9911796707
TMI Blog1956 (11) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... divided into 25,000 shares of Rs. 100 each and according to the balance-sheet of the company filed by the Registrar of Joint Stock Companies, Orissa, the subscribed capital of the company is Rs. 7,75,000 being the fully paid up capital of 7,750 shares. Out of these 7,750 shares, opposite party No. 2, the Maharaja of Mayurbhanj, is the registered holder of 7,500 fully paid up shares of the value of Rs. 7,50,000. The objects of the company, according to the memorandum of association annexure A (the annexures to the petition filed by the petitioner are marked A, B, C etc. and the annexures filed along with the counter-affidavit of opposite party No. 1 are also marked A, B, C etc. In this judgment the annexures of the petitioner will be referred to as A, B, C, etc., and the annexures of opposite party No. 1 will be referred to as A/1, B/1, C/1 etc.) are to carry on the business of chemists, druggists, distillers, drysalters, oil and colour men, importers and manufacturers of and dealers in chemicals, forest by-products, medical, pharmaceutical, medicinal, industrial, and other preparations and articles etc. to buy, sell, manufacture, refine, prepare, manipulate, import, export and deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yurbhanj and by this order, the entire administration was taken over by the Central Government from November 9, 1948. By notification No. 388P, dated December 31, 1948, the Government of India notified "Whereas the Central Government has full and exclusive extra-provincial jurisdiction for, and in relation to, the governance of the Mayurbhanj State. Now, therefore, in exercise of the powers conferred by sub-section (2) of section 3 of the Extra-Provincial Jurisdiction Act, 1947 (XLVII of 1947), and of all other powers enabling it in this behalf, the Central Government is pleased to direct that the Mayurbhanj (Administration) Order, 1948, shall be cancelled with effect from the January 1, 1949, and to delegate to the Provincial Government of Orissa with effect from the said date the extra-provincial jurisdiction as aforesaid, including the power conferred by section 4 of the said Act to make orders for the exercise of that jurisdiction; Provided that ( i )the exercise of the jurisdiction hereby delegated shall be subject to the control of the Central Government; and ( ii )the delegation shall not preclude the Central Government from exercising the jurisdiction hereby del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her the purposes for which any property is held immediately before the appointed day are Central purposes." The case of the petitioner is that by virtue of the above-said provisions of law and the agreement the said 7.500 shares in the company vested in the petitioner, the State of Orissa, with which the State of Mayurbhanj was integrated. According to annexure D, the certificate given by the Government of India under section 5, clause (2), of the States Merger (Governors' Provinces) Order, 1949, and signed by the Secretary to the Government the said 7.500 shares which had vested in the Government of the Dominion of India by virtue of the agreement for the merger of the State concluded with the Maharaja of Mayurbhanj for the purpose of governance of the merged State of Mayurbhanj, was not held for a Central purpose. The petitioner being, according to the provisions of law, the absolute owner of the said 7,500 ordinary shares in the company is entitled to have its name registered as the shareholder of the company in the register of members thereof. On December 1, 1953, Messrs-Fox and Mandal, the solicitors at Calcutta, wrote to the company on behalf of the petitioner requesting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... party No. 2 appeared through Mr. S. Patnaik and did not oppose the application, Opposite party No. 1 the company filed a counter affidavit with several annexures refuting all the allegations of the petitioner. The company averred that this court has no jurisdiction; that the application by the petitioner is barred by time; and that the company by virtue of its articles of association is entitled to refuse to recognise the transfer. It also alleged that the petitioner has not complied with all the formalities required in connection with the transfer inasmuch as the transfer deed is not properly stamped and left many blanks and that the petitioner is not entitled to be the owner of the shares by operation of law and even if it is, did not submit the required proof to make out its ownership. It is also alleged that the reason for the refusal by the board of directors to register the petitioner as the holder of the shares is the non-execution of the agreement forming part of the memorandum of association, agreed to be executed as stated therein, either by the Maharaja of Mayurbhanj or by his successor-in-interest, the State of Orissa. The application was argued before me on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vos or a transmission by operation of law. In either view, his contention is that the petitioner has not complied with the requirements necessary to recognise the transfer and enter its name in the register of the company. The learned counsel further contended that under article n of the articles of association, the board of directors has full right to refuse to register the transfer of any share or shares to any person without showing any cause or sending any notice to the transferee or transferor, as this power of the board of directors under the articles of association cannot be questioned in this application. His further contention is that the company refused to register the name as the Maharaja of Mayurbhanj and the State of Orissa failed to implement the agreement agreed to be entered into in the memorandum of association at the time of the incorporation of the company, according to the terms of the said agreement which is a part of the memorandum of association. Article 6 of the memorandum of association says: "A copy of agreement between this company and the Government of H.H. Maharaja of Mayurbhanj proposed to be entered into is annexed hereto and form part hereof." