1949 (12) TMI 27 - HC - Companies Law

Summary

Issues Involved:
1. Whether the directors of the company acted arbitrarily and not bona fide in refusing to register the transfer of shares.
2. Whether the directors were required to specify the grounds for refusing the registration of the transfer.
3. Whether the previous registration of shares in favor of the plaintiff affects the current refusal.
4. Whether the refusal to register the shares was influenced by a mala fide motive.

Detailed Analysis:

1. Arbitrary and Non-Bona Fide Action by Directors:
The plaintiff alleged that the directors' refusal to register the transfer of shares was arbitrary, unjust, and opposed to law. The company defended itself by stating that under Article 37 of its Articles of Association, the directors had the power to refuse registration without assigning reasons and claimed they acted bona fide and in the best interest of the company. The court examined the language of Article 37, which allows directors to decline registration if they do not approve of the proposed transferee. The court found that the directors must exercise this power bona fide and not arbitrarily or capriciously.

2. Requirement to Specify Grounds for Refusal:
The court held that while the directors were not obliged to give reasons for not approving the transferee, they were bound to specify which of the two grounds mentioned in Article 37 was the basis for their refusal. The distinction between the grounds for refusal and the reasons for not approving the transferee is crucial. The court referred to the decisions in Sutherland (Duke) v. British Dominions Land Settlement Corporation and Berry and Stewart v. Tottenham Hotspur, which clarified that while directors need not assign reasons, they must state the grounds for refusal. In this case, the company failed to specify the grounds, but the court did not draw adverse inferences solely based on this failure.

3. Previous Registration of Shares:
The court considered the fact that a few months before the current application, the company had registered other shares in favor of the plaintiff. This prior recognition was significant and prima facie precluded the possibility of disapproval of the plaintiff on personal grounds. There was no evidence suggesting any change in circumstances that would justify a different treatment of the plaintiff. Therefore, the previous registration supported the argument that the current refusal was arbitrary and not based on personal disapproval of the plaintiff.

4. Mala Fide Motive:
The plaintiff provided evidence that the managing director of the company had previously attempted to coerce him into selling the shares to him. This evidence was uncontradicted, as neither the managing director nor any other representative of the company testified to deny it. The trial judge found this evidence credible and concluded that the directors' refusal was influenced by a mala fide motive. The court agreed with the trial judge's assessment, noting that the refusal was not bona fide and was improper.

Conclusion:
The court concluded that the refusal by the directors to register the transfer of shares was improper, not bona fide, and could not be upheld. The appeal was dismissed, and the plaintiff was awarded costs. The court emphasized that while directors have discretion in registering transfers, this discretion must be exercised bona fide and not arbitrarily or capriciously.