1988 (4) TMI 343 - HC - Companies Law

Shares warrants and entries in register of members, Transfer to shares Power to refuse registration and appeal against refusal, Power of court to rectify register of members

Summary

Issues Involved:
1. Transfer of shares and compliance with Articles of Association.
2. Discretion of the Board of Directors in rejecting share transfer applications.
3. Compliance with Section 108 of the Companies Act, 1956.
4. Jurisdiction of the court to interfere with the discretion of the Board of Directors.

Issue-wise Detailed Analysis:

1. Transfer of Shares and Compliance with Articles of Association:
The controversy arose from the appellant's purchase of 705 shares from the second respondent and the subsequent rejection of the transfer request by the first respondent company. The company's Articles of Association, particularly clauses 33 to 41, govern the transfer of shares. The appellant contended that the transfer should have been registered as the company did not find a member to purchase the shares within the stipulated period. However, the company argued that the appellant did not comply with the mandatory requirements, including sending the share certificates and remitting Rs. 2 for registration.

2. Discretion of the Board of Directors in Rejecting Share Transfer Applications:
Clause 40 of the Articles of Association grants the Board of Directors absolute discretion to reject any application for transfer without stating reasons. The court held that unless it is proved that the directors acted oppressively, capriciously, arbitrarily, or in bad faith, the court cannot interfere with the discretion exercised by the company. The appellant failed to provide positive evidence that the Board acted in such a manner. The court referenced previous decisions, including Teekoy Rubbers' case and South Indian Bank Ltd. v. Joseph Michael, to support this view.

3. Compliance with Section 108 of the Companies Act, 1956:
Section 108 mandates that a proper instrument of transfer, duly stamped and executed, must be delivered to the company along with the share certificate. The appellant did not comply with these procedural requirements, which justified the company's rejection of the transfer application. The court cited the Supreme Court's decision in Mannalal Khetan v. Kedar Nath Khetan, affirming that the provisions of Section 108 are mandatory.

4. Jurisdiction of the Court to Interfere with the Discretion of the Board of Directors:
The court's jurisdiction under Section 155(2) or (4) of the Companies Act to interfere with the Board's discretion is limited. The court can only intervene if it is proved that the Board acted corruptly, oppressively, capriciously, arbitrarily, or in bad faith. The appellant did not meet this burden of proof. The court emphasized that a private limited company, being a closed corporation, has greater discretion in determining its members.

Conclusion:
The court dismissed the appeal, affirming that the company's rejection of the share transfer application was justified due to non-compliance with procedural requirements and the discretionary powers granted to the Board of Directors. The appellant failed to provide sufficient evidence to prove that the Board acted in bad faith or against the interests of the company.