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Indian Chemical Products Vs. State of Orissa and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtOrissa High Court
Decided On
Case NumberAppeal No. 4 of 1956
Judge
Reported inAIR1961Ori188; [1962]32CompCas908(Orissa)
ActsCompanies Act, 1913 - Sections 38 and 39; States Merger (Governors Provinces) Order, 1949 - Schedule - Article 5; Government of India Act, 1935 - Sections 290A
AppellantIndian Chemical Products
RespondentState of Orissa and anr.
Appellant AdvocateR. Choudhury, Adv.
Respondent AdvocateAdv. General
DispositionAppeal dismissed
Cases ReferredAmraoti v. Y. H. Deshpande
Excerpt:
- motor vehicles act, 1988 [c.a. no. 59/1988]section 173(1) proviso; [d. biswas, amitava roy & i.a.ansari, jj] appeal without statutory deposit but within limitation/or extended period of limitation maintainability - held, if the provision of a statute speaks of entertainment of appeal, it denotes that the appeal cannot be admitted to consideration unless other requirements are complied with. the provision of sub-section (1) of section 173 permits filing of an appeal against an award within 90 days with a rider in the first proviso that such appeal filed cannot be entertained unless the statutory deposit is made. the period of limitation is applicable only to the filing of the appeal and not to the deposit to be made. it, therefore, appears that an appeal filed under section 173 cannot.....narasimham, c.j.1. this is an appeal under clauses 4 and 6 of the orissa high court order, 1948 read with clause 10 of tile letters patent of the patna high court against the decision of the company judge (late rao, j.), in company act case no. 2 of 1955 directing the appellant, to rectify the share register by incorporating the name of respondent no. 1 (state of orissa) as the holder of shares nos. 1 to 7500. the order was passed under section 38 of the indian companies act, 1913 (act vii of 1913 hereinafter referred to as the act). the judgment of rao, j. was delivered on 22nd november, 1956. but on 13th september, 1957 he passed a further order under section 39 of the act directing the appellant to give notice of the rectification to be filed with the registrar within a fortnight from,.....
Judgment:

Narasimham, C.J.

1. This is an appeal under Clauses 4 and 6 of the Orissa High Court Order, 1948 read with Clause 10 of tile Letters Patent of the Patna High Court against the decision of the Company Judge (late Rao, J.), in Company Act Case no. 2 of 1955 directing the appellant, to rectify the Share Register by incorporating the name of Respondent No. 1 (State of Orissa) as the holder of Shares Nos. 1 to 7500. The order was passed under Section 38 of the Indian Companies Act, 1913 (Act VII of 1913 hereinafter referred to as the Act). The judgment of Rao, J. was delivered on 22nd November, 1956. But on 13th September, 1957 he passed a further order under Section 39 of the Act directing the appellant to give notice of the rectification to be filed with the Registrar within a fortnight from, that date. The appellant has also challenged the jurisdiction of the Company Judge to pass the order alleging that his order dated 13th September, 1957 was in the nature of a supplementary order not contemplated by law.

2. The essential facts are all admitted. A limited company known as the Indian Chemical Products Ltd., (hereinafter referred to as the company) was floated with an authorised capital of Rs. 25 lakhs divided into. 25,000 shares of Rs. 100/-each at a time when Mayurbhanj was one of the Feudatory States of Orissa and its Ruler, Maharaja Sri Pratap Chandra Bhanj Deo (Respondent No. 2) exercised sovereign powers within the State. The Maharaja of Mayurbhanj purchased 7500 shares in the Company. Though the share certificates were issued in his name, it is not denied that they were purchased in his capacity as Ruler and not in his personal capacity.

The remaining shareholders were six in number--all residents of Calcutta, who purchased 25 shares each. The main object of the Company was to exploit the mineral resources of the State of Mayurbhanj for the purpose of manufacturing chemical products and other allied articles. The Company was incorporated on the 21st November, 1947 under the provisions of the Act--as adapted in Mayurbhanj State, with its registered Office at Baripada, the head-quarters of the State. When the members subscribed to the Memorandum of Association of the Company, it was stipulated that an Agreement would be executed between the Maharaja on the one hand and the Company on the other, the former offering -certain concessions, and leases to the .Company and the latter, in its turn, offering some facilities to the residents of the State. Paragraph 6 of the Memorandum of Association was as follows :

'0. A copy of the agreement between this company and the Government of His Highness the Maharaja proposed to be entered into, is annexed hereto and forms part thereof.'

Though the Maharaja of Mayurbhanj invested 7 1/2 lakhs of rupees by cheque No. 4288 dated the 5th December, 1947 and took 75 per cent of the shares in the Company, the Agreement referred to in the aforesaid paragraph 6 of the Memorandum of Association was not executed between the Ruler and the Company. Thereupon the Company reminded him by its letter dated 31st July, 1948 (Annexure R-1) about the matter. Subsequently, there was some correspondence between the two parties on the subject, which, however, did not result in the execution of the formal agreement as contemplated by the parties.

