1970 (9) TMI 55 - SC - Indian Laws

Whether the directors acted in the interest of the company? Whether they acted on a wrong principle? Whether they acted with an oblique motive or for a collateral purpose? Held that - The discretion of the directors is to be tested as the opinion of fair and sensible men in the interest of the company. In the present case the directors did not act bona fide nor did they act in the general interest of the company. On the contrary they acted upon a wrong principle and for the oblique motive of squeezing out Firodia. The in scapable conclusion is that the directors acted arbitrarily and unjustifiably.

Issues Involved:
1. Refusal to register transfer of shares.
2. Directors' exercise of discretion and fiduciary duty.
3. Allegations of mala fide actions and collateral motives.
4. Validity and legitimacy of reasons for refusal.
5. Interest of the company and shareholders.
6. Historical context and relationships between parties.
7. Legal principles governing directors' discretion.

Detailed Analysis:

1. Refusal to Register Transfer of Shares:
The appeals were against the order directing the appellant-company to register the transfer of 3,643 shares. The board of the appellant refused to register the transfer of shares and communicated this refusal in June 1968. Subsequently, 338 appeals were filed before the Company Law Board regarding this refusal.

2. Directors' Exercise of Discretion and Fiduciary Duty:
Article 52 of the appellant-company allowed directors to decline to register any transfer of shares at their absolute and uncontrolled discretion. However, discretion implies just and proper consideration of the proposal and must be exercised bona fide and in the interest of the company and shareholders. The directors must act reasonably and not arbitrarily or for any collateral motive.

3. Allegations of Mala Fide Actions and Collateral Motives:
The appellant-company provided three reasons for refusal:
- Jaya Hind Industries and N.K. Firodia's actions against the company's interest.
- Threat to the company's management and the passing of special resolutions.
- Shares acquired with mala fide purpose and evil design.

4. Validity and Legitimacy of Reasons for Refusal:
The court examined whether the directors acted in the company's interest, on a wrong principle, or with an oblique motive. The refusal to register the transfers was scrutinized for legitimacy, and the court found the reasons given by the directors to be a camouflage for preserving the Bajaj group's hegemony and acting for personal interest.

5. Interest of the Company and Shareholders:
Firodia's actions were deemed to be in the larger interest of the company, opposing the re-appointment of managing agents without a shareholders' resolution and public notice. The directors' refusal to register the transfers was found to be driven by a desire to exclude Firodia and not in the company's general interest.

6. Historical Context and Relationships Between Parties:
The judgment provided a detailed history of the relationships and transactions between the parties, including joint ventures, share acquisitions, and the roles played by different individuals. The historical context highlighted the contributions of the Firodia group to the company's growth and the subsequent conflicts.

7. Legal Principles Governing Directors' Discretion:
The judgment referenced several legal principles and precedents, including the requirement for directors to act bona fide, the implications of section 111(5A) of the Companies Act, and the court's role in scrutinizing the directors' reasons for refusal. The court emphasized that directors' discretion must be exercised in the company's interest and not for personal motives.

Conclusion:
The court concluded that the directors acted arbitrarily, unjustifiably, and with an oblique motive. The appeals were dismissed with costs, and the respondents were allowed one set of hearing fees. The judgment reinforced the principle that directors must exercise their discretion bona fide and in the interest of the company and shareholders.

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