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TMI Blog1998 (12) TMI 491X X X X Extracts X X X X X X X X Extracts X X X X ..... y stock exchange. On 3-1-1989 Shri Kashi Deora, (respondent No. 4 - transferee) lodged to the company 14605 equity shares of the company for transfer of the said shares in his favour. Shri Suresh Deora (respondent No. 5 herein - transferee) lodged with the company 3270 equity shares for transfer of the said shares in his favour. Another application, for transfer of 1100 shares was made by Shri Prashad Deora on 3-1-1989 to the company for transfer of the said shares in his favour. The company on 1-3-1989 intimated the respondent Nos. 4 and 5 - transferees that the board of directors has refused to transfer the said shares in their favour on various grounds, namely, ( a ) that the application is not accompanied by transfer fees as prescribed by article 40 of the articles of association; ( b ) that the application is incomplete inasmuch as full name of the transferor and transferee are not furnished; ( c ) that the intended acquisition is mala fide and for ulterior motives; ( d ) that the intended acquisition, if permitted, would be prejudicial to the interest of the company and general body of shareholders and ( e ) that the intended acquisition, if permitted, could bring out such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or transfer in the year 1990 for getting out of difficulty of limitation and therefore the rejection of transfer of shares by the board of directors on 3-1-1991 cannot be said to have given fresh cause of action to the respondent Nos. 4 and 5 and these appeals were patently time barred. 5. Per contra, Mr. Dwarkadas, the learned senior counsel appearing for respondent Nos. 4 and 5 urged that earlier applications made by respond- ent Nos. 4 and 5 on 3-1-1989 for transfer of equity shares were rejected on various grounds including non-compliance of the mandatory provi- sions by the applicants inasmuch as the applications were not accompa- nied by transfer fees and that the applications were incomplete in various respects and, therefore, there was no occasion for respondent Nos. 4 and 5 to challenge the said decision of board of directors rejecting the applications for transfer since even if they had challenged the said decision in appeal, no relief could have been granted to them since the applications for transfer were not in accordance with law. Section 111 deals with power to refuse registration of shares and appeal against such refusal. It reads thus : " Power to refuse re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay damages, if any, sustained by any party aggrieved. (6) The CLB, while acting under sub-section (5), may, at its discretion, make ( a )such interim orders, including any orders as to injunction or stay, as it may deem fit and just; ( b )such orders as to costs as it think fit; and ( c )incidental or consequential orders regarding payment of dividend or the allotment of bonus or rights shares. (7) On any application under this section, the CLB ( a )may decide any question relating to the title of any person who is a party to the application to have his name entered in, or omitted from, the register; ( b )generally, may decide any question which it is necessary or expe-dient to decide in connection with the application for rectification. (8) The provisions of sub-sections (4) to (7) shall apply in relation to the rectification of the register of debenture holders as they apply in relation to the rectification of the register of members. (9) If default is made in giving effect to the orders of the CLB under this section, the company and every officer of the company who is in default shall be punishable with fine which may extend to one thousand rupees, and with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been sent by the company within 4 months from the date on which the instrument of transfer was delivered to the company under sub-section (3) of section 111. Sub-section (4) is not very relevant for the present purposes. Sub-sections (5) and (6) of section 111 deal with the power of the CLB while dealing with an appeal under sub-section (2) of section 111 finally or at an ad interim stage. Adverting to the facts now in the background of section 111, it would be seen that the respondent Nos. 4 and 5 herein made the applications on 3-1-1989 to the company for transfer of shares. The respondent No. 4 made the application for transfer of 14,506 equity shares while respondent No. 5 made the application for transfer of 3270 shares. Apparently, the said transfer applications were not in accor-dance with the articles of association and the provisions of law. The applications were not accompanied by transfer fees as prescribed by article 40 of articles of association. The applications were incomplete inasmuch as full names of the transferees in all the applications were not furnished. Some of the annexures to the application were unsigned. Full name of the transferors in two applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider the contention raised by Mr. Seervai, the learned counsel for the company that the CLB is a Court within the meaning of Limitation Act, 1963 and that the CLB has power to condone to delay on sufficient cause being shown since section 5 of Limitation Act would be attracted and in the absence of any application for condonation of delay, the appeals were liable to be dismissed. As I have already held that the appeals preferred by respondent Nos. 4 and 5 before the CLB challenging the decision of the company dated 3-1-1991 were within time, there was no question of making any applica-tion for condonation of delay by respondent Nos. 4 and 5. 