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TMI Blog1977 (8) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... d 210 equity shares from the transferor on 22nd January, 1975, for a consideration of Rs. 10,000 and forwarded to the company the share transfer deed duly executed by the transferor and transferee together with the share certificates relating to the said shares for registering the transfer and entering the name of the transferee on the register of the company as the holder of the said 210 shares. But the company informed the transferee by a letter dated 18th March, 1975, that the board of directors of the company, in exercise of their power under regulation 42 of the articles of association of the company, read with section 111(1) of the Companies Act, 1956 ("the Act"), refused the application to register the transfer. According to the transferee the board of directors have acted capriciously, male fide and in excess of their power in refusing to register the transfer of the shares. The company contended before the learned judge that the directors were justified in refusing to register the transfer by virtue of their power under section 111(1) of the Act read with regulation 42 of the articles of association. It was stated that the reasons for the refusal were explicit from the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Government or under section 155 by petitioning the court. In the present case, the transferee chose the latter procedure and he was well within his rights to do so: Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 38 7 (SC) and Vidyasagar Cotton Mills v. Mt. Naztnunnessa Begum [1964] 34 Comp. Cas. 704 (Cal.). A shareholder has, subject to the articles of association, the right to transfer his shares. Restrictions can be legitimately imposed on such right, but such restrictions must be explicitly stated in the articles of association! Moodie v. W. & J. Shepherd Ltd. [1949] 2 All ER 1044, 1050 (HL). As stated by Lord Greene M R. in In re Smith and Fawcett Ltd. [1942] 1 Ch 304, 306 ; [1942] 1 All ER 542 (CA). "The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately framed, cannot be allowed to cut down the right of transfer to any extent which the articles on their true construction permit." The relevant provisions in the articles of association of the company is regulation 42, which reads: "The directors may decline to register any transfer of shares on which the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... First, whether the directors acted in the interest of the company; secondly, whether they acted on a wrong principle ; and, thirdly, whether they acted with an oblique motive or for a collateral purpose." If, upon an examination of the reasons disclosed by the directors, it is seen that they acted on a wrong principle, the refusal to register the transfer can be rescinded under section 155 of the Act. Even where the articles have conferred on the directors absolute and unlimited power, and the directors have ostensibly acted within the limits of the articles, yet their discretion is liable to be nullified if it is established that they "acted oppressively, capriciously or corruptly or in some other way mala fide". Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC). In Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 (SC) the articles conferred absolute and unlimited power upon the directors. Nevertheless the refusal of the directors to register the transfer of shares was held to be invalid as it was found to be mala fide, arbitrary and for a collateral purpose. (See also the judgment of Mellish L.J. in In re Gresham Life Assurance Society : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration. Articles 22 and 24 of the articles of association of the Bede Steam Shipping Company provided: "22. Subject to the restrictions of these articles any registered holder of shares may transfer all or any of his shares. 24. The directors and managers may in their discretion and without assigning any reason therefor refuse to register the transfer of any share (not being a fully paid up share) to any person of whom they shall not approve as transferee and may decline to register the transfer of any fully paid up share or shares on certifying that in their opinion it is contrary to the interests of the company that the proposed transferee should be a member thereof." Article 24 is in substance identical to regulation 42. Considering articles 22 and 24 of the Bede Steam Shipping Company, Lord Cozens-Hardy M.R. ([1917] 1 Ch 123, 133 (CA)) referred to the decision of Mellish L.J. in In re Gresham Life Assurance Society: Exparte Penney [1872] 8 Ch App 446, and stated: "The point which is taken by Mellish L.J. is this: You may look and see personally who the transferee is. There may be personal objections to him; it may be because he is a quarrelsome person, it may be because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 10 of the latter conferred absolute and unlimited powers on the directors. Article 10 was as follows: "The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares, and clause 19 of Table A shall be modified accordingly." Lord Greene M.R. pointed out that absolute powers, as under article 10, are normally vested in the directors of a private company. He then observed: "Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the directors powers of the widest description." The Master of the Rolls further stated: "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 387 (SC). If, on the other hand, the reasons disclosed are legitimate, the court would not overrule the directors' decision merely because the court itself would not have come to the same conclusion. The question is, did the directors act on a ground permitted under the articles, and if they did, was their power exercised bona fide in the interests of the company ? In In re Bedc Steam Shipping Company Ltd, [1917] 1 Ch 123 (CA), the articles, as in the present case, conferred a limited discretionary power of refusal on the directors, and their refusal to register the transfer of shares, for reasons not personal to the transferee, was held to be ultra vires, In In re Smith and Fawcett Ltd. [1942] Ch 304 (CA) the position was held to be different as the articles had conferred an absolute and unlimited power on the directors and it was not established that they had acted mala fide. In Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 (SC), notwithstanding the absolute and unlimited nature of the power conferred on the directors, the refusal to register was held to be invalid as it was found to be a mala fide and arbitrary exercise of power. As stated earlier, the power conferred ..... X X X X Extracts X X X X X X X X Extracts X X X X
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