1998 (12) TMI 491 - HC - Companies Law

Summary

Issues Involved:
1. Legality and correctness of the CLB's order dated 22-5-1992.
2. Timeliness of the appeals filed by the transferees under section 111 of the Companies Act, 1956.
3. Merits of the Board of Directors' decision to refuse the transfer of shares.
4. The burden of proof regarding the bona fide exercise of power by the Board of Directors.
5. Examination of the CLB's approach and findings.

Detailed Analysis:

1. Legality and Correctness of the CLB's Order:
The judgment addresses the challenge against the CLB's order dated 22-5-1992, which directed the company to register the transfer of shares in favor of the transferees within 10 days. The primary contention was whether the CLB's decision was legally and factually correct.

2. Timeliness of the Appeals:
The company argued that the appeals filed by the transferees were time-barred under section 111 of the Companies Act, 1956. The initial applications for share transfer were rejected on 1-3-1989, and the transferees did not appeal within the statutory period. Instead, they re-lodged the applications in 1990, leading to a fresh rejection on 3-1-1991. The court found that the initial applications were incomplete and non-compliant with the law, thus no relief could have been granted even if appealed. The fresh cause of action arose with the rejection on 3-1-1991, making the subsequent appeals timely.

3. Merits of the Board of Directors' Decision:
The Board of Directors refused the transfer applications on several grounds, including non-compliance with transfer fees, incomplete applications, mala fide intentions, potential prejudice to the company's interests, and possible changes in the Board's composition. The court emphasized that the decision must be examined to determine if it was made in the interest of the company, based on legitimate reasons, and without oblique motives.

4. Burden of Proof on Bona Fide Exercise of Power:
The court reiterated that the presumption is that the Board of Directors acted bona fide and in good faith. The burden lies on the transferees to prove that the Board acted mala fide, arbitrarily, or with corrupt motives. The court cited several precedents, including Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala and Bajaj Auto Ltd. v. N.K. Firodia, to underline that the directors' discretion is presumed to be bona fide unless proven otherwise.

5. Examination of the CLB's Approach and Findings:
The court found that the CLB did not adequately consider the legitimacy of the Board's reasons for rejecting the transfer applications. The CLB's decision was influenced by the dismissal of the eviction suit against TMI, which was later restored. The court noted that the CLB failed to examine the potential impact of the share acquisition on the Board's composition and the company's interests. The court directed the CLB to re-examine the appeals, considering the legal principles and the facts presented.

Conclusion:
The court quashed the CLB's order and remanded the matter for fresh consideration, directing the CLB to decide the appeals in accordance with law and relevant judicial precedents. The parties were instructed to appear before the CLB for further proceedings.