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Jalpaiguri Cinema Co. Ltd. Vs. Pramatha Nath Mukherjee and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCivil Writ Petition No. 111 of 1970
Judge
Reported in[1971]41CompCas141(Delhi)
ActsCompanies Act, 1956 - Sections 82, 108 to 110, 111, 111(2), 111(3) and 111(9); Constitution of India - Articles 136 and 226; Constitution of India - Article 42
AppellantJalpaiguri Cinema Co. Ltd.
RespondentPramatha Nath Mukherjee and ors.
Appellant Advocate B.R.L. Iyengar, Senior Adv.,; J.N. Agarwal and; Keshav Daya
Respondent Advocate B.C. Dutt, ; A.C. Roy, ; Yogeshwar Dayal and ;
DispositionPetition dismissed
Cases ReferredMoffatt v. Farquhar
Excerpt:
a) the case examined the registration of shares in the name of the transferer in the register of the members of the company under section 111 of the companies act - it was held that the board of directors could not refuse registration of fully paid shares without jurisdictionb) the case debated on whether the alternate remedy did bar the writ jurisdiction of the high court - it was ruled that existence of alternate remedy by way of special leave to appeal under article 136 of the constitution of india to supreme court would not bar the writ petition under article 226 of the constitution of india - - he ceased to attend the meetings of the board of directors of the company and by virtue of section 223 of the act had ceased to be a director on account of his failure to attend the said.....s. rangarajan, j. 1. the petitioner is the jalpaiguri cinema company which seeks to quash the order of the member, company law board (government of india, new delhi, the sixth respondent) dated december 19, 1969, allowing 33 out of 36 appeals filed by persons claiming as transferees of certain shares, the board of directors of the petitioner-company having declined to register those shares in the books of the company. respondents nos. 1 to 5 in this writpetition are the transferees who successfully appealed to the company law board under section 111, sub-section (3), of the companies act, 1956. all the appeals were disposed of by a common judgment. a single writ petition has been filed for setting aside the said order of the member of the company law board, even though objections were.....
Judgment:

S. Rangarajan, J.

1. The petitioner is the Jalpaiguri Cinema Company which seeks to quash the order of the Member, Company Law Board (Government of India, New Delhi, the sixth respondent) dated December 19, 1969, allowing 33 out of 36 appeals filed by persons claiming as transferees of certain shares, the board of directors of the petitioner-company having declined to register those shares in the books of the company. Respondents Nos. 1 to 5 in this writpetition are the transferees who successfully appealed to the Company Law Board under Section 111, Sub-section (3), of the Companies Act, 1956. All the appeals were disposed of by a common judgment. A single writ petition has been filed for setting aside the said order of the Member of the Company Law Board, Even though objections were taken to the appeals being in time and the transfers also not having been stamped according to law, these two objections writ petition may alone be briefly noticed.

2. The Jalpaiguri Cinema Co. Ltd. is a public limited company, incorporated in the year 1948, with a share capital of Rs. 10 lakhs, divided into 100 ordinary (equity) shares of Rs. 1,000 each, 200 ordinary (equity) shares of Rs. 100 each and 28,000 ordinary (equity) shares of Rs. 25 each. The company owns two cinema houses and is engaged in exhibition of films.

3. Respondents Nos. 1 to 5, who belong to the Mukherjee family, purchased shares from diverse shareholders out of which the registration of shares of the value of 1,90,000 are now called in question. When respondents Nos. 1 to 5 approached the company for registration of the shares, which they had claimed to have purchased, the same was refused by resolution of the board of directors dated March 23, 1967 (which was communicated to the respondents Nos. 1 to 5 on March 25, 1967), which, inter alia, reads as follows :

' Besides what has been stated above in respect of each of the transfer deeds it further appears that the transferees belong to the same family. The transferee, Sri Monoranjan Mukherjee, is the brother's son of Sri Pramatha Nath Mukherjee. Sri Pronab Kumar Mukherjee is the son of Sri Pramatha Nath Mukherjee. Sri Moni Mohan Mukherjee, Sri Durga Pada Mukherjee, Sri Tara Pada Mukherjee and Sri Pramatha Nath Mukherjee are brothers. The company has never paid dividends since its inception and its property is in the possession of mortgagees. Thus it is evident that the transferees did not purchase the shares for the purpose of investment but with a view to control the company and thereby to interrupt the smooth running of the company. The transferees in the circumstances are not desirable persons and it is thereforee resolved that after having carefully considered the nature and purpose of investment and the defects in the share transfer deeds that the company is constrained to refuse the registration of the shares in question.'

