of share transfer applications.
3. Conflict between the Listing Agreement and the Articles of Association concerning the power to refuse registration of share transfers.
4. Authority of the company court to direct the company to disclose reasons for refusal to register share transfers.

Detailed Analysis:

1. Validity of Regulation 24 under Section 82 of the Companies Act, 1956:
The appellants contended that Regulation 24 of the Articles of Association, which allows the board of directors to decline to register share transfers without assigning any reason, contravenes Section 82 of the Companies Act, 1956. The court examined the historical and philosophical context of granting discretion to boards of directors in voluntary trade organizations. It emphasized that such discretion is a recognized fact of life as long as it does not impair the interests of the company, its shareholders, or the public. The court affirmed that the Articles of Association represent a contract of incorporation, and adherence to its terms is crucial for the internal discipline of the organization. The court concluded that the appellants failed to provide absolute proof or positive evidence that the directors' refusal was arbitrary, capricious, or against the interests of the company or its shareholders.

2. Compliance with Rule 19(3)(e) of the Securities Contracts (Regulation) Rules, 1957:
The appellants argued that companies listed on a stock exchange must dispose of share transfer applications within one month of lodgement, as per Rule 19(3)(e) of the Securities Contracts (Regulation) Rules, 1957. The court noted that this argument was not raised before the company judge and found no basis to hold that Rule 19(3)(e) supersedes Section 111(2) of the Companies Act, which provides a two-month period for such actions. The court dismissed the argument that the outer limit of two months should only apply in exceptional cases, affirming that the specified time under Section 111(2) is valid.

3. Conflict between the Listing Agreement and the Articles of Association:
The appellants raised the issue of whether the Listing Agreement and the Securities Contracts (Regulation) Rules, 1957, supersede the Articles of Association regarding the power to refuse registration of share transfers. The court found no evidence that this issue was mentioned during the proceedings before the company judge. It held that the detailed factual information necessary to address this point was not established, making it unfair to consider this argument at the appellate stage.

4. Authority of the Company Court to Direct Disclosure of Reasons:
The appellants asserted that the company court should have the authority to compel the company to disclose reasons for refusing to register share transfers, similar to the power granted to the Central Government under Section 111(5A) of the Companies Act. The court rejected this argument, stating that the specific amendment to Section 111(5A) did not extend to Section 155. The court emphasized that it cannot assume powers not explicitly conferred by statute. It concluded that the company court's role is limited to reviewing whether the directors' discretion was exercised bona fide and reasonably, without requiring the disclosure of reasons unless there is proof of arbitrariness, capriciousness, or mala fides.

Conclusion:
The court upheld the company judge's decision, affirming that the directors' refusal to register the transfer of shares was within their discretion as per Regulation 24 of the Articles of Association. The appellants failed to provide sufficient evidence to prove that the directors acted arbitrarily, capriciously, or against the interests of the company or its shareholders. Consequently, the appeals were dismissed, and the appellants were ordered to pay the costs of the respondents.