9. Mr. Seervai, the learned counsel for the company then assailed the order of the CLB on merits. He urged that the entire approach of the CLB was against law inasmuch as the CLB proceeded to examine the decision of the board of directors as if, the burden lay on the company to show that it acted bona fide, in good faith and not with corrupt motive. Mr. Seervai, vehemently contended that the presumption is that the board of directors acted bona fide and in good faith and the burden lay on the transferees-applicants while were cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to register the transfer of shares when they have been invested with absolute discretion to refuse registration, that the exercise of the power was bona fide. In other words, the Apex Court ruled that discretionary power conferred by articles of association to refuse to register would be presumed to be properly exercised and it was for the aggrieved transferee to show affirmatively, that it had been exercised mala fide and not in the interest of the company. 12. In re Bell Bros. Ltd.: Ex parte Hodgson [1891] 7 TLR 689 with reference to English Companies Act it has been held that power relating to rectifi- cation of register is presumed to have been exercised reasonably, bona fide and for the benefit of the company and a heavy onus lay on those challenging the resolution of the directors to displace the presumption of bona fide exercise of power. It was emphasised in Bell Bros. Ltd., that the discretion to refuse to register transfers was not liable to be controlled unless the directors "acted oppressively, capriciously or corruptly or in some way mala fide. " 13. In re Mellish, L.J. in Ex parte Penney [1872] 8 Ch. A 446., James L.J. observed "But in order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be made to the decision in Greenhalgh v. Arderne Cinimas Ltd. [1951] Ch 286; [1950] 2 All. E.R. 120 C.A. where Evershed M.R. said that if a resolution had the effect 'to discriminate between the majority shareholders and the minority shareholders so as to give the former advantage of which the latter were deprived', the resolution could be attacked on grounds of elements of dishonesty or impropriety. The acts of the directors would have to be scrutinised as to whether they were the honest opinion of the directors acting for the company as a whole. Mellish L.J., in Ex parte Penny: Gresham Life Assurance Society, In re, [1872] LR 8 CH App. 446 said that the directors would have no right to force a particular shareholder to continue as a shareholder and not to allow him to transfer shares at all because that would be an abuse of their power. Lord Cozens-Hardy M.R., In re [1917] 1 Ch. 123 C.A. Bede Steam Shipping Co. Ltd. said that the personal objections to a transferee were where the transferee would be quarrelsome person or he would be an unreasonable person or he would be acting in the interest of a rival company. The directors there had power to refuse to register tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company and with due regard to the right of a shareholder to transfer his shares and they must fairly consider the question of the transferee's fitness at a board meeting. The directors in that case were not required to disclose reasons. Three propositions can be extracted from that case. First, where the directors do not assign any reason because of the articles it is competent for those who seek to have the transfer registered to show affirmatively by proper evidence that the directors had not duly exercised their power. Secondly, if reasons are given by the directors and the reasons are legitimate the Court will not overrule the directors' decision merely because the Court itself would not have come to the same conclusion. Thirdly, if the reasons are not legitimate, the Court would hold that the power had not been duly exercised. An example would be where the directors said that they rejected the transfer because the transferor's object was to increase the voting power in respect of his shares by splitting them among his nominees. In the case of Bell Brothers two Bell Brothers, John and Lowthian, and the members of their families were shareholders in Bell Brothers. John die ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Court will consider if the reasons are legitimate if the directors have acted on a wrong principle or from corrupt motive. If the Court found that the directors gave reasons which were legitimate, the Court would not overrule that decision merely on the ground that the Court would not have come to the same conclusion. Reference may be made to the decision in Balwant Transport Co. Ltd. v. Y.H. Deshpande AIR 1956 Nag. 20 which is a Bench decision of the Nagpur High Court. Sapate was a shareholder in the company and owned shares. One of his shares was sold by public auction and was purchased by Deshpande. Deshpande applied for registration. The article in the Nagpur case conferred absolute and uncontrolled discretion on the directors to refuse to register transfer where in the opinion of the directors it was not in the interest of the company to admit the proposed transferee to membership. The evidence in that case was that Deshpande was the lawyer of Sapate. Sapate was quarrelling with the company. Sapate also joined a rival concern. The directors' decision in those surrounding circumstances was found to be a legitimate exercise of the power of the directors in the interest of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not add to his voting power and 'harass the management'. It was found to be abuse of fiduciary discretionary power of the directors when they wanted to safeguard the directors' personal interest against McRobert." (p. 7) 15. The Apex Court thus emphasised that the decision of the board of directors has to be examined by applying the tests viz., ( i ) whether the directors acted in the interest of the company, ( ii ) whether they acted on wrong principle and ( iii ) whether the board of directors acted with an oblique motive for a collateral purpose. The CLB in exercise of its power conferred under sub-section (2) of section 111 has to examine the decision of the board of directors in the light of these legal principles and not as an appellate court from the decision of the Court of the original jurisdiction. 