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to a suit and so the application should not be granted. Also the company has a right to damages for breach of contract and has a lien over the shares. Under these circumstances, according to the learned counsel, the board of directors rightly refused to register the name of the petitioner. Mr. Choudhary contends that the directors are in fiduciary position as far as the company is concerned and look after the interests of the company and consequently are justified in refusing to register on the ground that the agreement contemplated was not implemented. In support of this contention he relied upon a decision of the Madras High Court in the case of E.M. Muthappa Chettiar v. Salem Rajendra Mills Ltd. [1955] 25 Comp Cas 283. In that case it was held 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 to register the shares in his name and such a reason is quite a valid reason. But the decisions relied on in that case clearly show that the directors also stand in a fiduciary relation as far as the shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, the above observations clearly show that if the reasons are given by the directors for the refusal the court can go into the questions whether those reasons are proper, legitimate and bona fide. Annexure Q/1, a letter from the Secretary to the Government of H.H. the Maharaja, to the promoters of the company, "The National Distributors Ltd.", dated October 16, 1947, shows that the Maharaja approved of the scheme furnished on the understanding that 30 per cent, of the proposed capital would be available for investment by H.H.'s Governor and another 20 per cent. by H.H.'s subjects and that the Maharaja would be entitled to nominate two directors on the board of the company and enclosed a draft agreement which the company would have to execute. The company, in accordance thereto, allowed the Maharaja to subscribe for 30 per cent. of the shares, but the Maharaja did not implement the said agreement. By annexure R/1 dated 31st July, 1948, the company asked the secretary, Mayurbhanj State, as to when the draft agreement, annexure to the memorandum of association, would be executed as the company intended to operate in Mayurbhanj as the advantages of the availability of raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank and did not even allow the Maharaja's officers to look into the accounts. In my view, it is not necessary for me to go into this question whether the Maharaja was justified in not implementing the same, as I am not satisfied that the registration was rightly refused on account of the non-execution of the agreement. The company can either sue for specific performance or for damages even after the registration was effected and the name of the State is entered in the register of the company. The Maharaja having refused to implement the agreement even before the merger and the petitioner as also the Chief Commissioner having refused to do the same, the conduct of the company in refusing to register the name of the petitioner on the ground of non-execution of the agreement without having recourse to suit in the long interval is, in my view, not bona fide, and is not proper and legitimate. Next with regard to the contention of the learned counsel for opposite party No. 1 that the petitioner failed to make out even the claim based upon devolution, I am satisfied that in the circumstances of this case, the petitioner has placed all the materials required in support of his claim b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Secretary to the Imperial Bank of India sending therewith the transfer deed form duly filled up along with the exemption certificates and requesting the bank to take early steps to get the shares transferred at an early date and from annexure U dated March 10, 1953, by the Imperial Bank to the Deputy Secretary informing that despite several reminders the bank had not yet received from the company the certificate for the shares duly registered, it is clear that by March 10, 1953, the transfer deed duly filled up along with the exemption certificate must have been sent to the company by the Imperial Bank, and from annexure M/1 filed by opposite party No. 1 which is the same as annexure W filed by the petitioner dated March 17, 1953, which is a letter written by the company to the Imperial Bank, it is evident that the company acknowledged the receipt of those two documents sent by the Imperial Bank; that the bank in its turn forwarded the transfer deed and the certificate of the Collector of Stamp Revenue to the company as, in it, it is stated by the company that the shares could not be registered so long in the name of the Secretary, Finance Department, Government of Orissa, for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus contravened clause (4) of section 34. The holding of the meeting of the board of directors on May 16, 1953, at which the resolution refusing to register was passed is also significant. If the resolution was passed on that day, there was nothing to prevent the company and no explanation is offered before me as to why either the Imperial Bank which was writing reminders about the subject to the company or the Government of Orissa was not informed of the refusal at such meeting immediately afterwards instead of waiting till May 28, 1953, and informing of the said refusal on that date, especially after the receipt of notice from the Deputy Secretary to the Government under annexure V, dated 19th May, 1953. This attitude of the company is, in my view, not bona fide. The last but the most important point very strenuously urged by Mr. Choudhary is with regard to the maintainability of this application and the limited scope of section 38 of the Companies Act. The learned counsel for the company contends that section 38 contemplates only a summary procedure and an application under section 38 can be allowed only when it is clear that the refusal was not bona fide and was witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y signed by the transferor the Maharaja of Mayurbhanj who is also opposite party No. 2 to this proceeding. Due execution of the transfer deed was never challenged by the company. Consequently, I am of opinion that this case does not help opposite party No. 1. The next case cited by the learned counsel is the case of Devakumar Mishra v. Rupak Ltd.' s Case ( supra ) This is a decision of a single Judge of the Patna High Court in which, I may mention, the learned counsel appearing before me also appeared for the opposite party. It was held in this case that the application for rectifying the share register under section 38 of the Companies Act cannot be allowed where there are serious disputes as to whether the resolution of the company is valid and intra vires and whether there can be a valid transfer of those shares in pursuance of that resolution and the issues arising