1980 (2) TMI 191 - HC - Companies Law

Declaration as to shares and debentures held in trust, Meetings and Proceedings - Exercise of Voting Rights in Respect of Shares Held in Trust, Declaration By person not holding beneficial interest in any share, Principles for interpretation of statutes

Issues Involved:
1. Whether the transfer of shares as collateral security creates a trust necessitating registration under Section 153B of the Companies Act.
2. Whether the banks are merely pledgees or trustees of the shares.
3. Interpretation and applicability of Section 153B and 187B of the Companies Act.
4. The locus standi of the petitioners to challenge the notices issued by the Public Trustee.

Issue-wise Detailed Analysis:

1. Whether the transfer of shares as collateral security creates a trust necessitating registration under Section 153B of the Companies Act

The primary controversy in both writ petitions revolves around whether the transfer of shares to banks as collateral security for loans results in the creation of a trust, thereby necessitating registration with the Public Trustee under Section 153B of the Companies Act. The petitioners argued that the banks were mere pledgees holding the shares as security, not trustees. The respondents, represented by the Public Trustee, contended that the transfer of shares created a beneficial interest retained by the original holders, thus forming a trust.

2. Whether the banks are merely pledgees or trustees of the shares

The banks argued that they were pledgees, holding the shares as security for the loans extended, and not trustees. The Public Trustee countered this by asserting that the transfer of shares to the banks, while the beneficial interest remained with the original holders, constituted a trust. The banks' authority to sell or transfer the shares and the retention of dividends by the original holders were cited as indicators of a trust relationship.

3. Interpretation and applicability of Section 153B and 187B of the Companies Act

Section 153B of the Companies Act mandates that shares held in trust must be declared to the Public Trustee if the trust is created by an instrument in writing and the value of the shares exceeds one lakh rupees. The court noted that the provisions of Section 153B do not elaborate on implied or constructive trusts and emphasized that the trust must be created by an instrument in writing. The court referred to the definition of a trust under Section 3 of the Indian Trusts Act, which involves an obligation annexed to the ownership of property for the benefit of another.

The court also examined the legislative intent behind Sections 153B, 187A, and 187B, which aimed to prevent the misuse of trust-held equities for control purposes by individuals. The court concluded that the transfer of shares to banks as security for loans did not create a trust as envisaged by Section 153B, as the primary purpose was to secure the loans, not to create a trust.

4. The locus standi of the petitioners to challenge the notices issued by the Public Trustee

The court addressed the locus standi of the petitioners, particularly the Gwalior Rayon, to challenge the notices issued by the Public Trustee. The court held that Gwalior Rayon had the standing to challenge the notices as it would suffer penalties if it did not comply with the Public Trustee's requirements. The Sutlej Cotton, however, had no right over the shares as long as they were transferred to the bank and the loan amount remained unpaid.

Conclusion

The court allowed the writ petitions, quashing the notices issued by the Public Trustee and restraining further proceedings against the petitioners for alleged violations of Section 153B. The court concluded that no trusts were created when the banks obtained the shares as security for loans, as the primary intent was to secure the loans, not to create a trust. The court emphasized that the banks acted in their interest to protect the loans, and the transactions did not align with the creation of a trust as defined under the Indian Trusts Act.

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