16. Recently, the Apex Court in Bajaj Auto Ltd. v. CLB [1998] 6 SCC 218 considered the relevant provisions of the Companies Act including section 111 in the light of the articles of association of the company conferring absolute, uncontrolled and unbridled power of the board of directors to decline to register the transfer of shares and held thus : "14. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot overlook the fact that under the proviso to section 38 this appeal is to be treated as equivalent to one filed under section 100, C.P.C. A finding fairly reached on the evidence would, therefore, be binding. In the present case, the learned Judge of the trial Court did not consider the question of onus at all. He felt that it was for the board of directors to justify their order, rather then for the applicant before him to show that there was lack of 'bona fides'. But it is well settled that the onus is on the shareholder to prove that the action of the directors was 'mala fide': - In Gresham Life Assurance Society; Ex Parte Penney, [1872] 8 Ch. A. 446 (A), In re Coalport China Co. [1895] 2 Ch. 404 (B), In re, Hannan's King (Browning) Gold Mining Co. Ltd. [1898] 14 TLR 314 (C); Sutherland (Duke) v. British Dominions Land Settlement Corpn. Ltd. [1926] I Ch. 746 at p. 756 (D). As in the present case the learned Judge reached his decision after placing the onus wrongly, the decision is open for further consideration even in an appeal under section 100, Civil P.C.- "Peddi Reddi Jogi Reddi v. Chinnabbi Reddi, AIR 1929 PC 13 (E) and Jogeshchandra Ray v. Emdad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether it was based on some wrong principle. He did not approach the question that way. He considered the action of the directors arbitrary. If the directors of the company had not given any reasons, the burden on Shri Desphande would have been all the heavier. Fortunately for Shri Deshpande, the directors of the company in stating their reasons give certain clue to the working of their minds. We have, therefore, to examine the reasons given together with the evidence of the Managing Director and to see whether they are valid under the Articles or 'bona fide ". "( 17 ) The directors' decision has to be understood in the circumstances surrounding the purchase of the share by the respondent. The company was not paying dividends for four years. The transferee purchased but one share in the company. In fact, Shri Sapate managed to get one share sold in the Court auction, while retaining 30 still with him, and the purchaser was no other than his lawyer. The directors probably considered that the lawyer, who was appearing for Sapate in some cases against the company, purchased just one share, though the company was not paying any dividend, probably only with a view to furthering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he intended acquisition of shares by respondent Nos. 4 and 5 was mala fide and for ulterior motives and if such acquisition was permitted it would be prejudicial to the interest of the company and the general body of shareholders. In the opinion of the board of directors the intended acquisition could bring about a change in the composition of the board of directors resulting in placing the respondent Nos. 4 and 5 in advantageous position in their dealings vis-a-vis the company resulting in a total conflict of personal interests of respondent Nos. 4 and 5 and that of the company. The basis of reaching such conclusion by the board of directors was that the respondent Nos. 4 and 5 together with other relatives sought transfer of 28,875 shares which were equivalent to 29.78 per cent of the total voting power. The respondent Nos. 4 and 5 and their relatives were in total management and control of the company, namely, Transformer Manufacturer of India Pvt. Ltd. The entire paid up equity share capital of the Transformer Manufacturer of India Pvt. Ltd., (TMI) is held by respondent Nos. 4 and 5 and their relatives. TMI is tenant of premises owned by the company situated at Vile Parle. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity and correctness of the CLB on the facts which were obtaining on the date the decision was given by the CLB and not the events that had taken place subsequently. If the impugned decision is required to be examined in the light of the facts and circumstances obtaining on the date such decision was given, which ordinarily is, then the CLB was required to examine the correctness and legality of reasons given by the board of directors on the date such decision was taken. Admittedly, when the board of directors rejected the applications made by respondent Nos. 4 and 5 for transfer of shares, the suit for eviction filed by the company against TMI which is fully owned and held by respondent Nos. 4 and 5 was pending and the said suit had not come to an end. It was only during the pendency of the appeal before the CLB that the said suit was dismissed for default. However, an application for restoration was made by the company and at the time the CLB decided the matter, the application for restoration was pending and during the pendency of the present company appeal the said restoration application has been allowed and the suit for eviction filed by the company against TMI is pending. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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