4. The sixth respondent found it was not necessary to go into the bona fides of respondents No. 1 to 5 in purchasing the shares or the mala fides of the board of directors in refusing registration because of the view taken that it was 'obligatory on the company to register the transfer' under Sub-section (1) of Section 111 of the Act, unless power to refuse is reserved under the articles of association.

5. Article 42 of the company's articles of association, which reads as follows, was relied upon :

' The directors without assigning any reason for such refusal may decline to register any transfer of shares or stock upon which the company has a lien, and in case of shares not being fully paid up may refuse to register a transfer to a transferee of whom they do not approve.'

6. The sixth respondent held that the refusal to register transfer of shares in question was ultra virus of the powers of the company under Article 42 and could not be sustained.

7. Dealing with the further contention on behalf of the company that the company had a Hen over the shares which were allotted to the transferors (in consideration of the purchase of two properties, the New Cinema and the New Chitraal, for Rs. 85,000 along with the goodwill for a further sum of Rs. 55,000, no deed of conveyance having been executed by Shri Ganguli, pursuant to the contract to allot shares to respondents Nos. 1 to 5 in lieu of transferring the two cinemas to the company) the sixth respondent observed in paragraph 9 of the impugned order :

' Shri Ganguli thereforee did not owe anything to the company on account of this transaction and it was conceded on behalf of the company that the claim for lien cannot be sustained on the basis of these documents. The respondent-company, however, produced at the hearing copy of the resolution passed by the board of directors at its meeting held on April 7, 1961, and demand notice dated April 12, 1961. Original record was not produced or offered for inspection and the appellant rightly objected to reliance being placed on the resolution. The resolution and demand notice relate to certain claims raised against M/s. N. Ganguli and Co. (P.) Ltd. which was managing agent of the respondent-company and Shri N. N. Ganguli who was managing director of the said managing agency company. There were no claims against Shri N. N. Ganguli personally as shareholders of the company so as to attract Article 36 of the articles of association. The article expressly speaks of ' first and paramount lien upon all the shares registered in the name of each member . . . for his debts and engagements . . .' The debt must be thereforee owed by the member in his personal capacity and not in any other capacity, viz., managing director of managing agency company. Claim of the respondent for the lien is not thereforee substantiated and cannot be sustained. '

8. It may, however, be noted that this claim for lien relates only to the shares of the value of Rs. 58,000 (the subject-matter of Appeal No. 3 filed before the sixth respondent).

9. Four preliminary objections were taken on behalf of respondents Nos. 1 to 5 by their learned counsel, Shri Dutt, to the maintainability of this writ petition :

1. There is little substance in the contention that since 33 appeals were decided by a common order there should have been 33 separate writ petitions. I do not see any force in this contention at all, especially when the parties, who are affected by the said decision, in all the 33 appeals, are only the petitioner-company (on the one side) and the transferees/respondents Nos. 1 to 5 (on the other). It is worth recalling that the entire controversy was disposed of by a common order which involved a common question--scope and construction of Section 111 of the Companies Act,

2. There is no force at all in the contention that these writ petitions should have been filed in Calcutta where the appeals were actually heard by the sixth respondent at the office of the Regional Director, Eastern Zone, Company Law Board. The sixth respondent has been described as a Member, Company Law Board, Development Department of Company Affairs, Ministry of Industrial Development, Internal Trade and Company Affairs New Delhi. In view of the 15th Amendment to the Constitution (1963) which added Article 226(1A) of the Constitution giving the jurisdiction to the High Court where the seat of the Government or authority concerned is, the contention has no merit at all.

3. Another contention on behalf of respondents Nos. 1 to 5, that the petitioner-company should have only filed an appeal to the Supreme Court after obtaining special leave under Article 136(1) of the Constitution is again of no force whatever. There is no statutory right of appeal. The existence of remedy by way of applying for special leave under Article 136(1) surely does not take away the right of the petitioner-company to move this court under Article 226 of the Constitution.

4. Yet another contention on behalf of respondents Nos. 1 to 5 was that as per Section 111(9) the petitioner-company, even before filing this writ petition, had to implement the said order of the Company Law Board within ten days because the company and every officer of the company, who was in default, became liable to be punished with a fine extending to Rs. 1,000 and a further fine extending to Rs. 100 every day for each subsequent day of default. The present writ petition was no doubt filed on January 27, 1970, even though the order of sixth respondent was passed on December 19, 1969. It is mentioned in the petition itself that prior to this writ petition another had been filed in this court, on January 15, 1970, the same was withdrawn on January 16, 1970, when it came up for preliminary hearing, on the ground that some further material and resolutions, which had a direct bearing on the lien (of shares) had to be completed. It was thereafter that the present writ petition was filed. Obviously the petitioner had to prepare this writ petition ; some time was also obviously needed for this purpose. The delay in this case, thereforee, is not such as will entail the dismissal of the writ petition on the ground of delay ; not even on theground, that by reason of not implementing the order of the Company Law Board within ten days or not asking for the stay of the operation of the order within ten days the petitioner lost the right to invoke the writ jurisdiction of this court, after incurring the penal consequences, as provided in Section 111(9) of the Companies Act. I am unable to find any force in this contention either.

