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TMI Blog1955 (4) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... pro forma parties. This appeal is only against the first defendant in the suit. The circumstances which led to the refusal of the transfer and which resulted in the suit are these. The plaintiff and one Karimuthu Thyagaraja Chettiar entered into a partnership in 1939 for the purpose of carrying on business as the managing agents of textile mills at Coimbatore and later took up the managing agency of the respondent-company, the Rajendra Mills at Salem, by entering into an agreement with the Salem Balasubramaniam and Co., who were then the managing agents of the Rajendra Mills at Salem. In connection with the managing agency of Rajendra Mills, with which alone we are concerned in this appeal, both the plaintiff and Thyagaraja Chettiar incurred certain financial responsibilities. In 1941, in consequence of a letter written by the plaintiff to Thyagaraja Chettiar stating that he has nothing to do with the Rajendra Mills and that Thyagaraja Chettiar alone is responsible for the debts and liabilities of the business and that he can do what he likes without the plaintiff's connection, there was an agreement between the plaintiff and Thyagaraja Chettiar by which the plaintiff was relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... felt in getting the reliefs claimed by him, since the partnership had not been registered under the Partnership Act. In O.S. No. 34 of 1942, the Court found that the plaintiff had severed his connection with Balasubramaniam and Co., on 17th May, 1941, and that he was therefore not entitled to question any acts done by Thyagaraja Chettiar after that date. The suit was therefore dismissed on 20th March, 1944. This was taken up in appeal to this Court and it was heard by a Bench of this Court. The learned Judges confirmed the finding of the lower Court and held that the plaintiff's "repudiation of the agreement was certainly open to grave criticism." The O.S. No. 55 of 1942 was filed by Thyagaraja Chettiar, in the Sub-Court, Madurai, for declaring that the plaintiff had no manner of interest in the managing agency of Rajendra Mills and for directing him to execute a transfer deed in respect of the 100 shares standing in his name in the books of Salem Balasubramaniam and Co. Though the trial Court did not give a decree, in the appeal, the District Judge upheld the plea of Thyagaraja Chettiar and directed the plaintiff to execute the transfer deed in respect of the 100 shares standing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board cannot be questioned either by the transferor or the transferee. They also stated that under the Articles of Association the Board need not give any reasons for their refusal. The case of the defendants is that the Board was acting with the best of motives and in the interests of the company and that the refusal was for good and sufficient reasons. The first defendant company, though they stated that they need not give any reason for refusing to register the transfer, still in the written statement gave the reasons and set out the circumstances relied on by them to show that the plaintiff is a cantankerous litigant and an undesirable person and that it was in the best interests of the company that the application was rejected. The fact of the purchase of the shares by the plaintiff and the refusal by the first defendant to register were not disputed. The lower court, after considering the evidence and the law on the subject, found that the plaintiff cannot be called a cantankerous litigant merely from the circumstances of the number of suits filed by the plaintiff, almost all of which being decided against him. It held that it was not unusual for partners to fall out and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gresham Life Assurance Society, ex parte Penny [1872] L.R. 8 Ch. App. 446 , James L.J. states the position as follows at page 450: "I cannot conceive that any director would choose to accept office, or exercise the power entrusted to him if he were liable to be called upon to say what the particular reasons were or the particular motive was which influenced him in coming to the conclusion that any person was not eligible as a shareholder." Earlier at page 449, the learned Judge says: "No doubt the directors are in a fiduciary position both towards the company and towards every shareholder in it. It is very easy to conceive cases such as those cases to which we have been referred, in which this court would interfere with any violation of the fiduciary duty so reposed in the directors. But in order to interfere upon this ground it must be made out that the directors have been acting from some improper motive, or arbitrarily or capriciously." Mellish L.J. who concurred with James L.J. observed as follows at page 451: "It appears to me that it is very important that directors should be able to exercise the power in a perfectly uncontrollable manner for the benefit of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat they have resolved must be taken, in the absence of positive evidence sufficient to satisfy the court to the contrary, to mean that they have resolved within their jurisdiction and for right reasons." It is thus clear from the above decisions that if the Articles of Association give power and in this case Article 56 undoubtedly gives such a power the respondent is not bound to give any reasons for not registering the transfer. That the Board considered the application at its meeting on 22nd September, 1944, is not disputed. As already stated, though the respondent did not give any reasons at the time of the refusal and took the stand that they are not bound to give any reasons, they have, however, in the written statement, come forward with the reasons for refusing. Now the question is whether the reasons given by the respondent are legitimate or not. It has been held that: "If the directors do give their reasons, the court will then consider whether they are legitimate or not, i.e., whether the directors have proceeded on a right or wrong principle, and will overrule their decision if their reasons are not legitimate, but not if they are legitimate, merely because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he directors do not assign any reason, it is still competent for those who seek to have the transfer registered to show affirmatively, if they can, by proper evidence that the directors have not duly exercised their power. These principles are deducible from the authorities, among which the more important are In re Gresham Life Assurance Co.; ex parte Penny [1872] L.R. 8 Ch. App. 446 and Moffat v. Farquhar [1878] L.R. 7 Ch. D. 591 ". It is clear from the above decision that if the reasons are not given, the court will not merely on that account draw an unfavourable inference against the Board. They are, however, at liberty to disclose the reasons, and if they do, the Court must consider the reasons assigned with a view to find out whether the defendants acted on a right or wrong principle. The learned advocate relies on the decision in support of his contention that the defendants acted on a wrong principle and the only object of refusing was that the plaintiff would oppose the domination of Thyagaraja Chettiar in the mills. The learned advocate also relied on the decision in Muir Mills Co., Ltd., of Cawnpore v. T.H. Condon and I.A. Butterworth [1900] I.L.R. 22 All. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterests of the company and that the refusal to recognise the assignment on the ground that the plaintiff is an undesirable person is valid. In Moffat v. Farquhar LR. 7Ch. D. 591 , Malins V. C. observed as follows at page 605; "In my opinion, therefore, it is perfectly clear there can be no justification for refusing the transfer unless they have an objection to the person of the transferee. That they should have such a power seems reasonable; because, this being a limited company, and it being very desirable that they should have respectable men and solvent men as members, and persons who would be able to pay the calls which should be made, it is reasonable that they would have the power of objecting to the person, and not have introduced among them insolvent persons, or it might be, if you like, disagreeable persons who would throw them into confusion, and therefore the directors have the power of objecting to the person". (italics is ours). This shows that if a person is of such a character as to throw their company into confusion and if he was not a desirable one, then the Board of Directors would certainly be acting in the best interests of the company in refusing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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