9911796707
TMI Blog1989 (9) TMI 352X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. The paid-up equity capital of the applicant-company prior to the public issue in May 1986 was Rs. 40.56 lakhs, consisting of 4,05,600 equity shares of Rs. 10 each. ( c )The applicant-company made public issue of its shares in May 1986. On allotment after the public issue, the applicant-company's share capital stood at Rs. 1,34,31,000 comprised of 13,43,100 equity shares of Rs. 10 each. ( d )After the said public issue, the first annual general meeting of the applicant-company was convened on 29-12-1986. Certain sharehold-ers of the applicant-company filed notices under section 257 of the Companies Act, 1956 with the company proposing candidature of six persons as Directors on the Board of the applicant-company. The said notices were rejected by the board of directors of the applicant-company at a meeting held on 20-12-1986. ( e )Aggrieved by such rejection, one of the shareholders who gave such notice, viz., Mr. Gopal Vyas filed a suit in the Hon'ble Calcutta High Court and prayed for leave to propose the said candidature at the said annual general meeting. Because of the intervention of the court the agenda item relating to the appointment of directors was post-poned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial facts and evidence were ignored. In this connection strong reliance was placed on a judgment passed by this Court in an earlier writ petition on 15-7-1987, directed against an order passed by the CLB dated 31-3-1987, in an application under section 409 of the Companies Act. Since strong reliance was placed on this judgment, it will have to be examined first to decide whether the controversy raised in this case is partly or wholly concluded by that judgment dated 15-7-1987. That judgment was concerned with an order passed by the CLB in an application under section 409. Section 409(1) provides as follows: " Power of Central Government to prevent change in Board of Directors likely to affect company prejudicially. (1) Where a complaint is made to the Central Government by the managing director or any other director or the manager of a company that as a result of a change which has taken place or is likely to take place in the ownership of any shares held in the company, a change in the board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Central Government may, if satisfied, after such enquiry as it thinks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he West Bengal Industrial Development Corpn. Ltd. It was submitted that an interested group of persons with the specific object of toppling the management were trying to replace the present set of directors with people who did not have the required expertise and background to pilot the affairs of the company. The CLB, however, dismissed the application under section 409 on two grounds. The first ground was suppression of material facts before the CLB. That ground is not material for the purpose of this case. The second ground given by the CLB in that case, as recorded in the judgment, is as follows: "The second ground given by the Company Law Board for dismissing the writ petition was the absence of one of the essential ingredients required for an order under section 409. The Company Law Board was not satisfied that the incoming management was likely to prejudicially affect the affairs of the company. There is no doubt that the onus of proving that the incoming management was likely to prejudicially affect the affairs of the company was on the complainants." In the judgment of this Court delivered on 15-7-1987 it was held that the CLB had completely overlooked the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e bio-data of the candidates, who were sponsored for election at the last Annual General Meeting, he argued that all of them were professionals or industrialists of repute. We find considerable force in this submission by the learned Advocate. Therefore, even without going into detail about the other issues, it would seem that one of the essential ingredients of section 409 as to how the incoming management is likely to prejudicially affect the affairs of the company, has not been convincingly brought out by the petitioners.' The Company Law Board has overlooked the fact that every set of persons may not be good for every type of job. Merely because some successful lawyers and Directors of Tea Companies, Leasing Companies, etc., have joined together and formed a group for taking over the company, it does not necessarily mean that they have the competence to run this company. Whether they are as good as the outgoing Directors have to be judged by having regard to the activities of the company. The Company Law Board did not examine these allegations in depth. It overlooked the fact that the company's businesses were in specialised lines, like hotel management and ship broking. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hibited by any order of any Court, Tribunal or other authority under any law for the time being in force." Sub-section (2) of section 22A declares that the securities of a company shall be freely transferable, subject to the other provisions of that section. The other provisions of section 22A should be construed bearing in mind this basic object of section 22A. Sub-section (3) of section 22A provides that a company may refuse to register the transfer of any of its securities in the name of the transferor or transferors on any one or more than one of the grounds mentioned in the various sub-clauses therein but no other ground. Therefore, whatever may be the provision of the articles of the company or any other provisions of law, the company cannot refuse to register the name of the transferor except on the grounds specified in various sub-clauses of sub-section (3). The directors of a company really have no option in respect of the grounds mentioned in clauses ( a ), ( b ) and ( d ) of section 22A(3). Clause ( a ) merely deals with the formalities that have to be complied with relating to registration of transfer. Clause ( b ) of the said sub-section (3) deals with the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were filed beyond the period of two months from the date of lodgement of share transfer applications as provided in section 22A(4). In some of the cases, after the fact of delay was pointed out by the CLB, the company filed an application for condonation of delay. The CLB classified the references under four groups as under: No. of References C.P. Nos. ( a ) References where there is no delay 34 50 to 52, 133, 134, 162, 163, 166, 167, 174, 177, 179, 183, 184, 218 to 231, 233 to 237, 208. ( b ) References where delay is of 1 day* 29 8 to 36 ( c ) References where delay is of more than 1 day up to 7 days 8 39 to 46 ( d ) Reference where delay is more than 15 days up to 60 days 49 Remaining, i.e., other than those mentioned above. Total 120 The CLB decided to condone the delay in making references contained in Groups C and D has held that the other references contained in Groups A and B, which are 57 in number, were barred by limitation. 5. In my view, the CLB fell into an error in holding that some of the references were barred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails to effect such registration within a period of two months, does it mean that the company is powerless to grant such registration thereafter? The company may still effect such registration but as a consequence of delay for this purpose, the company and/or its officers are liable to be visited with penalty. 