10. It is necessary to notice a few facts against the background of which the further contentions of both sides have to be appreciated. According to the petitioner since the inception of the petitioner-company (in the year 1948) Messrs N. Ganguli & Co. (P.) Ltd. were its managing agents. Messrs. N. Ganguli & Co. (P.) Ltd. is a family concern of Shri N. Ganguli, his wife and his son. Shri N. Ganguli was the managing director of the managing agents company ; the term of the managing agents expired on August 15, 1960. The Ganguli family had shares in the petitioner-company approximating Rs. 1,41,600. Shri N. Ganguli was also a promoter of the company and continued to be a director of the same even after the managing agency was not renewed. He ceased to attend the meetings of the board of directors of the company and by virtue of Section 223 of the Act had ceased to be a director on account of his failure to attend the said meetings.

11. The petitioner-company had financial difficulties ; as on March 31, 1956 its debts stood at Rs. 4,64,999 ; but for the loan raised, by creating a mortgage in favor of Sri Nath Mal Daga, Sri Jugal Kishore Daga and Sri Ajit Kumar Neogi (on April 1, 1956), the company would have been wound up. Since it was in further financial trouble there was need to create another deed of further mortgage on January 15, 1960. Rupees 18,000 per year are being paid to the petitioner company in satisfaction of the loans. The financial position of the company is still precarious. The total indebtedness is said to be about Rs. 3,50,000. The company had not declared any dividend since its inception. It could not make any profit till the outstanding loans are fully liquidated. The petitioners averred that some persons', including the Mukherjee and Ganguli families, started harassing the present shareholders of the company and launched several legal proceedings ; the Mukherjee family purchased a large number of shares said to be of the value of Rs. 2,94,000 for nominal sums in order to gain control of the management of the company. It was in these circumstances that the application for registering the transfer of shares said to have been obtained by respondents Nos. 1 to 5 was refused to be registered. As against the above-said averments made in the petition it is seen from the affidavits of respondents Nos. 1 to 5 in opposition to the writ petition, particularly of Shri Durgapada Mukherjee (respondent No. 3) that the indebtedness of Rs. 3,50,000 was said to be a collusive arrangement with the object of perpetuating the possession of the mortgagees. The shareholders of the company felt compelled toinstitute a suit (No. 1 of 1967) for the redemption of the mortgages, and for accounts in the Court of Subordinate Judge, Jalpaiguri. One Ramananda Daga (since deceased), a rich and powerful person, was a director of the company from the inception and his son, Nathmal Daga, was also taken as a director on April 15, 1955. The design of advancing the loan on the basis of mortgages with possession was put through in the name of Nathmal Daga and his brother, Jugal Kishore Daga. Nathmal Daga managed the business from October 1, 1955, and continued his management till April 3, 1956. One of the mortgagees, Ajit Kumar Neogi, was under the power and control of the Dagas, Some of the directors were close associates and friends of the Daga family. Not only the mortgagees in possession but some of the directors were contesting the suit for redemption of the mortgages.

12. Along with the rejoinder filed on behalf of the company a copy of the written statement filed by them before the Company Law Board, in answer to the appeals filed by respondents Nos. 1 to 5, was annexed (vide anriexure ' A ' to the rejoinder).

13. In the written statement filed by the petitioner-company before the Company Law Board, made annexure to the rejoinder, reliance was placed on Article 36 of the articles of association which gave the company a first and paramount lien upon all the shares registered in the name of each member and upon the proceeds of sale thereof for his debts and engagements, solely and jointly with any other person to or with the company, and such lien shall .extend to all dividends from time to time declared in respect of such shares. Article 36 further provides that unless otherwise agreed the registration of a transfer of shares shall operate as a waiver of the company's lien, if any, on such shares. Article 36 was invoked with reference to the 2,320 shares, worth Rs. 58,000, transferred by N. N. Ganguly to Mr. Pramatha Nath Mukherjee. Shares worth rupees one lakh had been allotted to Shri N. N. Ganguly against the property of New Chitraal and New Cinema (including the goodwill amounting to Rs. 15,000). The company referred to two copies of the board's resolutions (marked as annexures 'I' and 'J' to the written statement). Copies of the same have also been annexed along with the said written statement. It is worth recalling that this question of lien arises for consideration only in Appeal No. 3. A concession seems to have been made at the time of the hearing of the appeal in the following manner as seen from paragraph 9 of the order (already set out) :