3. In the meantime, far-reaching constitutional changes took place in Mayurbhanj State in consequence of which the Maharaja of Mayurbhanj ceded all his sovereign powers to the Government of India by the well known Merger Agreement dated the 17th October, 1948, reserving to himself only some private properties. In the list of private properties which he gave to the Government of India (which was eventually accepted) (see Annexure C), he did not very properly, include the 7500 shares in the Company as they were treated as the property of the State of Mayurbhanj--whose administration, by virtue of the Merger Agreement, was transferred to the Central Government, along with the cession of sovereignty by the Maharaja.

For some months after the merger, the administration of Mayurbhanj was carried On by a Chief Commissioner, appointed by the Government of India, but subsequently, from the 1st January, 1949, the Government of India delegated to the Government of Orissa full powers to administer the State of Mayurbhanj in exercise of the powers conferred on them by the Extra Provincial Jurisdiction Act, 1947, Then, by the Constituent Assembly Act 1 of 1949 the Government of India Act, 1935, was amended by the insertion of a special Section 290A to deal with merged area and in exercise of the powers conferred by that section the Governor-General made the States Merger (Governors Provinces) Order, 1949, which came into force on the 1st August, 1949. Article 5 of that Order is as follows :

'5. (1) All property, wherever situate, which immediately before the appointed day is vested in the Dominion Government for Purposes of governance of a merged State shall, as from that day, vest in the Government of the absorbing Province, unless the purposes for which the property is held immediately before that day, are central purposes.

(2) A certificate of the Dominion Government signed by the Secretary to that Government shall be conclusive as to whether the purposes for which the property is held immediately before the appointed day are Central purposes.'

By virtue of Clause (1) of Article 5 all properties of Mayurbhanj State which vested in the Dominion Government for the purpose of governance of that State vested in the Province of Orissa (which was the 'absorbing Province' so far as Mayurbhanj State was concerned) -- unless the purpose for which the property was held was a Central purpose.

A certificate was also issued by the Ministry of States of the Union Government on the 10th November 1953 (Annexure D) in accordance with Clause (2) of Article 5 of the said Order certifying that the 7500 shares in the Company were not held for a Central purpose. This certificate is conclusive on this question. When the Constitution came into force on the 26th January, 1950 the territory of Mayurbhanj was made a part of the State of Orissa, by virtue of Article 1(2) read with item 9 of the First Schedule to the Constitution; the personal privileges granted to the Ruler of Mayurbhanj were alone saved by Article 362.

Sovereignty over the entire territory of Mayurbhanj was thus transferred to the Government of Orissa or the Dominion Government, as the case may be, in accordance with the distribution of powers under the Constitution. Hence it is well established that the aforesaid shares are now the property of the Orissa Government, though at the time of the incorporation of the Company in 1947 they were the property of Maharaja of Mayurbhanj qua Ruler. It should also be mentioned that though the Maharaja was made a party in the proceedings he never contested this position.

4. On the 16th March 1960, the Government of Orissa in the Finance Department intimated to the Company (Annexure H) their acquisition of the said 7500 shares and requested it to make the necessary rectification in the share Register. This led to protracted correspondence between the Government of Orissa and the Company. In the first instance the company asked the Government of Orissa on 1st April, 1950 (Annexure 1) to send a properly stamped transfer deed form as required by Sub-section (3) of Section 34 of the Act. The Government of Orissa replied on the 17th April, 1950 (Annexure, J.) that no stamp duty was payable and in support of this contention they enclosed a copy of letter No. 338-Res dated the 19th October, 1949 from the Collector of Stamp Revenue, West Bengal.

The Company then replied in its letter dated 22nd/27th April, 1950 (Annexure K) that it was 'taking advice in the matter but at the same time it requested the Government of Orissa to fill up the transfer deed form at the appropriate places and send it back. The Government of Orissa in Annexure L dated the 1st June 1950 adhered to their original contention that this was not a case of 'transfer' of shares inter vivos, but a case of 'transmission by operation of law' to which the provisions of Sub-section (3) of Section 34 of the Act had no application. But in spite of this the company insisted on the filling up of the transfer deed form (Annexure M dated 10th June, 1950).

Subsequently, the Government of Orissa with a view, presumably to avoid Unnecessary controversy, sought the help of the Imperial Bank of India, Calcutta (who held a power of attorney on behalf of the Maharaja of Mayurbhanj) to get the transfer deed form duly filled in (Annexure N). There was then protracted correspondence between the Imperial Bank and the Company and the State of Orissa (See Annexure N, O,P, F-1, Q, R, H-1, L-1 J-1 and K-1, S. T and W). Some of these documents will be referred to in detail later on. Ultimately on ,18th March, 1953, the Bank communicated to the Government of Orissa (Annexure W), in intimation given to it by the Company (Annexure M-1) that 'the shares could not be registered so long in the name of the Finance Secretary, Government of Orissa, tor want of quorum at the last meeting of the Board of Directors.' but that the Company assured Government through the Imperial Bank that 'registration will be effected shortly.'

