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TMI Blog1970 (9) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant for being transferred to different names. Jaya Hind Industries Private Ltd. applied for transfer of 1,500 shares in their names. Firodia applied for transfer of 30 shares in his name. The other transfers were in the names of associates, nominees and friends of the Firodia group. The board of the appellant refused to register transfer of the said shares at the board meetings held on May 23, 1968, in respect of 2,532 shares and on June 24, 1968, in respect of 1,111 shares. The appellant communicated the said refusal to transfer the shares in the month of June, 1968. Thereafter, in the month of August, 1968, 338 appeals were filed before the Company Law Board in respect of refusal of the appellant to transfer 3,643 shares. The Company Law Board by its letter dated January 16, 1969, asked the appellant to disclose the reasons for refusal to register transfer of shares. The appellant-company gave three reasons for refusal to register transfer of the said 3,643 shares. First, that Jaya Hind Industries Private Ltd. was a beneficiary to the extent of 1/4 share in the managing agency remuneration receivable by Jamnalal Sons Private Ltd. from Bajaj Auto Ltd. and yet N.K. Firodia cho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year 1952, N.K. Firodia became a director of Bachhraj Trading Corporation Ltd. In the month of April, 1954, Jaya Hind Industries Ltd. acquired 1,800 shares of the face value of Rs. 1,80,000 of Bachhraj Trading Corporation Ltd. at Rs. 36-8-0 per share which together with 50 shares held by N.K. Firodia equalled 3/8ths of the share capital. In the month of May, 1954, Bachhraj Trading Corporation Ltd. again took over the business of the joint venture from Bajaj Factories Ltd. In the year 1955, N.K. Firodia as a director of Bachhraj Trading Corporation Ltd. applied to the Central Government for the manufacturing licence of scooters, auto rickshaws and tempo three wheeler vehicles. In the year 1957, Bachhraj Trading Corporation Ltd. was granted the manufacturing licence of tempo three wheelers. In 1958 Bajaj Tempo Private Ltd. was formed to manufacture tempo three wheeler vehicles and N.K. Firodia was appointed the managing director of the same. In the year 1959, Bachhraj Trading Corporation Ltd. was granted licence to manufacture scooters and auto rickshaws. In the year 1960 the name of Bachhraj Trading Corporation Ltd. was changed to Bajaj Auto Private Ltd. Shares of Bajaj Auto Priva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he term of managing agency of Jamnalal Sons Private Ltd. for a period of 7 years so that the managing agents would have a term of 10 years commencing August 16, 1965. The letter of the appellant-company was signed by the secretary. In the month of March, 1968, Firodia came to know about the said letter and wrote to the Chairman of the Company Law Board that there was neither any resolution of the general meeting of the company for such extension nor any publication of such appointment. Firodia said that the appellant-company contravened, in particular, the provisions contained in sections 326 and 640B of the Companies Act, 1956. The Company Law Board, however, approved of the extension of the managing agency for a period of two years from March 31, 1970. The appellant-company was converted into a public limited company in 1960 and the share capital was increased from Rs. 9,90,000 to Rs. 70,00,000. In the months of February and March, 1967, the capital of the appellant-company was increased by issue of right shares. By the endiof February, 1968, out of the issued share capital of 1,04,250 shares the Bajaj group held about 28,600 shares, the Firodia group 23,40.0 shares, and the gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal, in the facts and circumstances of the case. In the exercise of that discretion the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive. If the articles permit the directors to decline to register transfer of shares without stating the reasons, the court would not draw unfavourable inferences against the directors because they did not give reasons. In other words, the court will assume that the directors acted reasonably and bona fide and those who allege to the contrary would have to prove and establish the same by evidence. Where, however, the directors gave reasons the court would consider whether they were legitimate and whether the directors proceeded on a right or wrong principle. As a result of the introduction of section 111(5A) in the Companies Act, 1956, two consequences follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In re [1872] LR 8 Ch. App. 446, said that the directors would have no right to force a particular shareholder to continue as a shareholder and not to allow him to transfer shares at all because that would be an abuse of their power. Lord Cozens-Hardy M.R. in In re Bede Steam Shipping Co. Ltd. [1917] 1 Ch. 123 (CA) said that the personal objections to a transferee were where the transferee would be quarrelsome person or he would be an unreasonable person or he would be acting in the interest of a rival company. The directors there had power to refuse to register transfer of shares if "in their opinion it is contrary to the interest of the company that the proposed transferee should be a member thereof". In that case there were disputes between the elder brothers who were directors. One of the elder brothers sold his two shares to a clerk of his and another share to his house-keeper. The other director said that the company was really a family concern and therefore the shares; should not be transferred singly or in small lots to outside persons having no interest in, or knowledge of, shipping. In In re Bede Steam Shipping Co. [1917] 1 Ch. 123 (CA) the power of the directors was to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors' decision merely because the court itself would not have come to the same conclusion. Thirdly, if the reasons are not legitimate, the court would hold that