1978 (12) TMI 136 - HC - Companies Law

Transfer to Shares Power to refuse registration and appeal against refusal, Powers of Court to rectify register of members

Summary

Issues Involved:
1. Rectification of the register of shareholders.
2. Approval of the transfer of shares by the board of directors.
3. The nature of discretion exercised by the directors in refusing the transfer.
4. Compliance with Articles of Association and the Companies Act.

Issue-Wise Detailed Analysis:

1. Rectification of the Register of Shareholders:
The appeal challenged the judgment directing the appellant-company to rectify its register of shareholders by entering the name of the second respondent as a member. The appellant was to file the notice of rectification with the Registrar of Companies within thirty days. The court upheld the rectification order, emphasizing that the refusal to register the transfer was not based on valid grounds.

2. Approval of the Transfer of Shares by the Board of Directors:
The appellant argued that under Article 76 of the Articles of Association, any transfer to an outsider required the board's approval. The board refused the transfer to New Mahalaxmi Mills, citing the latter as a rival company. However, the court found that the two companies were not in direct competition. The court emphasized that the directors' discretion must be exercised in the interest of the company and should not be arbitrary or for collateral motives.

3. The Nature of Discretion Exercised by the Directors in Refusing the Transfer:
The court examined whether the directors acted bona fide and not arbitrarily. The directors' refusal was based on a blanket policy against corporate bodies becoming shareholders, fearing potential changes in the law that could affect the company's status. The court ruled that such a blanket policy was not a valid exercise of discretion under Article 76, which required consideration of the transferee's personal suitability.

4. Compliance with Articles of Association and the Companies Act:
The court analyzed Articles 71 to 76 of the Articles of Association, focusing on Article 76, which allowed directors to refuse registration if they did not approve of the purchaser. The court held that the directors must consider the transferee's personal suitability and not impose a blanket ban on corporate bodies. The court also referred to Section 43A of the Companies Act, which was not applicable as the shareholding threshold for corporate bodies was not met.

Conclusion:
The court concluded that the directors' refusal to register the transfer was not based on valid grounds and was an improper exercise of their powers under Article 76. The appeal was dismissed, and the rectification of the register of shareholders was upheld. The court emphasized that directors must exercise their discretion in the interest of the company and not based on arbitrary or blanket policies.