Apparently Government remained content with this assurance, but as nothing happened subsequently for about two months, they sent a fairly strong letter on the 19th May, 1953 (Annexure V) threatening the Company with legal action if registration was not done promptly. Thereupon, the Company in its reply (Annexure X dated the 28th May, 1953) informed them that at the meeting of the Board of Directors held on the 16th May, 1953 the Board refused to register the transfer of shares in favour of the Secretary to the Government of Orissa, Finance Department. No reason was disclosed for the refusal. Then on the 1st December, 1953 (Annexure E), Government of Orissa sent a notice through their Solicitors. To that the Company replied on the 8th December, 1953 (Annexure F) that the Board of Directors refused to disclose the reasons for refusing to register the transfer of shares. It however emphatically denied the suggestion that the refusal was based on mala fide grounds.

5. Rao, J. held that there was a valid transmission of title from the Ruler of Mayurbhanj to the State of Orissa, that the State of Orissa had lodged a proper deed of transfer with the Company and that the refusal of the Company to register the transfer was not bona fide or for sufficient cause. Hence he allowed the application of the State of Orissa, under Section 38 of the Act.

6. In the present appeal Mr. R. Choudhury for the appellant company raised the following important contentions.

(i) This is a case of disputed title to the shares which ought to have been agitated in a properly constituted Civil suit and recourse to the summary procedure prescribed in Section 38 of the Act was not proper.

(ii) Under paragraph 11 of the Articles of Association of the Company the Board of Directors had absolute right to refuse to register a transfer without assigning any reason and consequently they were entitled to refuse to recognise the transfer in this case. Such unfettered discretion applied even where there is 'transmission by operation of law.'

(iii) The powers of the Court under Section 38 of the Companies Act are extremely limited and as no mala fide on the part of the Company has been established it was not proper for the learned Judge to have allowed the application under that section.

(iv) The learned Company Judge had no jurisdiction to write a supplementary judgment, on the 13th September, 1957.

7. There is sufficient authority for the proposition that where serious disputed questions of title arise, the summary remedy envisaged by Section 38 of the Act should not be resorted to, and the parties should be directed to go to the Civil Court --See Union Indian Sugar Mills Co. Ltd v. Jaideo, AIR 1922 All 258, Ramesh Chandra v. Jogini Mohan Chatterji, ILR 47 Cal 901: (AIR 1920 Cal 789); and Devakumar v. Rupak Ltd. AIR 1955 Pat 486.

8. But in my opinion, this is not a case of disputed title. The Company was fully aware that though the shares were purchased in the name of the Maharaja of Mayurbhanj nevertheless they were purchased on behalf of the State of Mayurbhanj. Its own document (Annexure S-1) dated 22nd September, 1948, which is a copy of a letter sent to it by the Secretary to the. Government of Mayurbhanj, Finance Department (during the pre-merger period) says that the share certificate may be issued as early as possible in favour of His Highness the Maharaja of Mayurbhanj and not in his personal name'. It has already been pointed cut that the Maharaja never claimed these shares as his own property, and in the list of personal properties given by him to the Government of India in Annexure C, these shares were not mentioned.

By virtue of Clause (1) of Article 5 of the States Merger (Governors Provinces) Order, 1949 they automatically vested in the State of Orissa. Thus the transmission of interest has been brought about by a change of sovereignty and by virtue of the provisions of the aforesaid order promulgated by the Governor-General, in exercise of the powers conferred on him by the newly inserted Section 290-A in the Government of India Act 1935. I have also referred to the Certificate issued under Clause (2) of Article 5 by the Ministry of States which is conclusive on this question, viz., that the property was not required for a Central purpose. The title of the Government of Orissa to the shares is thus beyond question.

9. Some of the papers filed by the Company indicate that the Company was also fully aware of the title of the Government of Orissa. I have already referred to Annexure S-1 dated 22nd September, 1948. That letter gave sufficient notice to the Company of the fact that the Maharaja was the owner of the share not in his personal capacity, but as the Ruler of Mayurbhanj. On the 21st December 1948, the Company sent a letter (Annexure T-1) to the Chief Commissioner, Mayurbhanj State, in which the Company stated: 'We understand that the future of Mayurbhanj State has now been definitely settled.' This letter was written soon after the execution of the Merger Agreement by the Maharaja ceding his sovereign power to the Dominion Government on the 17th October 1948 when the Government of India administered that State through their Chief Commissioner.