the power had not been duly exercised. An example would be where the directors said that they rejected the transfer because the transferor's object was to increase the voting power in respect of his shares by splitting them among his nominees. In the case of Bell Brother's case (supra) two Bell brothers, John and Lowthian, and the members of their families were shareholders in Bell Brothers. John died leaving a will and the beneficiaries under the will were his widow and children. The will provided for the widow an annuity. The will contained a general trust for conversion. John's shares were sold to provide a fund to meet the annuity. Hodgson purchased those shares. The directors were Lowthian, his son, Hugh, and his son-in-law. Hugh was an executor trustee under the will of John and as such was one of the transferors of the shares of John. The shares of the testator were in the names of Hugh, the nephew, and Charles, the son of the testator, as executor trustees. The shares being registered in two names, Hugh as the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ande applied for registration. The article in the Nagpur case conferred absolute and uncontrolled discretion on the directors to refuse to register transfer where in the opinion of the directors it was not in the interest of the company to admit the proposed transferee to membership. The evidence in that case was that Deshpande was the lawyer of Sapate. Sapate was quarrelling with the company. Sapate also joined a rival concern. The directors' decision in those surrounding circumstances was found to be a legitimate exercise of the power of the directors in the interest of the company. The decision in In re Smith & Fawcett Ltd. [1942] Ch. 304 (CA) indicates the extent to which the court upholds the exercise of absolute and uncontrolled discretion of the directors to refuse to register any transfer of shares. In that case there were two directors who held the shares in equal numbers. One died. The other director refused to register the transfer of shares in the names of the executors of the deceased director except in respect of a part of the holding and upon the condition that the balance be transferred to the surviving director. It was found to be a justifiable act of the director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term for about three years which was to expire on March 31, 1968. In the month of August, 1967, when Kamalnayan Bajaj of the Bajaj group proposed an extension of the term of the managing agents, Firodia represented to the Board that Firodia was opposed to the same. No application for extension of the term of managing agents was made at that time. The appellant, however, behind the back of Firodia, wrote to the Company Law Board in the month of December, 1967, and, though Firodia was the chief executive, the letter was signed by the secretary and kept concealed from Firodia. Firodia came to know of the letter in the month of March, 1968, and he wrote to the Company Law Board that the company had made "false statement" in the application for extension of the term, namely, that the appellant-company gave a wrong impression that it had received permission to increase its production to 60,000 scooters per year whereas in fact no such permission had been granted. Firodia also pointed out that the appellant suggested that its progress was because of the Bajaj group and made no reference to Firodia who was the chief executive of the appellant. In 1965 the appellant asked for appointment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch, 1968, on the powers of Firodia as chief executive of the appellant-company and, secondly, by the resolution in the month of May, 1968, to terminate the services of Firodia as chief executive. The refusal to register the transfers was at the meetings of the board held in the months of May and June, 1968. The directors had a hostile feeling against Firodia and they had the dominant desire to keep Firodia out of the company. The directors did not act in the interest of the company and their discretion was tainted by unfair conduct and unjustifiable attitude against Firodia. The second reason given by the appellant-company was that the Firodia group acquired the shares with a design of acquiring interest in the company which was likely to result in a threat to the smooth functioning of the management of the company and to vote down the passing of the special resolution. There are well recognised safeguards as to notice and content for passing special resolutions. Special resolutions are for limited purposes and are not matters of daily occurrence or of daily routine administration. The mere apprehension that special resolutions will not be passed is not a legitimate reason. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lodged 4,243 shares for transfer in their names and the transfers were registered. Again, in the month of February, 1968, when the Firodia group lodged 68 shares with the appellant-company for transfer, the appellant-company accepted the said transfer. It is, therefore, revealed that after the appellant came to know that Firodia wrote to the Company Law Board in the month of March, 1968; the directors of the appellant-company developed antipathy against Firodia. The refusal to register the shares was a sequel to the termination of the appointment of Firodia as chief executive and it is manifest that the directors acted for collateral reasons and in their own interest. Counsel on behalf of the appellant contended that of the seven directors only Kamalnayan Bajaj belonged to the Bajaj family and each director was an independent industrialist and could not be described to be of Bajaj group. Neither the status and wealth of the directors nor their lack of relationship with the Bajaj family could be decisive as to whether they exercised their discretion on correct principle or without any corrupt motive. The Firodia group alleged that Kamalnayan Bajaj was an arbitrator in the family di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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