1994 (2) TMI 231 - SC - Companies Law

Transfer of shares - Power to refuse registration and appeal against refusal - Heirs of deceased shareholders of respondent-company filed a petition for rectification of register of members by deleting name of deceased shareholder and substituting their names therein -On 21-9-1977 existing articles of association were replaced by a new set wherein new articles were introduced conferring power on company to reject any application for transfer or transmission without assigning any reason in that behalf - On 21-8-1984 appellants received heirship certificate - On 21-11-1984 appellants forwarded a true copy of heirship certificate and requested respondent to do needful - But respondent refused registration to appellants in exercise of powers conferred under articles of association - Appellants submitted that upon failure of Board of Directors to exercise right of refusal within period of two months, they were entitled to registration of shares in their names - Whether right of refusal of a company to register transfer of or transmission by operation of law of right to any share comes to an end after expiry of a period of two months and an absolute right is created in favour of transferee - Held, no - Whether in view of established fact that there was animosity between parties, respondent s decision of refusal to register shares in appellants names was a proper and commercial decision - Held, yes

Issues Involved:
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.
2. Whether the Board's failure to register the transmission within the period of two months and the subsequent decision taken on 9-4-1985 was mala fide and not taken in the interest of the company.
3. Whether the company had the power to refuse registration or transmission of shares in the absence of a specific provision in the articles of association.
4. Whether the subsequent amendment of the articles of association to deny registration of transmission was valid and effective.
5. Whether the refusal of registration by the Board was wrongful and mala fide exercise of discretion.

Detailed Analysis:

1. Loss of Power to Refuse Transmission After Two Months:
The Division Bench of the High Court considered whether the Board of Directors lost its power to refuse the transmission of shares to the appellants after two months. The appellants argued that the Board's failure to act within this period resulted in the loss of its power to refuse transmission. The Division Bench referred to section 111 of the Companies Act and observed that the delay, if unexplained, might influence the appellate authority or the Court in considering whether discretion was exercised bona fide but did not imply a loss of power. The Court concluded that the Legislature did not provide a specific deeming provision to that effect, and thus, the power was not lost after two months.

2. Mala Fide Action and Interest of the Company:
The Division Bench also examined whether the Board's failure to register the transmission within two months and the subsequent decision taken on 9-4-1985 was mala fide. The Court reviewed the materials on record and the ratio laid down in several cases, ultimately holding that the decision was a commercial one taken honestly by businessmen in the interest of the company and its shareholders. The decision was not characterized as capricious, perverse, or mala fide.

3. Power to Refuse Registration or Transmission of Shares:
The appellants contended 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. The Court referred to Articles 26 and 34 of the articles of association, which allowed the directors to decline registration of any transfer or transmission of shares. Section 111 of the Companies Act also provided the power to refuse registration and for an appeal against such refusal. The Court found that the language of section 111 did not create an absolute right in favor of the transferee upon the expiry of two months and that the power to refuse was not lost.

4. Validity of Subsequent Amendment of Articles of Association:
The appellants argued that the subsequent amendment of the articles of association to deny registration of transmission was invalid and ineffective. The Court noted that the registration and transmission were sought only in 1984, by which time the articles had been amended. The Board was given the power to refuse registration or transmission, and the Court did not find any irregularity or lack of bona fide action in bringing about those amendments.

5. Wrongful and Mala Fide Exercise of Discretion:
The appellants argued that the refusal of registration by the Board was wrongful and a mala fide exercise of discretion. The Court referred to the principles laid down in Bajaj Auto Ltd v. N. K. Firodia and Life Insurance Corpn. of India v. Escorts Ltd., which emphasized that directors must act bona fide and not arbitrarily. The Court examined the reasons provided by the Board of Directors and found that the decision was a proper and commercial one made in the interest of the company. The Court concluded that there was no dishonest intention, and the concurrent finding of fact by the lower courts was not interfered with.

Conclusion:
The appeal was dismissed, and the Court held that the Board of Directors did not lose its power to refuse transmission after two months, the decision was not mala fide, the company had the power to refuse registration or transmission of shares, the subsequent amendment of the articles of association was valid, and the refusal of registration by the Board was not a wrongful or mala fide exercise of discretion. There was no order as to costs.

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