Annexure T-l may therefore be taken as the best evidence to show that the Company was fully conscious of the change of sovereignty and the divesting bv the Ruler of his powers as a sovereign, and their vesting in the Government of India which was then exercising the same through their Chief Commissioner. The next important document is Annexure U-1 dated the 29th March 1951 from the Company to the Government of Orissa. This letter is curiously worded. Here the fiction of 'Government of Mayurbhanj' (as a separate entity) was kept up though by that date the complete merger of Mayurbhanj with the State of Orissa, by virtue of the provisions of the newly inserted Section 290-A of the Government of India Act prior to the coming into force of the Constitution, was well known to every one.

The Constitution had come into force on the 26th January 1950 and Mayurbhanj had become part of the State of Orissa. But even in this letter at is admitted that 'the said Government of Mayurbhanj is the shareholder of the Company,' thus making it absolutely clear that the owner of the shares was the Government of Mayurbhanj and not the Ruler of that State in his personal capacity, Further, in that letter the Company 'called upon' the Government of Mayurbhanj through the Government of Orissa' to permit the Company to execute the Agreement.

Though a clever and far fetched artifice was thus attempted to be used so as not to admit, in unambiguous terms that the Government of Orissa was the successor in interest of the old Durbar Government of Mayurbhanj, a fair reading of their letter must lead to the following inferences: (i) that the Company was aware that the shares belonged to the Government of Mayurbhanj, and (ii) that the sovereign powers over Mayurbhanj were transferred from the Ruler to the Government of Orissa. Otherwise, there was no question of the company 'calling upon the Government of Mayurbhanj' (which had ceased to exist as a separate entity) 'Through the Government of Orissa' to permit the execution of the Agreement entered into between the Company and the Ruler of Mayurbhanj. For these reasons this is not a fie case for driving the respondent to file a regular civil suit as there is no disputed question of title. An application under Section 38 of the Act was the proper remedy.

10. I may now refer to paragraph 11 of the Articles of Association of the Company which is as follows:

'11. The Board of Directors shall have full-right to refuse to register the transfer of a share or. shares without showing any cause or sending any notice to the transferee or transferor.'

In paragraph 1 of these Articles it was stated that the Regulations of Table A in the First Schedule to the Act shall apply to the Company so far as they have not been altered by the subsequent provisions of the Articles. Table A in the first schedule consist of several clauses, under several sub-headings, but Clauses 18 and 23 have been grouped under the heading 'Transfer and transmission of shares'. The use of the words 'transfer' and 'transmission' in juxtaposition clearly shows that the Legislature intended to give different meanings to the two expressions. Similarly, in Section 34 also while Sub-sections (1), (2), (3) and (4) refer to 'transfer' of shares, Sub-section (6) refers to 'transmission by operation of law.' Clauses 18, 19 and 20 of Table A deal with transfers inter vivos. Clauses 21, 22 and 23 may reasonably be said to refer to 'transmission by operation of law viz., law of succession arising out of the death of the previous owner or the law of insolvency. Clause 22 may be quoted:

'Any person becoming entitled to a share in consequence of the death or insolvency of a member shall, upon, such evidence being produced as may from time to time be required by the directors, have the right either to be registered as a member in respect of the share, or, instead of being registered himself, to make such transfer 61 the share as the deceased or insolvent person could have made; but the directors shall, in either case, have the same right to decline or suspend registration as they would have had, in the case of a transfer of the share by the deceased or insolvent person before the death or insolvency'.

It is clear from this clause that where there is transmission of shares by death or insolvency, the directors shall have the same right to decline or suspend registration as they would have had in the case of a transfer.

Relying on this clause Mr. Choudhury urged that though paragraph 11 of the Articles of Association of the Company may, by its own force apply only to 'transfers' and not to 'transmission by operation of law', nevertheless, by virtue of the aforesaid clause in table A (which was made expressly applicable to the Company by the Articles of Association) all cases of transmission by operation of law would be controlled by paragraph 11 of the Articles of Association and that the Board of Directors have absolute and unfettered discretion to recognise or refuse to recognise any transmission by operation of law.

11. The distinction between transfer of shares inter vivos and transmission of shares by operation of law seems to be well recognised in Company law. This distinction has been recognised not only in the Act in Table A as pointed out above but also in the corresponding provisions of the English Act of 1948 (11 and 12 Geo 6, O. 38) -- see the proviso to Section 75 and the sub-heading above Article 29 of Table A. In fact Sub-section (6) of Section 34 of the (Indian) Act is almost a verbatim reproduction of the proviso to Section 75 of the English Act. In the new Indian Companies Act of 1956 also, the same distinction is maintained in the second proviso to Section 108 and Sub-section (3) of Section 111. In this connection, the observations of James L. J. in In re, Bentham Mills Spinning Co., (1879) 41 LT 10: 11 Ch. D. 900 (904) may be quoted:

'In Table A the word 'transmission' is put in contradistinction to the word 'transfer'. One means a transfer by the act of parties, and the other means transmission by devolution of law, if it is a change in the property by the operation of law'.

