2010 (7) TMI 288 - HC - Companies Law

Whether an award under the Arbitration and Conciliation Act, 1996 directing the transfer of shares to a party falls within the ambit of the second proviso to section 108? Held that - The entitlement to shares pursuant to an award made under the provisions of the Arbitration and Conciliation Act, 1996, is in consequence of lawful means other than by a transfer in accordance with the Articles of Association of the Company. Thus, the acquisition of the said shares by and pursuant to the award falls within the ambit of Article 23. The consent of the board having been accorded to the same, it cannot be said that the registration of the said shares by the board of directors was contrary to the Articles of Association of the Company. The impugned action of the Board of Directors of registering the shares pursuant to the said award is, therefore, neither contrary to section 108 nor to the Articles of Association of the Company. Thus the appeals are allowed.

Issues Involved:
1. Whether the registration of share transfers was contrary to Section 108 of the Companies Act, 1956.
2. Whether the registration of share transfers was contrary to the Articles of Association of the company.

Issue-wise Detailed Analysis:

1. Whether the registration of share transfers was contrary to Section 108 of the Companies Act, 1956:

The appeal raised an important question of law regarding the ambit of the second proviso to Section 108(1) of the Companies Act, 1956. The issue was whether an award under the Arbitration and Conciliation Act, 1996 directing the transfer of shares to a party falls within the ambit of the second proviso to Section 108. The court held that it does, and accordingly, it was not necessary for the Board of Directors of the Company to require a transfer form to be executed by the parties before effecting the transfer in its Register of Members.

Section 108 mandates that a company shall not register a transfer of shares unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and transferee is delivered to the company. However, the second proviso to Section 108 states that nothing in this section shall prejudice any power of the company to register as a shareholder any person to whom the right to any shares in the company has been transmitted by operation of law.

The court noted that the transfers were effected based on the arbitration award and not pursuant to any application from the respective respondents. The appellants admitted that the concerned respondents had not signed any share transfer forms nor authorized any of the appellants or the company to effect the said transfers. The court emphasized that the term "transmission" under the second proviso to Section 108 includes involuntary transfers such as those arising from an arbitration award, which is by operation of law.

The court concluded that the registration of the transfer of the shares was not contrary to Section 108, as the second proviso allows for the registration of shares transmitted by operation of law without the need for a transfer form.

2. Whether the registration of share transfers was contrary to the Articles of Association of the company:

The respondents argued that the registration of the transfers was contrary to Articles 15 and 16 of the Articles of Association of the company. Article 15 requires a member intending to transfer shares to give notice in writing to the Board, constituting the Board as the agent for the sale of the shares. Article 16 requires the Board to notify all equity shareholders of the number and price of the shares to be sold and invite them to state in writing within 21 days whether they are willing to purchase any shares.

However, the court highlighted Article 19 of the Articles of Association, which provides exceptions to Articles 15 to 18. Article 19 states that these articles shall not apply to transfers to a person who is already a member of the company. Since the transferees were already members of the company, Article 19 exempted the transfers from the requirements of Articles 15 and 16.

Additionally, the court referred to Article 23, which pertains to the registration of persons entitled to shares otherwise than by transfer. Article 23 allows the Board to register a person as the holder of shares if they become entitled to shares by lawful means other than a transfer in accordance with the Articles. The court noted that the entitlement to shares pursuant to an arbitration award falls within the ambit of Article 23. The Board had consented to the registration of the shares, and thus, the registration was not contrary to the Articles of Association.

Conclusion:

The court concluded that the impugned action of the Board of Directors in registering the shares pursuant to the arbitration award was neither contrary to Section 108 of the Companies Act, 1956, nor to the Articles of Association of the company. The appeals were allowed, and the impugned order and judgment of the Company Law Board were set aside. There was no order as to costs.

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