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The Gadag Cotton Sales Society Ltd. Vs. C.F. Angadi - Court Judgment

LegalCrystal Citation
SubjectTrusts and Societies
CourtKarnataka High Court
Decided On
Case NumberWrit Petn. No. 949 of 1963
Judge
Reported inAIR1967Kant104; AIR1967Mys104
ActsBombay Co-operative Societies Act, 1925 - Sections 54 and 56; Constitution of India - Article 227; Companies Act
AppellantThe Gadag Cotton Sales Society Ltd.
RespondentC.F. Angadi
Appellant AdvocateH.B. Datar, Adv.
Respondent AdvocateVasudeva Reddy, Adv. for ;S. Venkataramaiah, Adv.
Excerpt:
.....dismissed his suit holding that he had failed to make a written application for the allotment of shares and further that on the relevant date, he was not an agriculturist. the articles may, however, be so framed as to authorise directors to refuse a transfer on any ground which they conceive to be in the interests of the company and accordingly in the case last cited, the court of appeal held in such circumstances that in the absence of bad faith, where the issued capital was held in equal proportions by two directors, one of whom died, the survivor was entitled to refuse to register the executor of the deceased directoras the holder of all his shares, while at the sametime offering to register the executor in respect of part of the holding and to buy the balance at a price fixed by..........and before he can be a member, his application has to be approved by an absolute majority of the board of directors, chapter iv of the bye-laws deal with shares. bye-law no. 13 says that all applications for shares shall be made in writing and shall be disposed of by the board of directors. the decision of the board of directors is taken on the basis of majority vote. no other bye-law relevant for our present purpose was brought to our notice.7. the entire administration of the society is left in the hands of the directors. the powers of the directors are enumerated in bye-law no. 32. but so far as the allotment of shares is concerned, they are exclusively regulated by bye-law no. 13 already referred to.8. the main question for our consideration is as to what is the true effect of the.....
Judgment:

Hegde, J.

1. In this application, under Article 227 of the Constitution, it is urged on behalf of the petitioner that the order of the Mysore Revenue Appellate Tribunal, Belgaum Bench, in appeal B. 2 of 1963 on its file suffers from error or law apparent on the face of the records,

2. The petitioner-Society was registered in 1922 under the provisions of the Bombay Cooperative Societies Act 1912. The respondent was a member of that Society. On 20-10-1954, he applied to the petitioner-society for allotting him shares of the value of Rs. 150. On 30-10-1954, the Directors of the petitioner-society refused to allot him the shares asked for. Aggrieved by that order, the respondent raised a dispute under Section 54 of the Bombay Cooperative Societies Act 1925. That dispute was referred to an Arbitrator. The Arbitrator dismissed his suit holding that he had failed to make a written application for the allotment of shares and further that on the relevant date, he was not an agriculturist. Aggrieved by that order, he went up in appeal to the Revenue Appellate Tribunal, under Section 56 of the 1925 Act. The Tribunal allowed that appeal and directed the petitioner-society to allot him additional shares of the value of Rs. 150. The question for consideration is whether the order of the Tribunal is plainly opposed to law.

3. Shri H. B. Datar, the learned counsel for the petitioner-society contended that it was entirely within the discretion of the directors of the petitioner-society to allot any share to an applicant or not; the decision of the society in that regard being an administrative decision was not open to be challenged before any authority unless it is said that that decision was made on collateral grounds. The Tribunal has not come to the conclusion that the rejection of the application of the respondent was made for collateral reasons, and, therefore, no direction could have been issued to the directors of the petitioner-society to allot to the respondent additional shares.

4. It may be noted that the Tribunal nowhere came to the conclusion that there were any shares unsold and available for allotment. It was necessary for the Tribunal to first find out whether there were any shares available for allotment. This aspect was wholly lost sight of by all the parties concerned. The respondent in his application no where stated that there were shares of the petitioner-society which were issued but not yet allotted. Nor did the petitioner-society contend that there were no shares available for allotment. That aspect was not gone into either by the Arbitrator or by the Tribunal.

