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TMI Blog1994 (2) TMI 231X X X X Extracts X X X X X X X X Extracts X X X X ..... of refusal of a company to register transfer of or transmission by operation of law of right to any share comes to an end after expiry of a period of two months and an absolute right is created in favour of transferee - Held, no - Whether in view of established fact that there was animosity between parties, respondent's decision of refusal to register shares in appellants' names was a proper and commercial decision - Held, yes - CIVIL APPEAL NO. 854 OF 1994 ARISING OUT OF SLP (CIVIL) NO. 9345 OF 1990 - - - Dated:- 15-2-1994 - K. JAYACHANDRA REDDY AND G.N. RAY, JJ. A.M. Singhvi, Vibhu Bakhru, M.N. Shroff and Ms. Reema Bhandari for the Appellant. Ashok H. Desai, Dushyant Dave, Vikram B. Trivedi, Ms. Manjula Gupta and Bharat Sangal for the Respondent. JUDGMENT Reddy, J. - Special leave granted. 2. This appeal arises out of Company Petition No. 39 of 1985 , which was dismissed by a learned Single Judge of the Bombay High Court by his order in Shailesh Prabhudas Mehta v. Calico Dyeing Printing Mills Ltd. [1990] 67 Comp. Cas. 533 and an appeal filed against the said order was also dismissed by a Division Bench. The order of the Division Bench is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 1984, the company closed down its operations and by arriving at a settlement with the workers retrenched all the workmen obtaining voluntary resignations from them. It is alleged by the appellants that this was done with the motive of making huge profits by the directors and their related shareholders by disposing of the plant, machinery, etc. On or about 23-6-1984, the company requested the appellants to approach the company for transmission of snares after obtaining the succession certificate in respect of the estate of the deceased, Shri Prabhudas V. Mehta. On 21-8-1984, the appellants received the heirship certificate in which 100 shares were mentioned as one of the assets standing in the name of Shri Prabhudas V. Mehta in the company. On 31-8-1984, the appellants sent a letter to the company intimating that the heirship certificate-cum-letter of administration has been received by them and, therefore, the company should give to them the details about the formalities to be complied with for the purpose of effecting the transmission of the said shares in their favour. On 16-9-1984, since there was no response from the company, a reminder was sent. On 19-9-1984, the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that were refused the appellants filed a Special Leave Petition (Civil) No. 13605 of 1988, in this Court but before the same came up for hearing, the Division Bench of the High Court completed the hearing of the main appeal and dismissed the appeal on 22-12-1989. Questioning the same the present appeal is filed. 4. The Division Bench of the High Court mainly considered two questions, namely, (1) whether the Board of Directors lost its powers to refuse to transmit the shares to the names of the appellants after a lapse of two months, and (2) whether the Board's failure to register the transmission within the period of two months and the subsequent decision taken on 9- 4-1985, was mala fide and not taken in the interest of the company. The Division Bench observed that the first contention is obviously based on the provisions of the English Companies Act and cases decided thereunder and after referring to some decided cases held that they do not lay down that on the expiry of period of two months the power would be lost and the whole question would be exercise of discretion rather than any alleged loss of power and for that purpose the factual position in the case has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re concurrent findings of fact that the refusal was not a mala fide action and it was a proper exercise of discretion in the interest of the company and that the company in the instant case is only a private company in the nature of partnership and that the appellants cannot force themselves to be partners. The first and second submissions can be dealt with together as they are very much based on the provisions of the Act and articles of association. Articles 26 and 34 of the articles of association of the respondent- company are relevant in this regard. Article 26 lays down that subject to the provisions of section 111, the directors may in their absolute discre- tion and without assigning any reason decline to register any transfer of any share and if the directors decline to register a transfer of any share, they shall, within two months after the date on which the transfer was lodged with the company, send to the transferee and the transferor notice of the refusal. Article 34 is to the effect that any person becoming entitled to a share in consequence of the death or insolvency of a member may, upon such evidence as may be produced and as required from time to time by the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that: "( i ) ... the period of two months mentioned in clause 19 of Table A under the Act of 1929, and specified in section 78 of the Act of 1948, may, I think, safely be taken as the outside limit after which there is unnecessary delay. ( ii )The power of veto is a restriction on the right of alienation and as such must, I think, be exercised at the proper time for its exercise, if it is to be exercised at all. For this purpose, the proper time is the occasion on which the transfers are placed before the Board for confirmation if and it seems only if they are so placed without unnecessary delay. If there is unnecessary delay in placing the transfers before the Board, the power of veto must, I think, be regarded as lost, so that the right of transfer becomes unrestricted. It cannot be the law that the Board of a company can improperly delay considering a transfer and then when driven to do so, as for instance here, by the launching of a motion, exercise the power of veto...?" (p. 1136) 6. The learned counsel placed strong reliance on these observations. But the observations made in this case were later considered in Swaledale Cleaners Ltd., In re [1968] 3 All ER 619 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n favour of the transferee. Further, section 111 provides for a right of appeal to the Central Government and if, as contended by the learned counsel, on a mere failure to send an intimation within two months an absolute right came to be vested in the transferee, then the question of the transferee filing an appeal would not arise at all. Thus, this section mainly deals with the right to receive a notice and the consequence of non-sending of such a notice results in penalty. These provisions would go to show that what was intended was to provide for a notice of refusal to be sent and failure thereof only resulting in levying penalty. 8. The submission that the company had no power to refuse registration or transmission of shares in the absence of a specific provision in the articles of association is also untenable. According to learned counsel, the articles of association at the time of death of the deceased did not provide for such a refusal and even if there is an amendment later, the same cannot empower the Board to refuse the registration of the shares. In our view, particularly in view of the facts of this case, the Board had such power when the registration and transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal with the other submission, namely, whether the action of the Board of Directors was mala fide. In Bajaj Auto Ltd v. N. K. Firodia [1971] 41 Comp. Cas. 1 (SC) it was laid down that the Court can consider whether the directors acted in the interests of the company. This case was cited in Life Insurance Corpn. of India v. Escorts Ltd. [1986] 59 Comp. Cas. 548 (SC) with approval and in that case the nature of the power of the directors and scope of scrutiny by the Court were explained and it was observed as under: "...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." (p. 6) Keeping these principles in mind, we shall examine the reasons that weighed with the Board of Directors in refusing transmission. The Board of Directors have stated in the affi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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