12. I cannot however accept Mr. Choudhury's contention, that the combined effect of paragraph 11 of the Articles of Association and Clause 22 of Table A of the first schedule to the Act is that all classes of transmission by operation of law would be controlled by that paragraph and that the Board of Directors have full unfettered discretion to refuse to register transmission of shares without giving any reason. Such an extreme view is not justified. Clause 22 of Table A deals only with two classes of transmission by opperation of law, namely due to (1) the death or (ii) the insolvency of member.

Other classes of transmission are not referred to in that Table. It would seem that the Company adopted only these two types of transmission in their Articles of Association subject to the modifications brought about in paragraph 11 of the Articles of Association. Hence, as a matter cf construction, these clauses of transmission not referred to in any of the clauses of Table A must be held to be unaffected by the powers conferred on the Board of Directors by paragraph 11 of the Articles of Association. Every person is presumed to know the law of the land, especially the law dealing with Constitutional changes.

Hence, where there is transmission of title to shares in a Company in consequence of a change of sovereignty effected between two High Contracting parties which was subsequently given recognition in the Constitution, it will be fantastic to say -- equate such transmission with a transmission brought about by either the law of succession or the law of insolvency, referred to in Table A. In my opinion, therefore, the present case is completely outside the scope of paragraph 11 of the Articles of Association and of Table A in the first schedule to the Act and the Board of Directors have no discretion to refuse to recognise the change in title.

13. I may now review some of the Indian decisions on the subject. In Mphideen Pichai v. Tin-nevelly Mills Co. Ltd., AIR 1928 Mad 571, after a review of the previous decisions and after quoting the observations of James L. J. in 41 Law Times p. 10, it was held that the expression 'transfer' is not appropriate where there is a sale of share by the Court and that the provisions in the Articles of Association dealing with voluntary transfer have no application. In Thenappa Chettiar v. Indian Overseas Bank Ltd., AIR 1943 Mad 743 which was a case of transmission by operation of the law of succession, it was held that where the directors claimed absolute discretion to refuse to recognise change of ownership, without giving any reason whatever, their action amounted to abuse of powers vested in them and may be set aside by a Court, under Section 38 of the Act. In In re, Wahid Bus and Mailsi Transport Co. Ltd., Multan, AIR 1949 Lah 6 where there was a transmission of interest by a court sale, it was held that the unrestricted discretion to recognise or refuse to recognise the transfer conferred by the Articles of Association of a Company would not apply where there was a 'transmission by operation of law'.

14. But in a recent decision of the Nagpur High Court on which great reliance Was placed by Mr. Choudhury -- Balwant Transport Co. Ltd., Amraoti v. Y. H. Deshpande (S) AIR 1956 Nag 20 a different view was taken. That was a case of transfer of ownership by virtue of a court sale which also may, in a sense amount to 'transmission by operation of law'. The learned Judges of the Nagpur High Court held that in such cases nothing turned on the distinction between 'transmission' and 'transfer' and that the powers of the Board of Directors to refuse to register is identical in both the cases.

They expressly referred to Clause 22 of Table A of the Act which applied to a case of transmission by operation of the law of succession. In that case the share of the judgment-debtor was purchased by some other person in a Court sale. Their Lordships pointed out that under Order 21, Rule 79 (3) and Order 21 Rule 80 C. P. C. the execution of a document wes necessary and that therefore the purchaser of a share in a court sale did not 'automatically' become a member of the company. The decision in AIR 1928 Mad 571 was distinguished on the ground that the Articles of Association in that case were slightly different.

15. In my opinion the aforesaid Nagpur decision does not help Mr. Choudhury, There, their Lordships very guardedly observed that on the facts of that case nothing turned on the distinction between 'transmission' and 'transfer', because even a sale of shares by a Civil Court requires certain other steps to be taken to complete the transfer of title. Hence, in paragraph 21 at page 24 of the report they observed as follows:

'If there is no automatic acquisition of membership of a company at an auction as we held there is not, the purchaser can only become a member of the company on compliance with the requirements of Articles 18 and 19'.

In the instance case, however, the title passed automatically by the operation of law of the peculiar type described above, and there is no statutory provision anywhere for any further steps to be taken to complete the transfer of title to the Government of Orissa.

