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TMI Blog1987 (4) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... ticles of association of the company provides that : "The board of directors may, in their absolute discretion and without assigning any reason, decline to register, ( a )the transfer of shares to a person of whom they do not approve, ..". The authorised capital of the company is Rs. 16,00,000 made up of 60,000 cumulative preference shares of Rs. 10 and one lakh equity shares of Rs. 10 each. The company is listed in the Madras Stock Exchange and its shares are quoted. The appellants, who were applicants before the company judge, purchased equity shares of the company at prevailing market rates. They forwarded such share certificates to the company along with share transfer deeds duly executed by the transferors for registration of the transfer. By letter dated August 14, 1979, the company informed the transferees that the board of directors had declined to register the transfer. The share certificates were returned along with that letter. But the share transfer deeds were kept back. The transferees filed applications under section 155 of the Companies Act, alleging that the refusal to register the transfer of shares was arbitrary, malicious, capricious, oppressive and witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferor members, that the refusal to register the transfer of shares was not arbitrary or capricious or malicious or oppressive or against the interest of the company or its shareholders and that the transferees had significantly failed in making out their case against the refusal by the board of directors by absolute proof or positive evidence. The appellants assail the above orders of the company judge. Mr. Jagadischandran Nair, counsel appearing for the appellants, submitted that substantial questions of law arising for consideration in the appeal ought to have been formulated earlier because of the requirements of section 155(4) of the Companies Act, read with section 100 of the Code of Civil Procedure. He has now formulated such substantial questions of law in C. M. P. No. 1362 of 1987 and similar petitions seeking amendment of the memorandum of appeal. Those questions are the following : "(1)Whether regulation 24 of the articles of association (exhibit B-1) is void being in contravention of section 82 of the Companies Act, 1956 ? (2)Whether companies listed on a stock exchange, which have entered into agreements with the stock exchange, are legally bound to dispose of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 155(4) of the Companies Act reads as follows : "(4) From any order passed by the court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in section 100 of the Code of Civil Procedure, 1908, ( a )if the order be passed by a District Court, to the High Court ; ( b )if the orders be passed by a single judge of a High Court consisting of three or more judges, to a Bench of that High Court". To us it appears that as per the requirements of section 155(4) of the Act, an appeal will be confined to the grounds mentioned in section 100 of the Code of Civil Procedure. That provision does not incorporate the entire body of section 100 of the Civil Procedure Code into section 155(4). It only indicates the nature of the grounds on which an appeal may be entertained. It does not prescribe the procedural formalities applicable to a second appeal under the Code of Civil Procedure to appeals under section 155(4) of the Companies Act. Absence of formulation of substantial questions of law does not appear to us to be a defect in the memorandum of appeal. The only requirement of that provision seems to us to be that an ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... organisation is a matter to be preserved by the organisation itself by insisting upon strict adherence to the terms of that contract. Courts may have power to review the working of such terms of the contract when a complaint is raised before it, that the power is being exercised in a malicious or arbitrary or oppressive or capricious manner or in a manner contrary to the interests of the company or its shareholders. It is elementary that when such a complaint is made, it has to be established by absolute proof and by positive evidence. An averment, an allegation or an assertion will not amount to absolute proof by positive evidence. Unless we reach that degree of proof of oblique motives or collateral purposes vitiating the action of a voluntary trade organisation in the matter of enlistment and admission of members, the court shall not ordinarily intervene. This, we understand, is a basic reasoning adopted over the centuries by English common law and which has been scrupulously followed in Indian decisions under the Companies Act. Justice Menon, in the decision under appeal, has traced the genesis and growth of this principle through centuries of development in English law and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot now compel such disclosure or draw upon such inference. This, according to counsel, is an absolutely anomalous situation. According to him, the power of the court under section 155(4) and that of the Government under section 111(3) to section 111(5) is as much judicial. The refusal complained against in these alternative proceedings may be the same. Before the administrative appellate authority, he can seek a direction from the authority to compel the company to disclose the reasons for refusal. In that event, it must be equally possible for a company court under section 155(4) to direct the company to disclose the reasons and examine the propriety of the same or draw an inference adverse to the company if such disclosure is not made. It shall not be as if a quasi-judicial administrative tribunal can compel disclosure of reasons, but not a regular court in an appeal, so proceeds the argument. We have prefaced that this is a very ingenious argument. But there is only one difficulty in accepting the same. In a statutory appeal under section 111(3) of the Companies Act, sub-section (5A) had to be incorporated by a specific amendment enabling the unsuccessful applicant to requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to the person giving intimation of such transmission, as the case may be. If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues". We did not hear counsel for the appellant submitting that the notice of refusal was sent to the transferee and transferor beyond the period of two months, which is fixed by the above provision. What he submits is that the outer limit of time applies only to extraordinary cases ; and ordinarily, the refusal should have been communicated within a reasonable time, which shall be less than the maximum time. We are not persuaded to agree that reasonable time shall invariably be less than the time specified under section 111(2) of the Act. It may as well, in most cases, be the same as the specified time. Counsel submitted that such reasonable period shall be a period of one month in view of rule 19(3)( e ) of the Securities Contracts (Regulation) Rules, 1957, which provides, that "A company applying for listing shall, as a condition precedent, undertake, inter alia ... ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transfer of shares was ultra vires their power and is of no effect". That decision is not an authority for the proposition that even in the case of absolute discretion conferred on the board of directors to refuse to register transfer of shares without stating any reason, the company court shall compel disclosure of such reasons in proceedings under section 155 of the Companies Act. Reliance was sought to be placed on the decision in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp Cas 387 ; AIR 1961 SC 1669. It was observed in that decision that proceedings under section 111(3) or section 155 of the Act are two alternative remedies available to a person whose application for transfer of shares was refused by the company ; and that the court shall, in exercise of its power under section 155, adjudicate upon the right exercised by the directors in the light of the powers conferred upon them by the articles of association. We do not find anything in that decision which lends support to the proposition advanced by counsel for the appellant, that in all cases of refusal to register applications for transfer, the company court is bound to compel disclosur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled. The latter part of the article is only illustrative of the grounds on which the directors could decline to register but not exhaustive. It does not control the absolute and uncontrolled discretion given in the first part of article 52 ... Even in a case where the articles of association give uncontrolled and absolute discretion to the directors to decline to register transfer of shares and also gives them power to withhold reasons for such refusal, if it is shown that there has been no exercise of any discretion but an exercise of a whim or a caprice, then such purported exercise of power under such an article can be examined by the court". Here again, a closer scrutiny by the court could be attracted only if it was positively proved that there had been no exercise of discretion but only an exercise of a whim or caprice, or the decision of the directors was oppressive, capricious, or mala fide or not in the interests of the company at all. Counsel for the appellants sought to rely on clauses 3( c ) and 12( a ) of the Listing Agreement Form (Appendix B to regulation 2), to make out that the company was obliged to register the transfer within one month from the date of l ..... 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