9. Similarly, clause ( b ) of sub-section (4) requires the company to intimate the transferor and the transferee by a notice in the prescribed form about the requirements of law which have not been complied with. It cannot be suggested that merely because two months from the date of lodgement of the Share Transfer Forms have expired, the company is powerless to intimate the defect like insufficiency of stamps in the application for registration of the shares to the parties concerned, but will have to register such transfers. Clause ( c ) of sub-section (4) must also be viewed from this angle. It is the duty cast on the company to make a reference to the CLB and forward copies of such reference to the transferor and the transferee within a period of two months from the date of lodgement of the shares, scrips and the Share Transfer Forms in accordance with law. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a change in the management of the company. His contention was that that if the disputed 7 per cent shareholding was transferred, the balance will not be tilted in favour of the respondent group. 12. If this contention is right a person who has given notice of his intention to seek replacement of the existing group of Directors may go on acquiring shares without resistance from the company until the balance of 50 per cent of the shareholding is reached. A company raider may come to the brink of toppling the existing Board and the Board will be powerless to resist such moves of a company raider. 13. In my view, section 22A does not permit this sort of brinkmanship on the part of a company raider. 14. Mr. Mukherjee has tried to demonstrate by referring to the chart of the shareholders that this 7 per cent of the shares will have a crucial role to play in deciding the composition of the board of directors at the annual general meeting of the company. In my judgment whether these shares will have the tilting effect or not is not really the material issue. Clause ( c ) of sub-section (3) of section 22A empowers the company to decline to register transfer of the shares if su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing about a change in the composition of the board of directors and if there is some ground to form the opinion that the object is likely to succeed even in the long run, the company will be entitled to refuse registration of such shares provided other conditions laid down in the statute are fulfilled. The shares which are subject matter of dispute in this case may or may not by themselves tilt the balance in favour of any group. But this bunch of shares may help the transferee with the support of the other shareholders or by further acquisition of shares to bring about a change in the composition of the board directors. In the facts of this case, I am of the view that the CLB was in error in holding that there was no likelihood of change in the composition of the board of directors. 16. In my judgment, the reasoning given by the CLB on this point is also erroneous. 17. There is, however, another aspect of this matter. The earlier proceeding before the CLB was under section 409. The complaint in that case was that as a result of a change which had taken place in the ownership of shares held in the company, a change in the composition of the board of directors was likely t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be prejudicial to the interest of the company or to the public interest. Therefore, the board of directors before declining to register any transfer of shares under clause ( d ) will have to form an opinion that ( 1 ) the transfer of security is likely to result in change in the composition of the board of directors, and ( 2 ) such change will be prejudicial to the interest of the company or to the public interest. Both the conditions must be fulfilled. 20. In the instant case, there is no dispute that the shares which are sought to be transferred are held by persons who are opposed to the present board of directors. If such persons transfer the shares in favour of some other persons, then it cannot be said that the transfer is likely to result in change in the composition of the board of directors. That likelihood was there even before the transfer of shares took place. The writ petitioner has failed to establish how the transfer of the shares in dispute in this case would likely to result in change in the composition of the board of directors. The case of the writ petitioner is that a group of persons have managed to acquire a substantial number of shares of the company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferors of the shares in question were disinterested persons or friendly to the present management, then a question would have arisen whether the transfer was likely to bring about a change in the management of the company. But if the transferors are hostile to the present management and are trying to bring about a change in the board of directors, then the transfer of the share by these transferors to the transferee who are also hostile to the present management will not make any difference to the likelihood of the change in the composition of the board of directors when voting takes place. 24. Therefore, I am of the view that the petitioner has not been able to satisfy the Court that the change in the shareholding is likely to cause a change in the composition of the board of directors. I have considered the facts of the case anxiously and I am of the view that on this ground only this writ petition must fail. If the writ petitioner could show that the transferors, directly or by proxy, were likely to vote for the present management at the time of voting or would have abstained from voting altogether, I would have held in favour of the writ petitioners in this case. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransferee. If the opinion for non-registration of the shares has been formed by the company unlawfully or without having regard to the relevant facts or for extraneous reasons, the CLB may give suitable directions to the company. Having regard to the language of the section and the scheme of the Act, I am of the view that the CLB has not been empowered to sit on appeal over the decision taken by a company in the matter of registration of snares but exercises supervisory powers in that regard. The Legislature has refrained from using the expression 'appeal' and adopted the term 'reference' consciously and deliberately. Neither the transferor nor the transferee has been given any right of appeal. No grounds of appeal are to be filed by them. The CLB has to ensure that the statutory right conferred upon the company to decline registration of shares in certain cases is exercised bona fide and in accordance with law. Therefore, in my view, the jurisdic-tion of the CLB conferred by section 22 A is supervisory and not appellate. Another point which was debated at great length, was about the finding of the CLB that no prejudice would be caused to the company even if the shares were t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Financial institutions, had filed applications before the CLB under section 409 on 22-12-1986. The CLB also lost sight of the fact that the nominees of the Financial institu-tions are on the Board of the company and were parties to the decision taken by the Board not to register the transfer of snares. The CLB should have taken notice of all these facts. The decision of the board of directors were taken in the context of these facts, and the CLB should have approached the problem likewise. 29. My ultimate decision is that this writ petition also fail. I have reached this conclusion with considerable hesitation, but since I am of the view that the company has failed to establish that the transfer of the shares is likely to result in a change in the composition of the board of directors, this writ petition must be dismissed. 30. The writ petition is dismissed. All interim orders are vacated. 31. There will be no order as to costs. There is a prayer for stay of operation of the order. The prayer is allowed. There will be a stay of operation of this order till one week after the long vacation. The interim orders passed in the writ petition will also continue till the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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