'Shri Ganguli thereforee did not owe anything to the company on account of this transaction and it was conceded on behalf of the company that the claim for lien cannot be sustained on the basis of these documents. '

14. No other document having been filed and no contention regarding the lien having been put forward at the time of the hearing of the appeal the camp any cannot be permitted to put forward such a contention for thefirst time in the writ petition and against the concession made by them. In this unfortunate situation all that could be done, in the event of the order of the Company Law Board having to be upheld, is to relieve the company of the consequences of their claim to the lien being deemed to be given up or waived as per Article 36 of the articles of association. The company is not itself voluntarily registering the shares. This would have to be done only by reason of the order of the Company Law Board. The only thing that can be made clear in the present proceedings is that by the shares being registered in the books of the company as per order passed in the appeals the company would not be deemed to give up its lien, if any, over the above-said shares. No further direction could be made in the event of the petitioner failing in this petition.

15. Having thus cleared the ground it remains to consider the crucial question which falls for decision in this case, as one of first impression, the scope and ambit of Section 111 of the Companies Act. Before noticing the terms of Section 111 the following provisions in the Companies Act concerning the transfer, of shares may be briefly noticed. Section 108(1) of the Act lays down that a company shall not register a transfer of shares except on production of the instrument of transfer. According to Section 109 a transfer of the share or interest in a company held by a deceased member thereof made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of the execution of the instrument of transfer. Section 110 provides that the application for registration for transfer of shares may be made either by the transferor or by the transferee. Where it is made by. the transferor in respect of shares not fully paid up the transfer shall not be registered without notice to the transferee and in the absence of objections within two weeks thereafter.

16. After making these provisions (Sections 108 to 110) Section 111(1) provides that nothing in those provisions shall prejudice any power of the company under the articles to refuse to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company.

17. Sub-section (2) is important and has to be set out fully :

' If a company refuses, whether in pursuance of any power under its articles or otherwise, to register any such transfer or transmission of right, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be.

If default is made in complying with this sub-section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues. '

18. The words ' if a company refuses, whether in pursuance of any power under its articles or otherwise ' were added by amending Act No. 65 of 1960. The expression formerly used was ' if in pursuance of any such power a company refuses '. By this amendment, of the year 1960, the words ' or otherwise' were newly added. The significance of such addition has to be determined.

19. Whereas according to Mr. Dutt, learned counsel for respondents Nos. 1 to 5, the expression ' or otherwise ' has to be read only ejusdem generis, according to Shri B. R. L. Ayyangar, learned counsel for the petitioner-company, the expression refers to power which could be wider than and even different in content from the power which is given specifically under the articles of association ; the words ' or otherwise ' are words of amplitude and not of limitation.

20. Sub-section (5A) of Section 111 of the Companies Act may now be read :

'Before making an order under Sub-section (5) on an appeal against any refusal of the company to register any transfer or transmission, the Central Government may require the company to disclose to it the reasons for such refusal, and on the failure or refusal of the company to disclose such reasons, that Government may, notwithstanding anything contained in the articles of the company, presume that the disclosure, if made, would be unfavorable to the company.'

21. According to Shri Ayyangar this provision only imposes a limitation in the matter of the Central Government not being able to set aside the order of refusal passed by the board of directors of the company without calling upon the company to state its reasons for such refusal where it had already failed to give such reasons and no more. If even after being called upon to give reasons the company refused to disclose the reasons a presumption could be made that the disclosure, if made, would be unfavorable to the company. Sub-section (5A) has, however, no application to the present case since this is not a case where the company has given no reason.

22. The further question is whether the reason given is valid (sufficient) to justify the refusal to transfer the shares.

23. Shri Ayyangar has invited my attention to a decision by a Division Bench of the Madras High Court in E. M. Muthappa Chettiar v. Salem Rajendra Mills Ltd, : AIR1955Mad665 . It was stated in that case, on the law as it stood prior to the amendment in 1960, that the board of directors were not bound to give reasons for not registering the transfer ; if the reasons were not giventhe court will not, merely on that account, draw an unfavorable inference against the Board. They were at liberty to disclose the reasons ; if they disclosed them the court must consider the reasons assigned with a view to find out whether the defendants acted on a right or wrong principle. It was further observed in that case that if a person was of such character as to throw their company into confusion and if he was not a desirable one, then the board of directors would certainly be acting in the best interests of the company in refusing to register the shares in his name and the reason was quite a valid one. Many of the observations in the English decisions, which are quoted therein, to the effect that no director would choose to accept office if he was liable to be called upon to say what his particular motive was in coming to the conclusion regarding the inability of a shareholder, are now beside the point in view of the present accent (after the amendment of 1960) being on the giving of reasons, despite the company being enabled under the concerned article provision to refuse registration without giving any reason. Equally beside the present point are the observations in the English decisions cited in the said report bearing upon an adverse inference not being drawn from such refusal because the same has been set at naught by Sub-section (5A). Shri Ayyangar, however, contended that the amendment of 1960 has not shaken the validity of the further observations in that case relating to the validity of the refusal to register shares on the ground of the transferee, claiming registration, not being a desirable person. Referring to the facts of the case before them the Division Bench of the Madras High Court referred to the transferee purchasing shares at thrice the value of the shares and the purchases not being for investment ; hence the transfers were stated to be for an ulterior object.

