2018 (12) TMI 1546 - AT - Companies Law

Power to refuse registration of transfer of shares in the Company to outsiders - sufficient cause - Board of Directors of Synthite Industries, which at the time concerned was deemed public company and which was in the process of conversion into a private company power to refuse registration of transfer of shares in the Company to outsiders - Held that - Admittedly Article 24 of the Articles of Association was existing as a contract between the Appellant Company and the respective Respondents 10. Apart from that, Sub-Section (4) of Section 58 of the Act, itself provides for an Appeal if the public company without sufficient cause refuses to register the transfer of securities. It is obvious that if there is sufficient cause, the transfer can be refused. In the facts and circumstances of the present matter, looking to the above discretion, we are satisfied that the Appellant Company had sufficient cause to apprehend that Respondents No.10 in these Appeals were acting with a design and the original Petitioners had not purchased the share with bona fide object of investment. Respondent No.10 Beena George held 2,640 shares of ₹ 100/- each in the Appellant Company but transferred just 25 shares. Appellant submitted that this could not be said to have been done with the bona fide object of trading but is rather attempt at introducing outsiders in the Appellant Company to get control and to create obstruction in the process which had been initiated by the Appellant Company of converting itself back to private limited company from a public limited company. We find the reason recorded by the Company to refuse to record transfers is based on reasonable apprehensions recorded in the letters sent to Petitioner. We do not wish to impose our wisdom on that of the Board of Directors which cannot be said to be arbitrary on lacking in bona fides. The decision was in interest of Company. Going through the reasons recorded by the learned NCLT for allowing the Compny Petition, we do not find that the Impugned Orders are well reasoned. For reasons discussed above, we find that the Petitions deserve to be rejected.

Summary

Issues Involved:

1. Whether the Board of Directors of Synthite Industries had the power to refuse registration of transfer of shares to outsiders.
2. The validity and applicability of Article 23A and Article 24 of the Articles of Association.
3. Allegations of hostile takeover and competition between Synthite Industries and the transferee companies.
4. The sufficiency of the cause for refusal of share transfer under Section 58(4) of the Companies Act, 2013.

Detailed Analysis:

1. Power to Refuse Registration of Transfer of Shares:

The primary issue revolves around whether the Board of Directors of Synthite Industries, a deemed public company in the process of converting to a private company, had the authority to refuse the registration of share transfers to outsiders. The Appellant argued that the refusal was justified based on the company's Articles of Association and the competitive nature of the transferee companies. The NCLT initially directed the registration of the share transfers, but the Appellate Tribunal later found that the Board acted within its rights to protect the company's interests.

2. Validity and Applicability of Article 23A and Article 24:

Article 23A, introduced in the Articles of Association during a resolution to convert the company to a private entity, restricted the transfer of shares without prior Board approval. The Appellant contended that this article was valid and enforceable even before NCLT's approval of the conversion. Additionally, Article 24, which pre-existed, allowed the Board to refuse share transfers if deemed undesirable. The Tribunal found that Article 24 provided sufficient grounds for refusal, irrespective of the status of Article 23A.

3. Allegations of Hostile Takeover and Competition:

The Appellant presented evidence that the transferee companies, M/s. Plant Lipids (P) Ltd. and M/s. Aromatic Ingredients (P) Ltd., controlled by Mr. C.J. George, were major competitors. The Board of Directors believed that the share transfers were part of a strategy for a hostile takeover, as both companies had resolved to acquire a significant number of shares. The Tribunal agreed that the competitive relationship and the resolutions to acquire shares indicated a potential threat to the company's management and justified the refusal.

4. Sufficiency of Cause for Refusal under Section 58(4):

Section 58(4) of the Companies Act, 2013, permits refusal of share transfer registration for "sufficient cause." The Tribunal emphasized that the Board's decision must be bona fide and in the company's interest. The Tribunal found that the Board's refusal was based on legitimate concerns about competition and potential hostile takeover, thus constituting "sufficient cause." The decision was deemed to be in the company's interest and not arbitrary.

Conclusion:

The Tribunal concluded that the Board of Directors of Synthite Industries acted within their rights and in the company's best interest by refusing the share transfers. The refusal was based on valid concerns about competition and potential hostile takeover, supported by the existing Article 24 of the Articles of Association. Consequently, the appeals were allowed, and the NCLT's orders directing the registration of the share transfers were set aside.