1966 (12) TMI 44 - HC - Companies Law

Summary

Issues Involved:
1. Justification of the company's action in canceling the share certificate and removing the respondent's name from the share register.
2. The company's power to rectify the share register without court intervention.
3. The awarding of damages without rectification of the share register.

Detailed Analysis:

1. Justification of the Company's Action in Canceling the Share Certificate and Removing the Respondent's Name from the Share Register:
The respondent filed an application under Section 38 of the Indian Companies Act, 1913, for rectification of the share register by restoring his name as the owner of 100 shares or alternatively, to direct the appellant to pay damages. The company argued that the share certificate was fraudulently transferred and subsequently canceled. However, the court observed that the company continued to treat the share certificate as valid and effected subsequent transfers without verifying the signatures or rejecting the transfer application. The court held that the company's action in canceling the transfer five years later without notice to the respondent was unjustified. The court emphasized that once the transfer has been recognized, there is no provision in the Companies Act that permits the directors or any officer of the company to alter the register without a court order.

2. The Company's Power to Rectify the Share Register Without Court Intervention:
The appellant-company contended that it had the power to rectify the register if it had sufficient cause, citing Smith v. Brown and In re Ottos Kopje Diamond Mines Limited. However, the court held that there was no evidence of fraud being practiced on the company. The company failed to provide a valid explanation for the lack of entries regarding the cancellation and issuance of split certificates. The court concluded that the company facilitated the subsequent fraud by not making necessary entries. The court reiterated that the company's remedy, if the transfer was improperly effected, was to apply to the court under Section 38 for rectification of its register and not to unilaterally alter the register.

3. The Awarding of Damages Without Rectification of the Share Register:
The court examined whether damages could be awarded without rectification. It referred to Section 38(1) and (2) of the Indian Companies Act, which allows the court to order rectification of the register and payment of damages. The court noted that damages can only be awarded if the court orders rectification of the register. The court cited Ottos Kopje's case, where it was held that no damages could be awarded without rectification. The court concluded that since no rectification could be ordered due to the shares being split in 1946, the respondent's legal representatives could not be registered as holders of the shares. Consequently, the court held that no damages could be awarded.

Conclusion:
The appeal was allowed, the judgment of the learned judge was set aside, and the application of the respondent was dismissed with costs. The court emphasized that the company's action in canceling the share certificate and removing the respondent's name from the register was unjustified and that the company had no power to rectify the register without court intervention. Additionally, the court clarified that damages could not be awarded without rectification of the register.