16. Assuming that the transmission by operation of law of the peculiar type found in this case is also impliedly controlled by Table A, Clause 22, read with paragraph 11 of the Articles of Association the question for decision is whether the refusal of the Company to rectify the Share Register by recognising the transmission was without sufficient cause. The powers of the Court under Section 38 of the Act are well settled. Even if the Articles of Association give an unfettered discretion to the Board of Directors to recognise or to refuse to recognise, any transfer or transmission the court has a limited jurisdiction to examine whether the company acted bona fide or arbitrarily or capriciously. The English law has been summed up in Buckley's Companies Act (Thirteenth Edition) (at pages 176-177) thus:

'In the absence of evidence to the contrary the court will assume that they (managing directors) 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.....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 right or wrong principles, and will overrule their decision if their reasons are not legitimate; but not if they are legitimate, merely because the court wouid not have come to the same conclusion. The court will also Overrule the Directors' decision where, though they have given no reason, it is proved that they have acted on wrong principles or otherwise than bona fide'.

To a similar effect are the observations in Palmer's Company Law (Twentieth Edition) page 343:

'It is common for articles to provide that the director shall have power of declining to register without assigning any reason therefor; or in their absolute and uncontrolled discretion or in some equally sweeping terms. In such a case the court will not draw any unfavourable inference (sic) the directors because they do not give their reasons for refusing to pass a particular transfer, for they are under no obligation to disclose their reasons either in court or out of court, it is enough that they have in fact considered the transfers and that in the exercise of the discretion given to them by the articles they have not passed it. If the directors choose to give their reasons, the court will then consider whether they are legitimate or not'. The same principle has been recognised in AIR 1943 Mad 743 (already cited) and also in the Nagpur case, (S) AIR 1956 Nag 20. In the latter case while recognising that if the articles of association give unfettered discretion to the Board of Directors to recognise or refuse to recognise transfers the directors are given vast powers, it was observed further: 'Unless it can be shown that the powers so vested in them are exercised mala fide or for a collateral purpose the court cannot overrule the decision of the directors and substitute its own judgment about the desirability of bringing the name of a person as a shareholder in the Register'.

17. Mr. Choudhury placed considerable reliance on the well known decision of Lord Greene, M. R. in In re: Smith and Fawcett Ltd., 1942 Ch 304 which has been cited in later Indian decisions. But even in that decision it was pointed out that however wide the language used and however uncontrolled the discretion that may be vested in the Board of Directors there is a limitation implicit in law that 'a fiduciary power of this kind must be exercised bona fide, in the interests of the Company.' It is true that this decision makes a slight departure from the view which prevailed till then that the objection to the registration of shares must be limited to matters personal to the transferee.

This view was based on a series of decisions which have been summarised in In re Bede Steam Shipping Co. Ltd., (1917) 1 Ch 123. But Lord Greene M. R. in (1942) Law Reports Ch. 304 distinguished the previous decisions on the ground that they were based on the special provision of the Article of Association 'which by its express language confined the directors to a consideration of the desirability of admitting the proposed transferee to membership on grounds personal to him'. In the absence of such limiting words in the Articles, here, the power of the Board of Directors is undoubtedly wide. But even so, that power is always subject to its being exercised bona fide; and where reasons for refusal of registration are disclosed by the directors, it is open to the Court to examine whether those reasons are legitimate or not and whether they are based on collateral matters,

18. Following these principles therefore the question for decision is whether the refusal of the Company to register the transfer in favour of the State of Orissa was mala fide Or for a collateral purpose. Though the Company at first refused to disclose its reasons to the Government, it has disclosed the same to this Court in Clause (h) of paragraph 22 of its 'show cause' petition as follows:

'The act of the petitioner in seeking to put itself in the shoes of the Government of Mayurbhanj, when benefits were to be enjoyed but repudiating the obligations of the said Government appeared to the Directors of the Company to fall so far below that expected in dealing with persons in commercial or and industrial circles, that the Directors declined to register the transfer of the said shares in the name of the petitioner as they had every right to do'.

Even at the appellate stage Mr. Choudhury put forward the same reason for the refusal of the Board of Directors to recognise the transmission and made an open offer in court to the effect that if the Government of Orissa would consent to the execution of the Agreement the Board would be willing to recognise the transmission. Thus the reason given for the refusal is that the Government of Orissa while claiming to be the successor in interest of the former Government of Mayurbhanj were not prepared to honour the obligations of the latter to execute the Agreement. Consequently the Board of Directors felt that the standard set up by the Government of Orissa fell below that required from persons dealing with commercial or industrial undertakings and hence they refused to recognise the transmission of the shares.

19. A careful scrutiny of the entire correspondence leads to the conclusion that 0) the so-called reason is a mere pretence and (ii) even if it be held to be genuine, it will not be a 'legitimate reason'. Under some pretext or other the Company delayed registration for nearly three years and ultimately refused to recognise the transmission of shares. The first letter of the Government of Orissa (Annexure H) was written on the 16th March 1950 after the advent of the Constitution. I have already shown that apart from the general presumption that every person knows the law of the land especially about far reaching constitutional changes of the type brought about in Mayurbhanj, the papers filed by the Company itself, namely Annexures S-1, T-1 and U-1 show that it was fully aware of the fact that the title in the shares vested in the Government of Orissa who became the successor in interest of the defunct Government of Mayurbhanj.