between the parties cannot be properly decided in the summary proceedings under this section and that the proper course in such a case for the parties was to get the question determined in the civil suit. On the facts of this case the civil suit was already filed and was pending by the time the application cam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er any transfer of shares on which the company has a lien." The contention of the learned counsel is that article 11 represents an act of parties and is a contract and is binding on the shareholder. This power of the board of directors, according to Mr. Choudhury, is not restrictable. In the case of In re Smith and Fawcett Ltd. [1942] Ch 304 , it was held that article 10 of the articles of association of a private company gave the directors the widest powers to refuse to register a transfer, and that while such powers are of a fiduciary nature and must be exercised in the interests of the company, there was nothing to show that they had been otherwise exercised; and that affidavit evidence is unsatisfactory evidence of the motives of directors in exercising their powers. In the course of the judgment. Lord Greene M.R. observed: "The language of the article in the present case does not point out any particular matter as being the only matter to which the directors are to pay attention in deciding whether or not they will allow the transfer to be registered. The articles do not, for instance, say, as is to be found in some articles, that they may refuse to register any transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate-General relies upon a decision in the case of Thenappa Chettiar v. Indian Overseas Bank Ltd. [1943] 13 Comp Cas 202 In this case it was held by a single Judge of the Madras High Court, Chandrasekhara Ayyar J.: "The right of a shareholder to transfer his shares in a company is absolute as it is inherent in the ownership of the shares, but it can be restricted by contract, which has to be found in the articles of association of the company. Even in a case where the power to refuse registration of transfer of shares is conferred on the directors of a company in absolute terms, the refusal must not be arbitrary. Provided they act in a bona fide manner, the directors are not bound to give any reasons. But if they give reasons, the court can examine them, but it will not overrule the decision of the directors merely on the ground that it would have reached a different conclusion. If the directors refuse registration on any wrong principle, their act can be rectified. When consent for the transfer of shares is withheld by the directors for reasons which cannot stand scrutiny, and no objection is raised of a personal kind against him on whom the shares have devolved by operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -execution of the agreement forming part of the memorandum of association as the ground for refusal. This observation of Mellish L.J. approved by Lord Cozens-Hardy M.R. clearly shows that except on grounds which apply personally the refusal cannot .be based upon grounds like security was not given or a particular agreement was not executed. Mr. Choudhury contends that the power to reject contemplated under article 11 of the articles of association includes both transfers inter vivos as well as transfers by operation of law. The learned Advocate-General relies upon Table A in Schedule I of the Companies Act and contends that transfer and transmission are two different things contemplated and the heading given under regulation 18 of Table A is "Transfer and transmission of shares." He submits that transfer applies, therefore, to transfers inter vivos and transmission applies to devolution by operation of law and as article 11 uses only the word "transfer", the power is confined only to transfers inter vivos, specially in view of the fact that the words "transferee" and "transferor" are used in the said article. He relies upon a decision of a single Judge in the case of Wah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rolled discretion to refuse to register a transfer of a share, then even in a case falling under article 22, the directors have the same right to decline or suspend registration as they would have had in the case of a transfer of a share by the deceased or insolvent person before the death or insolvency." Regulation 22 of Table A says: "Any person becoming entitled to a share in consequence of the death or insolvency of a member shall, upon such evidence being produced as may from time to time be required by the directors, have the right, either to be registered as a member in respect of the share or, instead of being registered himself, to make such transfer of the share as the deceased or insolvent person could have made; but the directors shall in either case, have the same right to decline or suspend registration as they would have had in the case of a transfer of the share by the deceased or insolvent person before the death or insolvency." Section 18 of the Companies Act, says: "In the case of a company limited by shares and registered after the commencement of this Act, if articles are not registered, or if articles are registered, in so far as the articles do not ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tried in which any question of law may be raised; and an appeal from the decision on such an issue shall lie in the manner directed by the Code of Civil Procedure, 1908 (V of 1908), on the grounds mentioned in section 100 of that Code." As I have already stated, all the relevant papers to determine the question of title involved in this case are filed as annexures by the parties. The question of title does not appear to me to be of any complicated nature. I have held on the annexures filed that the petitioner succeeded in establishing his title by operation of law to the shares in question. The petitioner also lodged a proper deed of transfer with the company. The annexures disclose that the action of the board of directors in refusing to register the petitioner in the register of the company as a shareholder is not bona fide and is not for sufficient cause. Accordingly, I am of opinion, that the petitioner's name is to be registered in the register of shareholders of the company. Mr. Choudhary also raised some technical contentions. He contended that the correspondence shows that the petitioner wanted the shares to be registered in the name of the Secretary to the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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