24. It was in the above context that reference was made to the observations of Malins V. C. in Moffatt v. Farquhar, [1877] 7 Ch.D. 591.

' In my opinion, thereforee, it is perfectly clear there can be no justification for refusing the transfer unless they have an objection to the person of the transferee. That they should have such a power seems reasonable ; because, this being a limited company, and it being very desirable that they should have respectable men and solvent men as members, and persons who would be able to pay the calls which should be made, it is reasonable that they should have the power of objecting to the person, and not have introduced, among them insolvent persons, or, it might be, if you like, disagreeable persons who would throw them into confusion ; and thereforee the directors have the power of objecting to the person.'

25. The Madras High Court, after referring to the above passage, observed as follows, [1955] 25 Comp. Cas. 283, 292 (Mad.). :

' This shows that if a person is of such a character as to throw their company into confusion and if he was not a desirable one, then the board of directors would certainly be acting in the best interests of the company in refusing to register the shares in his name and such a reason is quite a valid reason. '

26. The position in England can be seen from a very recent decision of the Court of Appeal in Swaledale Cleaners Ltd., In re, [1968] 1 W.L.R. 1710 ; [1969] 39 Comp. Cas. 161, 166, 167 (C.A.). The question arose about the effect of unreasonable delay in placing the transfers before the Board. The decision of Pennycuick J. was affirmed on the ground that the directors' power of veto was lost by unreasonable delay. In this background the following observations were made by Harman L.J. :

'A shareholder prima facie has a transferable right of property in his shares and that can only be taken away from him by an express prohibition in the articles of association. '

27. Danckwerts L.J. observed :

' As my lord has pointed out, prima facie a shareholder has the right to transfer his shares ; but if that is prevented or obstructed by a harsh clause of this kind, it seems to me that such an arbitrary and harsh right must be exercised within a reasonable time. '

28. Sachs L.J. observed :

'The decision in In re Hackney Pavillion Ltd, [1924] 1 Ch. 276 (Ch. D.)......makes it clear that the applicant on his side had a right to be registered as a shareholder unless there were properly exercised against him the powers conferred on the directors by Article 8 of the company's articles of association. '

29. Even though we find that In re Bede Steam Shipping Co. Ltd. was cited in the course of the arguments before the Court of Appeal, no reference was made to the same in any of the judgments of the three Lords Justices. It is necessary to have an idea of what was before the Court of Appeal in In re Bede Steam Shipping Co., [1917] 1 Ch. 123 (C.A.). Reference to not only the majority judgment of Lord Cozens-Hardy M.R. and Warrington L.J. but also the dissenting judgment of Scrutton L.J. appears to be rewarding. Eve J., whose judgment was affirmed by the majority, proceeded on the view that the right of transfer being absolute, except in so far as it is restricted by contract inter socios, it is to the articles of association that one must turn for the purpose of ascertaining the nature and extent of the restrictions imposed. In the case before Eve J., a motion was made for the rectification of the register by inserting the name of A. K. Lewis in the place of B. S. Elder as the holder of fully paid ordinary shares in the company which B. S. Elder had sold and transferred to A. K. Lewis but the transfer of which the directors had refused to register. When one Andrew Frew died in the year 1902 the business of the company was carried on by his widow and her three sons including B. S. Elder. WhenMrs. Frew died in 1915 she held 578 shares. Her three sons continued as directors of the company. A family quarrel arose between B. S. Elder, his brother and half-brother about their mother's will and the ' policy to be pursued in the management of the company '. B. S. Elder had threatened to proceed to wind up the company on the ground that the firm of Frew, Elder & Co. had ceased to exist and there being no proper directors of the company. In January, 1906, B. S. Elder sold two fully paid ordinary shares, one to A. K. Lewis, who was at work in the office in which B, S. Elder was also employed, and the other to Miss Sisterton, who was a housekeeper in the home in which B. S. Elder lived, but not in his employment. B. S. Elder executed transfers of these shares and sent them for registration. J. A. Frew wrote to B. S. Elder that in the opinion of himself and his brother, Edward Elder, it was contrary to the interest of the company, which was really a family concern, that the shares should be transferred singly or in small lots to outside persons having no interest in, or knowledge of, shipping and that it was also contrary to the past policy of the company. The contention of B. S. Elder was that the only ground on which the director could certify, thus declining the registration of the transfer, was that ' it is contrary to the interests of the company that the proposed transferee should be a member thereof' and that the board could only decline on grounds personal to the transferee and not because of the number of shares involved. To this J. A. Frew replied that having numerous numbers would be a positive disadvantage, not only on account of the extra expense caused by the additional secretarial and other work but also the greater likelihood of differences among members and increasing the difficulty of management. When all the three directors met there was no discussion relating to the personal position, character or qualifications of the proposed transferees. B. S. Elder stated at the meeting that he wished to stop ' hole in corner ' meetings and that he wished to fill up the vacancy caused by his mother's death by registering another woman in her place. The resolution declaring that the transfer should not be made was passed by a majority which in sum stated that the transfer was contrary to the interests of the company, adding a postscript that the resolution did not reflect upon the personal character or financial standing of the transferee. Referring to the authority of Chitty J., in In re Bell Brothers, 65 L.T 245, that the director must act in good faith in the interest of the company and with due regard to the shareholder's right to transfer his share and the director must fairly consider the question of the transferee's fitness, Eve J. posed the following questions and answered them as follows , [1917] 1 Ch. 123, 127 (C.A.).:

