1991 (11) TMI 196 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles, General provisions with respect to memorandum and articles - Effect of memorandum and articles, Shares warrants and entries in register of members, Transfer of Shares Power to refuse registration and appeal against refusal, Oppression and mismanagement

Issues Involved:
1. Justification for refusal to register the transfer of shares.
2. Validity of the alteration of the articles of the company by inserting Article 17.
3. Applicability of Article 17 to the transfers in question.
4. Justification of the board in refusing the registration of transfers.

Detailed Analysis:

Issue 1: Justification for Refusal to Register the Transfer of Shares
- Grounds for Refusal: The company refused to register the transfer of shares on the grounds that the instruments of transfer were not duly stamped and that the transfer applications were not accompanied by evidence showing payment of the fee as per Article 22 of Table A of Schedule I to the Companies Act.
- Legal Provisions: Section 108 of the Companies Act mandates that a company shall not register a transfer of shares unless a proper instrument of transfer duly stamped and executed is delivered to the company. Additionally, Section 12 of the Indian Stamp Act requires adhesive stamps to be canceled at the time of execution.
- Court's Interpretation: The court held that the instruments of transfer were not duly stamped as the adhesive stamps were not canceled at the time of execution. The non-compliance with the requirements of Section 12 of the Stamp Act is mandatory and renders the instrument not duly stamped. Consequently, the board of directors was justified in rejecting the request to register the transfers.
- Precedents: The court referred to previous rulings, including Mannalal Khetan v. Kedar Nath Khetan, Malabar and Pioneer Hosiery (P.) Ltd., and P.V. Chandran v. Malabar and Pioneer Hosiery (P.) Ltd., which supported the mandatory nature of the provisions.

Issue 2: Validity of the Alteration of the Articles of the Company by Inserting Article 17
- Company's Power to Alter Articles: Under Section 31 of the Companies Act, a company has the power to alter its articles by special resolution. Such alterations are valid provided they are not inconsistent with the provisions of the Companies Act and the memorandum of association.
- Court's View: The court agreed with the view that the altered article has no retrospective operation. However, the transferor remains subject to the altered article if it is shown that he continues to be a shareholder of the company.
- Precedents: The court referred to Pepe v. City and Suburban Permanent Building Society and Sidebottom v. Kershaw Leese and Co. Ltd., which established that a company can alter its articles provided the alteration is bona fide for the benefit of the company as a whole.

Issue 3: Applicability of Article 17 to the Transfers in Question
- Timing of Alteration: The court held that the right of the transferee to get his name entered on the register gets crystallized when proper lodgment is effected, and the transfer becomes effective as against the company. Since there was no proper lodgment in this case, the transfer had not become effective as against the company.
- Court's Conclusion: The court concluded that the transferees cannot challenge the alteration of the articles as they had no proper lodgment, and their rights as transferees were not crystallized.

Issue 4: Justification of the Board in Refusing the Registration of Transfers
- Board's Discretion: The court held that the board of directors acted within their rights in refusing the registration of transfers due to the non-compliance with the statutory requirements.
- Court's Conclusion: The court found that the rejection of the application to register transfer of shares on the ground that there was no valid lodgment of the application is beyond challenge.

Conclusion:
The court allowed the appeals, holding that the company was justified in refusing to register the transfer of shares due to non-compliance with the statutory requirements for stamping and payment of fees. The alteration of the articles by inserting Article 17 was valid, and the board's refusal to register the transfers was justified. The cross-appeals were dismissed, and the court certified that the case involves substantial questions of law of general importance to be decided by the Supreme Court.

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