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TMI Blog1988 (4) TMI 343X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of those shares. The relevant facts are as follows: The appellant purchased those 705 shares from the second respondent. By exhibit A-2 dated November 10, 1983, the second respondent informed the first respondent about the sale of her shares to the appellant. She requested that the transfer of shares in the name of the appellant might be registered In exhibit A-3, dated December 1, 1981, the first respondent-company rejected the said request relying on article 33 of the articles of association of the company. It was thereafter that the second respondent is alleged to have written exhibit A-4, dated February 14, 1982, to the first respondent expressing her desire to dispose of her shares in the company at the price of Rs. 100 fixed by the company to a member or members of the company. Had this letter been received by the company, it would have been in terms of clause 35 of the articles of association; and if the company was not able, within three months thereof, to find a member of the company to purchase the shares at the designated price, it would have been obliged to permit the second respondent to sell her shares even to an outsider in terms of clause 39 thereof. The se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirm his offer. In exhibit A-5 letter, the second respondent was informed that one shareholder was interested in purchasing the shares. Exhibit A-6 dated November 15, 1982, and exhibit A-7 dated November 19, 1982, were received by the company from the second respondent requesting for transfer of her shares in the name of the appellant. At its meeting held on February 18, 1982, the company resolved to reject' the transfer application and the same was communicated to the appellant and the second respondent in exhibit A-9 (same as exhibit B-8). The company contended that the applicant had not sent the share certificates along with exhibits A-6 and A-7. Nor did he remit Rs. 2 for registration of transfer as required by clause 41 of the articles of association. Those requirements being mandatory under section 108 of the Companies Act, read with clause 41 of the articles of association, the applications were liable to be rejected. Clause 40 of the articles of association conferred an unfettered discretion on the company to reject any application for transfer without stating any reason at all. The company took up the position that, in an application for rectification of the register of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apricious, whimsical or arbitrary manner, or that the exercise of its powers was vitiated by mala fides. In that view, he rejected the application for rectification of the register of shareholders of the company. The appellant assails that decision. Shri P.N.K. Achan, counsel appearing for the appellant submitted that the findings of the learned company judge on both the points are wrong and unsustainable. It is his submission that the proposition that the company has unlimited discretion to reject any application for transfer of shares without stating any reason at all is unsustainable in view of the decision of this court in South Indian Bank Ltd. v. Joseph Michael [ 1978] 48 Comp. Cas. 368. He also relied heavily on the decisions in Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 (SC) and Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC). Counsel submitted that the decision in Teekoy Rubbers' case [1983] 54 Comp. Cas. 88 (Ker) did not apply to the facts of the present case and was wrongly relied on by the company judge. Dealing with the proposition that non-compliance with the formalities provided in the articles of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etan [1977] 47 Comp. Cas. 185 to the effect that the negative mandate contained in section 108 of the Companies Act, that "the company shall not register", was obligatory and mandatory, and non-compliance with the procedural requirements of the articles of association and the Companies Act was rightly held to be fatal to the registrability of the transfer of shares. He also relied on Shri Gulabrai Kalidas Naik v. Shri Laxmidas Lallubhai Patel of Baroda [1978] 48 Comp. Cas. 438 (Guj.). Shri Devan urged that the dispute relating to the title to shares cannot be determined in proceedings under section 155 of the Companies Act. The learned single judge has rested his decision on the first point mainly on Teekoy Rubbers' case [1983] 54 Comp. Cas. 88 (Ker.). Our learned brother M.P. Menon J. had, in that decision, held, on a review of the English and Indian authorities and with specific reference to Gulabrai Kalidas Naik [1978] 48 Comp. Cas. 438 (Guj.), Harinagar Sugar Mills [1961] 31 Comp. Cas. 387 (SC), Bajaj Auto [1971] 41 Comp. Cas. 1 (SC) and South Indian Bank [1978] 48 Comp. Cas. 368 (Ker.), that in view of clause 24 of the articles of association of that company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this rather heavy burden. True it is that the burden is onerous, but it shall be so if we accept the basic postulate that a corporation is entitled ordinarily to order its affairs in as best a manner as its constituents deem fit. This is more particularly so in this case, since the company concerned is a private limited company. Section 108 of the Companies Act deals with transfer of shares and debentures. That section reads: "108 . Transfer not to be registered except on production of instrument of transfer. (1) A company shall not register a transfer of shares in, or debentures of the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debentures: Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sell his shares to such member and that if the board of directors do not find a suitable purchaser among the members, it shall be open for the member, after the period above mentioned, to transfer the shares to any person at any price and the company shall enter