' In considering the question of the transferee's fitness, are they entitled to hold himunfit because they are of opinion that the transfer isbeing made to him as a trustee for the transferor, or because they disapprove of the transferee being brought into the company solely to increase votes in favor of a particular policy, or because they are apprehensive that his position as a shareholder may enable him to acquire and to pass on to others information as to the company's business, the dissemination of which might be contrary to the interests of the company? I think it is clear that the answer to the first two of these questions must be in the negative, and to the third in the affirmative.'

30. The following further passage from the judgment of Eve. J. printed on page 130 of the report, is also important:

' 'Was it possible that these nominees might take some step prejudicial to the company?', and replied : 'Yes, I thought they would.' It is certainly a pity, if these last answers disclosed additional reasons which really operated in the minds of the deponent and his co-director, who constituted the majority, that they were not stated earlier and included in the record in the minutes. But, assuming that they were in fact part of the reasoning which led to the refusal to register, were they reasons which can properly be relied on for rejecting these transfers under the power vested in the board? I do not think they were. So far as they involved the motives of the transferor and the possibility, or even probability that the transfers did not evidence any real contracts of sale and purchase, they were, on the authority of the quotations I have made from Chitty J.'s judgment in In re 'Bell Brothers, 65 L.T. 245, 248. irrelevant; and so far as they are made up of apprehensions of future trouble, they were founded, on the witness's own admissions, solely on the motives and attitude of the transferor, and without any inquiry into the position of the transferees, their motives, their attitude, or anything else. How can such a determination be in exercise of a discretionary power to reject transferees as unfit? The fact is the majority decided to reject these transfers on grounds which might, and probably would, have been open to them had the power to reject been an unqualified power, but which were not grounds legitimately available in exercising a power qualified as this one is by reference to the fitness of the transferee. In my opinion, thereforee, there was no proper exercise by the directors of the real power vested in them, and it becomes immaterial to consider the question whether they acted bona fide or arbitrarily.'

31. Concerning increasing the net number of shares in a small family company, Eve J. thought that the validity of such an argument would be limited to companies registered as private companies with a strictly limited membership, but not to a company upon which no statutory limit of membership is imposed, even though it may be in the nature of a family concern.

32. Lord Cozens-Hardy M.R. affirmed the decision and explained the position of a shareholder in a company such as the one before them : he has property in his share, a property which he is at liberty to dispose of, subject only to any express restriction which may be found in the articles of the said company. The directors had no right, Lord Cozens-Hardy M.R. proceeded, quoting Hellish L.J. in the Ex parte Penny, L.R. 8Ch. A pp. 446, 453. to 'force a particular shareholder to continue as shareholder, and . . , not allow him to transfer his share at all'. Hellish J. had permitted the directors to look and see who the transferee was. There may be personal objections to him ; it may be because he is a quarrelsome person, it may be because he is an uncertain person, or it may be that he is acting in the interests of a rival company, or something of that kind. All these things are fairly included in the word 'personal', but the directors could not say 'we will not accept any transfer of a single share from a particular shareholder who holds a large number ' ; that would be an abuse of the power : power which is conferred by the clause in the articles. The following observations of Chitty J. in In re Bell Brothers, 65 L.T. 245. were quoted, [1917] 1 Ch. 123, 134, 135, 136 (C.A.).:

' ' If the reasons assigned are legitimate, the court will not overrule the directors' decision merely because the court itself would not have come to the same conclusion. But if they are not legitimate, as, for instance, if the directors state that they rejected the transfer because the transferor's object was to increase the voting power in respect of a share by splitting them among his nominees, the court would hold that the power had not been duly exercised '.'