5. The main question for our consideration is whether the Directors of the petitioner-society had absolute discretion in the matter of allotting shares. To answer that question, it is necessary to examine the provisions of the Cooperative Societies Act, 1925, the rules framed thereunder, and the bye-laws that were in force. It is conceded by the counsel for all the parties that the provisions of the Act and (he rules framed thereunder do not bear on that question. Hence all that we have to do is to examine the relevant bye-laws and find out their effect.

6. Bye-law No. 3 enumerates the mode in which the society could raise funds. One of the modes mentioned therein is 'by the issue of shares'. Bye-law No. 4 says that the amount of capital to be raised by the petitioner-society by the sale of shares shall not exceed rupees one lakh. The nominal value of each share is rupee one (Re. 1) and shall be fully paid up.' While this bye-law prescribes the upper limit of the capital of the society, no bye-law is broughtto our notice under which the issue of shares is regulated. Bye-law No. 7 says that no person shall be a member of the society unless he fulfils the requirements enumerated therein. One of the requirements stipulated is that he should be an agriculturist. Every person seeking to be a member of the society must make a written application and before he can be a member, his application has to be approved by an absolute majority of the Board of Directors, Chapter IV of the Bye-laws deal with shares. Bye-law No. 13 says that all applications for shares shall be made in writing and shall be disposed of by the Board of Directors. The decision of the Board of Directors is taken on the basis of majority vote. No other bye-law relevant for our present purpose was brought to our notice.

7. The entire administration of the society is left in the hands of the directors. The powers of the directors are enumerated in bye-law No. 32. But so far as the allotment of shares is concerned, they are exclusively regulated by bye-law No. 13 already referred to.

8. The main question for our consideration is as to what is the true effect of the expression 'shall be disposed of by the Board of Directors' found in bye-law No. 13. None of the bye-laws lay down the criteria in the matter of allotting new shares to a member. From an examination of the scheme of the bye-laws, it appears that that matter is entirely left to the discretion of the directors. No appeal against the decision of the board of directors in the matter of allotment of shares is provided for either in the Act or in the Rules or in the bye-laws. The directors are not required to give reasons for refusing to allot any share to an applicant. So far as the admission of new members is concerned, approval of an absolute majority of the Board of Directors, and not merely a majority of directors present and voting, is required. But that is not the case as regards the allotment of shares. That question is left to the discretion of the directors. The bye-laws do not afford any guidance in the matter of allotment of shares. They just leave the question to be disposed of by the directors, which ordinarily means, by the vote of the majority of the Directors present and voting.

9. Stroud's judicial Dictionary says that the word 'dispose of means 'to consider, examine into, and adjudicate upon' and according to him 'adjudicate upon' means 'to arrive at a definite conclusion one way or another' The expression 'dispose of is not the same thing as to 'decide', which expression is commonly used when one refers to judicial or quasi-judicial decisions. Hence prima facie bye-law No. 13 confers absolute powers on the board of Directors to accept or reject an application for additional shares and their conclusion is final, so long as they act bona fide.

10. The constitution of a co-operative society, its powers and its functions, bear a close resemblance to a company registered under the Companies Act. By and large, they have similar characteristics. Therefore, the decisions rendered under the company law are of assistance. Courts had occasions to consider the limits of thepowers of the Directors of a company in the matter of transfer of shares. Dealing with that question, this is what is stated in Buckley on the Companies Acts, Thirteenth Edition pages 176 and 177.