the name of such transferee in the register of the company. Clause 40 confers an absolute discretion on the board of directors. That provision is in the following terms: "The directors may, at their own absolute and uncontrolled discretion, decline to register any transfer of shares by a shareholder who is indebted to the company or upon whose shares the company have a lien or otherwise, or any transfer to any person not approved by them, and in no case shall a shareholder or proposed transferee be entitled to require the directors to state the reason for the refusal to register, but their refusal shall be absolute, and shall not be liable to be questioned". We have discussed the effect of the aforementioned provisions in the previous paragraphs. We reiterate, in the light of decided cases, that the company cannot be compelled to disclose the reasons for refusal to register unless the applicants prove positively that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company for the registration of every such transfer, and upon payment thereof the directors subject to the powers vested in them by article 40 shall register the transferee as a shareholder and retain the instrument of transfer, but the transferor or the transferors, as the case may be, shall be deemed to remain the holder or holders of such share until the name or names of the transferees is or are entered in the register of members in respect thereof". It is clear from clause 41 of the articles of association that strict compliance with the procedural requirements is absolutely essential. Section 108 of the Act enjoins upon the company to reject any application for transfer of shares, unless the procedural requirements are fully complied with. That there has been non-compliance with the requirements is not very much in dispute in this case. What counsel for the appellant urges is that such non-compliance was inconsequential. The definite case of the respondent-company was that the appellant had not sent the share certificate which was sought to be transferred along with exhibit A-7 letter dated November 19, 1982. Nor did the applicant remit Rs. 2 to the company for transfer as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns were good or bad. Article 40 of the articles of association confers an unfettered discretion on the board of directors of the company not to state any reason at all for rejecting an application for transfer. That clause, which forms part of the contract of incorporation specifically provides that: "In no case shall a shareholder or proposed transferee be entitled to require the directors to state the reason for the refusal to register, but their refusal shall be absolute, and shall not be liable to be questioned". If no member is entitled to insist that the company shall state reasons for refusal to transfer, and such refusal shall be absolute and not liable to be questioned, we cannot hold that an outsider who wants to become a member of the company must be in a better position. The imperatives of clause 40 apply not only to the members but also to a proposed transferee. We are, therefore, not in a position to accede to the submission that clause 40 binds only a member of the company and not a proposed transferee. What, he offers and proposes is to be a member of the company in terms of the contract of its incorporation and not in defiance thereof. It may be true that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nair, withdrawing his offer. In reply to exhibit B-16 letter dated November 11, 1982, Shri Premkumar wrote exhibit B-17 dated December 7, 1982, affirming his offer. The company also received exhibit B-9 lawyer notice on behalf of Shri Premkumar protesting against the proposed rejection of the offer made by Shri Premkumar. The company also received exhibit B-18, letter dated December 7, 1982, from Shri Pachayyappan, father of Shri Premkumar, questioning the rejection of Shri Premkumar's offer to purchase the shares. Shri Pachayyappan was a member of the company. His letter was dated December 7, 1982. The difference in the signature of Shri Premkumar was pointed out again to his father Pachayyappan and his counsel Shri C. Achutha Menon. Copy of that letter was also sent to the Registrar of Companies. It was in the meantime that the company sent exhibit B-14 (exhibit A-6) letter dated November 11, 1982, to the second respondent to the effect that no shareholder is available to purchase her shares. RW-1 states that it was on the same date that he wrote exhibit B-16 to Shri Premkumar to confirm his address, so as to pursue his offer further. The company then received exhibit A-7 letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitrary or oppressive. The decision was apparently due to the compulsions of the articles of association to the effect that if another member offered to purchase the shares which were available for transfer, such member shall have priority over an outsider. The anxiety of the company to prefer a member, and not an outsider to hold the shares cannot be considered as unreasonable or arbitrary. We are, therefore, of the opinion that even on merits, the evidence available before the learned company judge was such that it fully justified the conclusion that the company was not actuated by any improper or mala fide motive in declining to register the transfer of shares in favour of the applicant. The company had its own reasons for not approving the appellant to be a constituent of the company. It is not liable to be compelled to disclose its reasons. Unless vitiating circumstances are specifically pleaded and positively proved, we shall assume that the reasons were good or at least that they were not bad. The court shall not look any further. The company, particularly a private limited company, should know better as to how to order its affairs. The court steps in only if it acts opp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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