33. The ground on which the decision of the majority was rested is clear from the following passage of Lord Cozens-Hardy H.R. on page 135 :

' In this case one of the directors gave evidence and said in cross-examination that in the circumstances he would not register any transfer of a single share from a fellow-director with whom he had a quarrel. Is it possible to say that that was a proper exercise of the power Or, in other words, is it possible to say that refusing to transfer shares because you do not approve of splitting up the holding, when you have no personal objection of any sort or kind to the proposed transferee, is a proper exercise of the power In my opinion it is not.'

34. Warrington L. J. in expressing the same opinion observed as follows :

' The article gives them one ground, and one ground only, for refusing to register the transfer of a fully paid share, namely that in their opinion it is contrary to the interests of the company that the proposed transferee should be a member ... in the present case we know on the facts that . . . the opinion that really formed was that it was contrary to the interests of thecompany that Mr. B. S. Elder should be allowed to transfer his shares singly or in small lots. That seems to me to be a ground not provided for by the articles. '.

35. The following passages from the dissenting judgment of Scrutton L.J. also help to understand the decision of the majority judges even more clearly. According to Scrutton L.J. the mere finding by the board of directors that it was. contrary to the interests of the company that the proposed transferee should be a member of the company--if that is ' an honest view ' and there were materials upon which such a view could have been taken--it was not for the court to see whether they could take a different view of such material. Repeatedly, in the course of his powerful dissent, Scrutton L.J. had referred to the existence of material on which the board of directors could have honestly come to the decision they did. Referring to what Mr. B. S. Elder. had said at the meeting is the reason for the transfer of shares by him, Scrutton L.J. observed as follows, [1917] 1 Ch. 139, 140. :

'Well, different things strike different minds in different ways. These two transferees apparently have excited no suspicion in my brother's mind at all. All I can say is they arouse the liveliest suspicion in my own mind. I am possibly wrong, because my brother Warrington agrees with the Master of the Rolls, but / should have thought it was perfectly reasonable for the directors to approach these transfers in a state of the liveliest suspicion . . . The reason actuating the directors being, as I think it was, that a change in the constitution of the company was being brought about by a gentleman who had avowed his intention to wind up the company, I am unable to say that the directors might not reasonably take that into consideration in considering whether it was to the interest of the company that the proposed transferee should be a member thereof.....All I can respectfully say is, having given thebest consideration to the matter I can, and it not being material what my own opinion is in the matter, the only matter of any materiality being whether directors acting honestly, as these directors have been found to have acted, could come to such a conclusion, I think there is material on which they could honestly come to the decision to which they came.'

36. The above passages from the judgment of Scrutton L.J. bring out thescope of dissent. Scrutton L.J., as a fact alone, thought the transfers inquestion excited the liveliest suspicion, though it did not excite the suspicionof the majority. ,

37. The position in India is governed by Section 82 of the Companies Act which provides as follows :

' The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.'

38. There is no other provision in the articles of association of the present company except Article 42 which was set out earlier. The member of the Company Law Board has pointed out, in his order, that the right of the company and director to refuse to register the transfer, in the case of those whom they do not approve is limited by the article to the case of not fully paid up shares. There is no such power in the case of fully paid-up shares. The provision, namely, Article 42, in the present case being thus different, the question is whether the petitioners could derive any assistance from any of the observations (including those of Scrutton L.J.) in Bede Steam Shipping Co. Ltd., [1917] 1 Ch. 123 (C.A.). and Muthappa Chettiar, [1955] 25 Comp. Cas. 283 (Mad.).. While analysing the relevant article of association (Article 56) in the latter case a right is stated to have been given to refuse registration on the ground of the transferee being one whom the board of directors would not approve ; this was not limited, as in the present case, to shares not being fully paid up. As Article 42 in the present case stands, thereforee, the member, Company Law Board, cannot be stated to have gone wrong in interpreting Article 42 as restricting the powers of the board of directors to refuse registration on the ground of not approving the transferee only in the case of not fully paid-up shares ; in other words, in the case of fully paid-up shares no such power to refuse registration (on the ground of the transferee not being one whom the board of directors could approve) was given to the board of directors. Shri Datta, thereforee, rightly urges that according to Section 82 of the Companies Act no registration of transfer of shares, in the case of those fully paid up, could be made on the ground of the transferee being a person whom the board of directors would not approve. No power to refuse registration has thus been reserved by Article 42 to refuse registration on the ground of the transfer not being in the interests of the company.