Hence their asking for execution of a transfer deed form duly stamped could not be construed as anything else but dilatory tactics. Again, when the Government of Orissa enclosed the letter of the Collector of Stamp Revenue West Bengal to show that no stamp duty was payable the company delayed the matter further by saying that they were 'taking advice'' in the matter (see Annexure K). This controversy over the payment of stamp duty was kept up for nearly a year (till the 31st March 1951) as will be clear from Annexure O which is a letter dated the 31st March 1951 from the Imperial Bank of India.

In that letter the Bank pointed out to the Government of Orissa that 'until the question of payment of stamp duty is settled between the Government and the Indian Chemical products' they could not do anything in the matter. It is difficult to understand what further doubt there could be about the payment of stamp duty especially in view of the clear opinion given by the Collector of stamp duty West Bengal. Even if the Company wanted to consult its own legal advisers on the subject that need not have taken a year.

Again, on the 28th July, 1952, when the Government of Orissa sent the transfer deed form with the Exemption Certificate granted by the Collector of Stamps under Section 32 of the Stamp Act (see Annexure 7 dated 28th July, 1952), there was no justification for the Company to delay the matter any further. It was only in March 1953 (vide Annexure W) that the Government of Orissa were informed that 'due to want of quorum at the last meeting of the Board of Directors that the shares could not be registered'.

20. Apart from the pretence of objection on the ground of non-payment of stamp duty the Company was again and again disingenuously asking for clarification as to how the title of the Maharaja of Mayurbhanj to the shares passed to the Government of Orissa. This doubt also must in the circumstances be held to be only a pretence. In the very first letter of the Government of Orissa dated the 16th March 1960 (Annexure H) the transfer of sovereignty consequent on the merger was mentioned. Again, in their letter dated the 21st July 1951 (Annexure R). a reference was made to Article 5 (1) of the States Merger (Governor's Provinces) Order, 1949.

The Company replied to this letter in Annexure 1-1 dated the 11th August 1951 through the Imperial Bank of India enquiring as to how the shares could possibly vest in the State of Orissa by virtue of the said order. Thus, though as late as the 11th August .1951 -- long after the coming into force of the Constitution -- the Company kept up a pretence that it was ignorant about the passing of title to the shares, to the Government of Orissa, yet on the 29th March, 1951, (Annexure U-1) it had asked the Government of Orissa to permit the execution of the Agreement as originally agreed upon, thereby impliedly recognising that Government's competence to consent to the execution of such an Agreement as the successor in interest of the Maharaja of Mayurbhanj.

I have referred to this document already. It is thus clear that though for the purpose of execution of the Agreement promised by the Ruler of Mayurbhanj in 1948 the Company had as early as March 1951 recognised the Government of Orissa as the successor Government, yet, on the 11th August 1951, they expressed doubts as to how the title of the Government of Mayurbhanj to the shares in question passed to the Government of Orissa in spite of their knowledge that those shares had been purchased by the former Ruler of Mayurbhanj not in his personal capacity but in his capacity as the Ruler.

Again having stated in March 1953 that the shares could not be registered for want of quorum at the meeting of the Board of Directors and having given an assurance that the registration would be done shortly later on the 28th May 1953 (Annexure X) they stated that the Board of Directors at their meeting held on the 16th May 1953 refused to register the shares. It is thus clear from the correspondence that under some pretext or other, for a period of more than three years (from 16th March 1950 till the 28th May 1953) the Government of Orissa were fed on hopes that the transmission of shares would be recognised and ultimately they were faced with refusal.

If the action of the Company in refusing registration was the result of bona fide exercise of discretion, conferred by paragraph 11 of the Articles of Association on the Board of Directors, there was no reason why within a short time after the (sic) Annexure H the Board did not meet and take such a decision. It cannot be said that the Board was overwhelmed with work for nearly three years. On the other hand, the Company's letter (Annexure U-1) itself makes it clear that the Company was unable to commence its business in accordance with its original plans, on account of the non-execution of the Agreement.

21. It is true that the certificate under Clause (2) of Article 5 of the States Merger (Governor's Provinces) Older, 1949, was produced by the Government of Orissa only on the 10th November, 1953, after the Company had refused to register the shares in their name. But this belated production of the Certificate was not given as a reason for such refusal, nor was it alleged that until the production of the Certificate the Company had genuine doubts about the title of the Government of Orissa. If it had any such doubts, it would surely have asked that Government to produce the certificate, especially when as early as 27th July 1951 (Annexure R) the Government of Orissa had informed the Company through the Imperial Bank of India that they claimed title by virtue of Clause (1) of Article 5 of the aforesaid Order. Moreover, the Company's letter dated the 29th March 1951 (Annexure U-l) already referred to contained an implied recognition of the fact that the shares in question were not held for any 'Central purpose', If the Company had doubts on this point it would have sought for clarification from the Central Government and not the Government of Orissa.

