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TMI Blog1953 (11) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... the Respondent, for ₹ 175/-. Shri Deshpande thereupon informed the Managing Director of the Company on 19-9-1948 that he had purchased the above share and requested that his name be entered on the register of shareholders. Along with this application to the Managing Director, he attached a true copy of the Court's order. On 6-11-1948, the Company sent back the letter on the ground that it was not in the prescribed form and according to law. 3. On 25-11-1948, Shri Deshpande resubmitted the papers for getting his name registered, and on 21-4-1949 made the application under. Section 34 of the Indian Companies Act out of which the present appeal arises, alleging that he had learnt that the directors of the Company had passed a resolution rejecting his application. 4. The application was made on the ground that the refusal of the directors to receive Shri Deshpande as a shareholder was lacking in good faith. The Company in its reply admitted some of the facts but denied any knowledge about the indebtedness of Sapate or the Civil Suit against him. It admitted that a prohibitory order in respect of the shares was communicated to the Company. The Company stated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve as the directors were likely to refuse to receive them as shareholders. To overcome the obstacle of Article 9 which gives discretionary powers to the directors, Sapate resorted to the expedient of having the shares sold in a Court auction to Shri Deshpande and his brother-in-law Gudhe. The Company alleged that by this means Sapate hoped that the Company would be required to enter the names of these persons on the register of shareholders without the directors being able to exercise their discretionary powers under Article 9 of the Articles of Association of the Company. 7. In giving the particulars of fraud and collusion, the Company alleged that the decree passed against Sapate was only for Rs, 771/- out of which Sapate had already paid off ₹ 450/-, and the balance was well within his means to pay; that he allowed his share to be sold for ₹ 175 and ₹ 200/- each to his lawyer and brother-in-law and the auction showed that there was hardly any outside competition; that there was no investment as such by Shri Deshpande, except to qualify himself to participate in the Company's affairs owning a single share in the private company; that Shri Deshpande was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the directors do give their reasons, the Court will examine them, but it will not overrule the decision of the directors because it disagrees with the conclusion they reached as to the advisability of refusing the transfer. It will, however, do so if the directors have acted on a wrong principle. 11. The learned Judge of the trial Court came to the conclusion that the exercise of discretion was arbitrary and regards being had to what is stated above, we have to see whether the finding is proper or not. We cannot overlook the fact that under the proviso to Section 33 this, appeal is to be treated as equivalent to one filed under Section 100, Code of Civil Procedure. 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 than 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 re, Gresham Life Assurance Society; Ex Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be questioned. This is what Lord Greene, M.R. with whom Luxmoore, L.J. and Asquith J. concurred, observed: There is also another consideration which I think is worth bearing in mind when one comes to examine the construction of any article that falls for consideration, and that is that this type of article is one which is for the most part confined to private companies. Private companies are, of course, separate entities in law just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that, in the articles of such a company, the control of the directors over the membership may be very strict indeed. There are very good business reasons, or there may be very good business reasons why chose who bring such companies into existence should give them a constitution which gives to the directors powers of the widest description. In the present, case the article in as follows: The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares. As I have said, it is beyond question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He was often quarrelling with the company and was actually fighting some cases against it. What is more significant in this context, he also joined a rival concern and applied for a permit to run buses on the very route on which the company used to ply its buses. The directors considered that the admission of the Respondent to the membership of the company was against its interests. They therefore, did not like to receive him as a member of the company. 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 (sic) 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 chare, though the company was not paying any dividend, probably only with a view to furthering the obstructionist policy of Shri Sapate. Nothing has been shown that the directors, in reaching the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration as they would have had in the case of a transfer of a share by the deceased or insolvent person beta a the death or insolvency . The Respondent's case does not fall under Article 22 because he did not become entitle to the share in consequence of the death or insolvency of a member but on purchase at a Court auction. As the articles stand, the only way the Respondent can become a member of the company is on a transfer under Articles 18 and 19. Article 18 requires that the instrument of transfer shall be executed both by the transferor and the transferee and Article 19 prescribes the form for the transfer. 20. All that is sold in a Court auction is the right, title and interest of the judgment-debtor; and where a share in a corporation is the subject-matter of the sale, sub-r (3) of Rule 79 of Order 21, Code of Civil Procedure, provides that the delivery of the share shall be made by a written order of the Court prohibiting the person in whose name the share may stand from making any transfer of the share to any person except the purchaser or receiving payment of any dividend or interest thereon, and the manager, secretary or other proper officer of the corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, is a right which 'ex hypothesi' the Court never had to sell . Nor, if we may add, does an auction sale enlarge the rights of a shareholder. The share purchased is subject to the same incidents and restrictions as regards transfer as before the sale. In AIR 1923 Mad 241 (K), the Division Bench agreed with the view taken in - 'Manilal Brijlal v. Gordon Spinning and Weaving Co. (J) '(cit. sup.) that there was still a discretion in the directors to recognize or not purchasers of shares in execution, of decrees. 22. The decision in AIR 1928 Mad 571 (M) was that the Plaintiff who purchased shares at a Court sale in execution of a decree was entitled to get his name registered forthwith and that the directors were not entitled to refuse registration of the shares in his favour. The decision was based upon a set of Articles different from those under consideration in the present case. The decision really turned upon the contra distinction between a transfer and a transmission of shares as made in the Articles in that case. Whether the distinction be valid or not, it was possible in that case to make that distinction and hold that the Articles concerning transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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