2004 (12) TMI 398 - HC - Companies Law

Summary

Issues Involved:
1. Whether the Company Law Board was correct in holding that the provisions of section 108, except sub-section (1) of the Companies Act, 1956 are only directory and not mandatory in nature?
2. Whether the Company Law Board was right in concluding that the share transfer has to be registered by the appellant despite non-compliance with certain provisions of law by the petitioner?

Issue-wise Detailed Analysis:

1. Directory vs. Mandatory Nature of Section 108:
The primary issue was whether the provisions of section 108, except sub-section (1), of the Companies Act, 1956, are mandatory or directory. The court analyzed section 108 and its sub-sections (1A), (1B), (1C), and (1D). It was noted that the Supreme Court in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185 had held that section 108(1) is mandatory. However, this case did not address sub-sections (1A), (1B), (1C), and (1D), which were introduced by the Companies (Amendment) Act, 1965. The court agreed with the Karnataka High Court's decision in Mukundlal Manchanda v. Prakash Roadlines Ltd. [1991] 72 Comp. Cas. 575, which concluded that sub-sections (1A) and (1C) are directory and not mandatory. The court reasoned that trivialities should not render an act futile and that technical formalities should not outweigh the substance of the transaction. Therefore, except for sub-section (1), the other provisions of section 108 were held to be directory.

2. Compliance with Section 108(1C) and Registration of Share Transfer:
The second issue was whether the Company Law Board was right in directing the registration of share transfers despite non-compliance with certain provisions by the petitioner. The petitioner, Gujarat Industrial Investment Corporation Limited, had advanced a loan to the company and received shares as a pledge. When the company defaulted, the petitioner sought the transfer of the pledged shares. The company argued that the petitioner had not complied with section 108(1C), which requires the instrument of transfer to be stamped or endorsed and delivered within two months. The petitioner contended that the requirement of section 108(1C) is directory and that the company had waived this requirement by transferring a portion of the shares without objection. The court noted that the company had not raised the issue of non-compliance with section 108(1C) at any stage, including before the Company Law Board. The court also found that the company's conduct in failing to repay the loan and raising technical objections to prevent the petitioner from realizing its dues was not appreciable. Consequently, the court upheld the Company Law Board's decision to direct the registration of the remaining pledged shares in the petitioner's name.

Conclusion:
The court concluded that the provisions of section 108, except sub-section (1), are directory and not mandatory. It also upheld the Company Law Board's decision to direct the registration of the remaining pledged shares in the petitioner's name, dismissing the appeals as devoid of merits. The court emphasized the importance of substance over technical formalities and the need to prevent the perpetuation of wrong actions.