'Where the articles authorise the directors to reject transfers to transferees of whom they do not approve, the directors must, before rejecting a proposed transferee, fairly consider the question at a board meeting and their decision must be embodied in a substantive resolution, so that, if there is no resolution because one of two directors is in favour of registration and the other is against it, the transferee will be entitled to registration. If, however, the question is so considered and a resolution passed, the directors are not bound to disclose their reasons for rejecting any particular individual, as to compel them to do so would be to deprive the power of half its efficacy. In the absence of evidence to the contrary the Court will assume that they have acted reasonably and bona fide and it is for those who allege that they have not done so to give evidence to that effect. It is, however, permissible to interrogate as to which of two or more grounds for rejecting transfers the directors have acted upon in rejecting the transfer, as distinguished from their reasons for so doing unless the articles provide that the directors shall not be bound to state the grounds on which they have acted. If the directors do give their reasons, the court will then consider whether they are legitimate or not, i.e., whether the directors have proceeded on a right or wrong principle and will overrule their decision if their reasons are not legitimate, but not, it they are legitimate, merely because the court would not have come to the same conclusion. The court will also overrule the directors' decision where, although they have given no reasons it is proved that they have acted on a wrong principle or otherwise than bona fide.

The Principles applicable are exactly the same whether the power of rejecting transfers is absolute or limited to particular grounds.

A power of this kind is a fiduciary power to be exercised only in a way which the directors bona fide consider to be for the benefit of the company and if wrested to a purpose foreign to its object e. g., to allow on terms dissentient shareholders to escape from the company, the transfer may be invalid. If on the true construction of the company's articles the directors' discretion is confined to considering the desirability of admitting the transferee to membership on grounds personal to him, they must not refuse to allow a transfer at all to anybody, nor transfers of small lots of shares because they do not think it desirable to increase the number of shareholders. The articles may, however, be so framed as to authorise directors to refuse a transfer on any ground which they conceive to be in the interests of the company and accordingly in the case last cited, the court of appeal held in such circumstances that in the absence of bad faith, where the issued capital was held in equal proportions by two directors, one of whom died, the survivor was entitled to refuse to register the executor of the deceased directoras the holder of all his shares, while at the sametime offering to register the executor in respect of part of the holding and to buy the balance at a price fixed by himself.

Where the directors' discretion as to rejecting transfers is expressed to be absolute, they may refuse to register a transfer to a person who is already a member.'

11. As noted earlier, issuing of shares is one of the modes of raising funds for the society. What amount is required for a society for its business is a matter to he decided by the directors. Supposing they have raised enough funds, necessary for the purpose of their business, they cannot be compelled to raise additional funds unwanted by them and thereby over-burden the society with surplus funds. It is because of this and other reasons, the power to issue shares is left to the discretion of the directors.

12. Re Smith and Fawcett Ltd., 1942-1 All ER 542 the court of Appeal laid down that where the articles of association of a private company provided that :

'the directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares, the only limitation on the directors' discretion was that it should be exercised bona fide in the interest of the company.'

13. As mentioned earlier in the case before us, it was not the case of the petitioner, that the directors of the petitioner-society had refused to allot him the shares asked for on collateral grounds. In Muthappa Chettiar v. Salem Rajendra Mills Ltd., Salem, : AIR1955Mad665 a Bench of the Madras High Court laid down that if a discretion as to registering transfers is given by the Articles to the Directors, the Court will not control the exercise of such discretion unless it is proved that the directors are not exercising it bona fide or are acting in other ways oppressively, capriciously or corruptly or in some way mala fide. The Board of Directors is not bound to give any reasons for not registering the transfer and if the reasons are not given, the court will not merely on that account draw the unfavourable inference against the Board. They are, however, at liberty to disclose the reasons, and if they do, the court must consider the reasons assigned with a view to find out whether the Board of Directors acted on a right or wrong principle.

14. The Revenue Appellate Tribunal in its impugned order has come to the conclusion that the Board of Directors acted arbitrarily, on the sole ground that they had not given any reason in support of their resolution rejecting the application of the petitioner. For the reasons already mentioned, that is, clearly an erroneous view of the law. The bye-laws do not require the Board of Directors to give reasons in support of their resolution nor can we conceive of any principles of law which compels the directors to give reasons in support of their resolution.

15. We are clearly of the opinion that the order of the Revenue Appellate Tribunal suffer* from errors of law apparent on the face of therecords and hence the same cannot be sustained. In the result, this application is allowed and the order Impugned quashed. No costs.

16. Application allowed.


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