39. The learned counsel for the petitioner-company, however, argued that the expression ' or otherwise ', which was added by amending Act 65 of 1960, no longer limits the powers of the board of directors to refuse registration only as provided by the articles of association and that the power is wider. Shri Datta, counsel for respondents Nos. 1 to 5 limited the meaning of the expression 'or otherwise' to cases expressly covered by Sections 108 and 109 of the Companies Act which have been noticed already ; they prevent the transfer from being registered unless the instrument of transfer is produced and the instrument of transfer is also in the prescribed form and duly stamped. It may be noticed that according to Section 111(1) nothing in Sections 108, 109 and 110 shall prejudice the power of the company under its articles to refuse to register the transfer, etc. It is significant that the expression ' or otherwise ' does not appear in Section 111(1). It appears only in Sub-section (2), which only describes how refusal should be intimatedin the case of company refusing to register, whether in pursuance of any powers given under articles ' or otherwise '. Shri Datta's contention is that the expression ' or otherwise ' cannot be understood as giving any power to the board of directors other than what the law expressly confers. If such a contention were to be adopted, he argues, then it will be to render Section 82 of the Companies Act nugatory.

40. An appeal under Section 111 of the Companies Act was proposed by the Sastri Commission to be made expressly subject to the result of a suit brought for this purpose or by means of action taken under Section 155 of the Companies Act. Section 155 reads as follows :

' 155. (1) If-

(a) the name of any person-

(i) is without sufficient cause, entered in the register of members of a company, or

(ii) after having been entered in the register, is, without sufficient cause, omitted there from ; or

(b) default is made, or unnecessary delay takes place, in entering on the register the fact of any person having become, or ceased to be, a member ;

the person aggrieved, or any member of the company, or the company, may apply to the court for rectification of the register.

(2) The court may either reject the application or order rectification of the register ; and, in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved.

In either case the court in its discretion may make such order as to costs as it thinks fit.

(3) On an application under this section, the court-

(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, whether the question arises between members or alleged members, or between members or alleged members on the one hand and the company on the other hand ; and

(b) generally, may decide any question which it is necessary or expedient to decide in connection with the application for rectification.

(4) From any order passed by the court on the application, or on any issue raised therein and tried separately, an appeal shall lie on the grounds mentioned in Section 100 of the Code of Civil Procedure, 1908 (5 of 1908)-

(a) if the order be passed by a district court, to the High Court ;

(b) if the order be passed by a single judge of a High Court consisting of three or more judges, to a Bench of that High Court.

(5) The provisions of Sub-sections (1) to (4) 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. '

41. It is seen from the report of the Sastri Committee which suggested an appeal from the order refusing registration of any share (after which recommendation, amended Act 65 of 1960 was passed) that the recommendation was made on the footing that the remedy provided under Section 155 or by suit was not affected by the new and speedy remedy of appeal to its shareholders. The Sastri report had recommended the introduction of another Sub-section (6) after this existing Sub-section (5) in the following terms :

'The order of the Central Government under this section shall be subject to the order, if any, of the court under Section 155 or in a suit. '

42. In the statute, as it has been finally passed, there is no such provision corresponding to this recommendation of the Sastri Committee. Nevertheless, the position may be the same, namely, that the result of an appeal is subject to proceedings under Section 155 or a suit. It is needless for the present purpose to even go into the effect of the order passed by the Company Law Board. All that is required is to decide whether there has been any error of law apparent on the face of the record, without which the jurisdiction of this court under Article 226 of the Constitution could not be invoked.

43. It seems to me on a consideration of Section 111 that the mere addition of the words 'or otherwise' in Sub-section (2) of Section 111 of the Companies Act (not even in the view contended for by the petitioner that those are words of amplification) cannot add to the grounds of refusal which are alone permitted by the articles of association and Sections 108 to 110 of the Companies Act would not help the petitioner-company when such a point is not given by the article ; any other construction would nullify Section 82 of the Companies Act.

44. The well established rule of construction of statutes is that the general terms following particular ones apply only to such persons or things as are ejusdem generis with those comprehended in the language of legislature. In other words, the general expression is to be read as comprehending only things of the same kind as that designated by the preceding particular expressions, unless there is something to show that a wider sense was intended, as where there is a provision excepting certain clauses clearly not within the suggested genus (vide Maxwell on the Interpretation of Statutes, twelfth edition, pages 197-198).

45. For these reasons I am of the view that no interference with the Company Law Board decision is warranted. The writ petition, thereforee, fails and is dismissed with costs of respondents Nos. 1 to 5. Lawyer's fee Rs. 500.


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