1970 (7) TMI 52 - HC - Companies Law

Summary

Issues Involved:
1. Whether the board of directors has the discretion to refuse the transmission of shares by operation of law.
2. Whether the refusal to transmit shares to the petitioner was bona fide, arbitrary, or mala fide.
3. The implications of the petitioner's conduct on the interests of the company.
4. The effect of delay in considering the petitioner's application for transmission.
5. The impact of a prior compromise on the petitioner's rights as a shareholder.
6. The relevance of the petitioner being a minority shareholder.

Detailed Analysis:

1. Discretion of the Board of Directors:
The main contention on behalf of the petitioner was that the articles of association did not confer power upon the board of directors to refuse recognition of the transmission of shares by operation of law in the case of death. The court examined Articles 15 and 19 of the company's articles of association. Article 15 allows for the transfer of shares by a shareholder or the heir of a deceased shareholder, subject to the discretion of the board of directors. Article 19 provides that any member or heir desirous of transferring shares must apply in writing, and the board has 60 days to effect the transfer if there are no objections. The court concluded that the articles give the board discretion to decide on the recognition of such transfers, including those by operation of law.

2. Bona Fides of the Refusal:
The petitioner argued that even if the board had such discretion, it was not exercised bona fide and was arbitrary and unjust. The respondents contended that they had considered the petitioner's conduct, which was detrimental to the company's interests, and decided against the transmission. The court referenced several precedents, including *Smith and Fawcett Ltd.* and *Harinagar Sugar Mills Ltd.*, which established that the directors' discretion must be exercised bona fide in the interest of the company. The court found that the board's decision was based on valid reasons and was not capricious, arbitrary, or mala fide.

3. Petitioner's Conduct:
The court examined the petitioner's conduct, including his actions that led to the removal of the first respondent-company as managing agents of Rajeswari Mills Ltd., and the subsequent legal disputes. The petitioner's actions were found to be inconsistent with the interests of the first respondent-company. His conduct in instituting a winding-up petition against the company further demonstrated his adverse stance. The board of directors had valid reasons to conclude that the petitioner's activities were against the company's interests.

4. Delay in Considering the Application:
The petitioner suggested that the delay in considering his application should be deemed as implicit acceptance. The court rejected this argument, noting that the petitioner had not obtained the necessary proof (succession certificate) until August 1968. Upon submission of the required documents in January 1969, the board promptly decided by March 1969. Hence, there was no undue delay.

5. Impact of Prior Compromise:
The petitioner argued that a prior compromise in C.P. No. 49 of 1966, which left his rights as a shareholder open, implied recognition of his rights. The court clarified that leaving the rights open did not equate to their recognition. The compromise did not advance the petitioner's claim for transmission of shares.

6. Minority Shareholder Argument:
The petitioner contended that as a minority shareholder, his recognition would not affect the company's operations. The court dismissed this argument, noting that even minority shareholders could disrupt the company by invoking provisions under sections 397 and 398 of the Companies Act, alleging oppressive conduct. Thus, the board's decision to reject the transmission was justified.

Conclusion:
The court dismissed the petition, finding that the board of directors had valid reasons to refuse the transmission of shares to the petitioner. The refusal was not arbitrary, capricious, or mala fide, and the petitioner's conduct was detrimental to the company's interests. There was no undue delay in processing the application, and the prior compromise did not imply recognition of the petitioner's shareholder rights. The status of the petitioner as a minority shareholder did not undermine the board's decision. There was no order as to costs.