22. The reason given by the Company before the learned Judge, viz., the failure of the Government of Orissa to take steps for execution of the Agreement cannot, in the eye of law, be a valid reason for refusal to recognise the transfer. It that reason be true, the exercise of discretion must be held to be for a 'collateral purpose' which has no relevance to the question as to whether the transfer would be recognised or not. Once the Company was satisfied that the title of the Maharaja of Mayurbhanj to the shares validly passed to the Government of Orissa by virtue of the operation of the Constitutional provisions already explained above, it was not right on their part to insist on the execution of the promised Agreement, as a condition precedent to the recognition of such transmission.

This is nothing but a veiled form of blackmail. The Company could have recognised the transmission and rectified their share Register and then taken such steps as are permissible under the law, for the enforcement of the Agreement if at all it is enforceable. The Company was conscious of the dual nature of the Government of Mayurbhanj in its relations with the Company. Firstly, it was a shareholder; secondly it was consenting party to the execution of the Agreement as envisaged in paragraph 6 of the Memorandum of Association. In its letter dated the 14th December 1948 to the Government of Mayurbhanj (enclosed to Annexure T-1) the Company made the following statement:

'We hereby make it clear to you that having failed to execute the Agreement, your Government cannot now have any rights higher than those of any other share holders',

23. This statement clearly shows that the Company was fully aware of the fundamental difference between the rights of the Government of Mayurbhanj as a shareholder and its contractual obligation arising from their consent to execute the promised Agreement. Hence the reason put forward before the Company at a belated stage even if it be taken to be true, can only be construed to mean that the Company wanted to take advantage of the eagerness of the Government of Orissa to get themselves recognised as a shareholder in the Company, to extort the concessions promised in the proposed Agreement with the former Ruler of Mayurbhanj, but not fulfilled.

But I cannot believe this to be the true reason for the refusal. If it were so it would have been put forward at the earliest opportunity -- soon after the receipt by the Company of the letter of the Government of Orissa dated the 4th January 1952 (Ext. V-I) in which they repudiated all liability on their part for damages on account of the non-execution of the Agreement by the Maharaja Durbar. But even after the receipt of this letter, till March 1953 the Company assured the Government of Orissa that transmission would be recognised in due course. At no stage did the Company call upon the Government of Orissa to execute the Agreement. Annexure U-1 dated the 29th March 1951 was essentially a claim for damages,

24. To sum up therefore:

(i) The present case is a peculiar case of 'transmission by operation of law' which is outside the scope of Clauses 18 to 23 of Table A to the First Schedule of the Act; and consequently the unfettered discretion conferred on the Board of Directors by paragraph 11 of the Articles of Association has no application. The transmission was automatic, requiring no other formalities to be completed and the Company was bound to recognise it as a matter of course.

(ii) Assuming that the discretion of the Board of Directors, in this respect, was unfettered, the Company's conduct as revealed by the correspondence, shows that the refusal was not made bona fide.

(iii) The reason eventually given for the refusal was not a 'legitimate reason' having any bearing on the question of recognition or non-recognition of the transmission, but is based on extraneous considerations i.e., for a collateral purpose.

25. As regards the last contention of Mr. Choudhury, I cannot agree with him that the learned Company Judge wrote a supplementary judgment on the 13th September, 1957. His judgment under Section 38 of the Act was delivered on the 22nd November, 1956. But as noted by the learned judge, on the previous occasion he had overlooked the provisions of Section 39 of the Act which requires that when making an order for rectification of the Share Register, the Court shall, by its own order direct notice of rectification to be lodged with the Registrar within a fortnight from the date of completion of that order.

When the learned Judge's attention was drawn to this omission on the 13th September 1957, he corroborated his earlier order. I think this is already a case of accidental slip or accidental omission which comas within the scope of Section 152 Civil Procedure Code. Doubtless, a wrong view of law based on an omission to consider a statutory provision may not come within the scope of Section 152 Civil Procedure Code as urged by Mr. Choudhury. But here no decision was at all given by the learned Judge under Section 39 of the Act. That section only directed an ancillary and consequential order to be passed by the court while passing the main order under Section 38. Section 39 was completely overlooked by the court and this omission was rectified after giving notice to all parties concerned. I see therefore no illegality or error of jurisdiction in the second order.

26. For these reasons this appeal is dismissed with costs. Hearing fee Rs. 250/- (Rupees two hundred and fifty only.)

Misra, J.

27. I agree.


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