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P.V. Chandran Vs. Malabar and Pioneer Hosiery P. Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKerala High Court
Decided On
Case NumberCivil Petition No. 4 of 1983
Judge
Reported in[1985]57CompCas570(Ker)
ActsCompanies Act, 1956 - Sections 108 and 155(2)
AppellantP.V. Chandran
RespondentMalabar and Pioneer Hosiery P. Ltd. and anr.
Appellant Advocate T.L. Viswanatha Iyer, Adv.
Respondent Advocate C.M. Devan, Adv.
DispositionPetition dismissed
Cases ReferredMannalal Khetan v. Kadar Nath Khetan
Excerpt:
company - transfer of shares - sections 108 and 155 (2) of companies act, 1956 - respondent no. 1 was private company - petitioner purchased certain number of shares of respondent company - respondent refused to transfer shares of petitioner - petitioner failed to sent letter, share certificates and stamp duty along with transfer deed - petitioner contended that respondent bound to transfer shares under article of association - articles of association did not enable petitioner to get his name registered as purchaser - discretion of directors to decline transfer of shares unlimited - transfer of shares can only be registered after delivery of letter, share certificate and stamp duty to be paid alongwith transfer deed - none of these requirement satisfied in case - held, decision of.....paripoornan, j.1. this is an application under section 155(2) of the companies act, 1956. the petitioner purchased 705 equity shares in the first respondent-company from the second respondent. the first respondent is a private limited company, incorporated on october 13, 1966, having its registered office at kallai road, calicut. by ext. b-1 (a-2) dated november 10, 1981, the first respondent-company was informed by the second respondent about the sale of 705 shares to the petitioner and requesting the transfer of shares in the name of the petitioner. by ext. b-2 (a-3), dated-december 1, 1981, the first respondent rejected the said request relying on article 33 of the articles of association of the company. the petitioner avers that by ext. a-4, dated february 14, 1982 (ext. a-4 (b-3)),.....
Judgment:

Paripoornan, J.

1. This is an application under Section 155(2) of the Companies Act, 1956. The petitioner purchased 705 equity shares in the first respondent-company from the second respondent. The first respondent is a private limited company, incorporated on October 13, 1966, having its registered office at Kallai Road, Calicut. By Ext. B-1 (A-2) dated November 10, 1981, the first respondent-company was informed by the second respondent about the sale of 705 shares to the petitioner and requesting the transfer of shares in the name of the petitioner. By Ext. B-2 (A-3), dated-December 1, 1981, the first respondent rejected the said request relying on Article 33 of the articles of association of the company. The petitioner avers that by Ext. A-4, dated February 14, 1982 (Ext. A-4 (B-3)), the second respondent wrote to the first respondent expressing a desire to dispose of the shares at the price of Rs. 100 fixed by the company to a member of the company and desired to take urgent steps in the matter. The company did not find any person as enjoined by Article 39 of the articles of association. By Ext. A-13 dated July 29, 1982, the second respondent wrote to the first respondent intimating that in the absence of a reply for Ext. A-4 (B-3) dated February 14, 1982, she has sold the shares to the petitioner, acting in conformity with Article 39 of the articles for association. There was no reply from the company. The company could not find any purchaser for 705 shares and so intimated the second respondent accordingly by Ext. A-5 dated November 11, 1982. By Ext. A-6 dated November 15, 1982, the second respondent intimated the first respondent that she has transferred the shares to the petitioner and handed over the share transfer forms duly filled in to the petitioner and requesting the company to register the transfer in the petitioner's name, on his furnishing the share transfer forms with similar request. The petitioner made a request on November 19, 1982, evidenced by Ext. A-7 along with Ext. A-6. This letter was delivered along with the share transfer forms duly filled in and stamped and delivered to the first respondent on November 20, 1982 (Ext. A-8). It is the petitioner's case that the first respondent is bound to register the shares in the petitioner's name under Article 39 of the articles of association. It did not do so. On the other hand, by Ext. A-9 (B-8), dated December 24, 1982, the first respondent intimated the second respondent and the petitioner, rejecting the transfer application. It was returned. In so doing, the first respondent acted illegally. The decision to reject the petitioner's application for transfer is totally unwarranted. Clause 40 of the articles of association has no application to the instant case. The petitioner was entitled to get the shares transferred in his name by virtue of Article 39 of the articles of association. On these grounds, the petitioner prays that this court may be pleased to direct rectification of the register of shareholders of the first respondent-company by substituting the name of the petitioner as the holder of 705 shares described in annexure A of the petition in the place of the second respondent.

2. The first respondent has filed a detailed counter. Ext, B-1(A-2) communication dated November 10, 1981, and the reply thereto,Ext. B-2(A-3), are admitted. It is averred that the shares could not be transferred in view of Article 33 of the articles of association of the company. The first respondent received Ext. A-4(B-3) dated February 14, 1982, only on September 24, 1982. The company sent a circular to all the members on October 7, 1982, intimating that the second respondent was willing to sell 705 shares at the rate of Rs. 100 per share. One Premkumar expressed willingness to accept the shares. The signature in the said letter was doubtful. On November 11, 1982, the company wrote to Premkumar to confirm the address, to verify that the offer was from Premkumar. At the same time, by Ext. A-6, the second respondent was informed that no shareholder was interested in purchasing the shares. On November 19, 1982, by Ext. A-7, the petitioner wrote to the company (enclosing Ext. A-6 dated November 15, 1982, communication by the second respondent) requesting for the transfer of 705 shares held by P-2 in her name. The petitioner undertook to produce the share certificates on being informed. It was finally by a letter dated December 24, 1982, by Ext. A-9(B-8), the first respondent informed the petitioner as also the second respondent about the resolution of the company dated December 18, 1982, rejecting the transfer application. It is the first respondent's case that on a fair and proper reading of the articles of association, the petitioner's case, based substantially on Article 39 of the articles of association, is unsustainable. The petitioner had not sent along with the letter, Ext. A-7, (enclosing Ext. A-6), dated November 19, 1982, the share certificates which were alleged to have been transferred in his name nor did he remit Rs. 2 for registration as required by Article 41. Under Section 108 of the Companies Act read with Article 41 of the articles of association/ compliance thereof is mandatory. Failure to do so is fatal. The interpretation placed on Article 39 of the articles of association, in isolation, and without reference to Artciles 40 and 41, is untenable. The communication of the second respondent, purporting to be a notice under Article 39 dated February 14, 1982 (Ext. A-4/B-3), was received by the company only on September 24, 1982, and the period of three months will expire only on December 24, 1982. The application for transfer from the petitioner (Ext. A-7) was received on or about December 19, 1982, even before the expiry of the period mentioned in Article 39. Article 39 of the articles of association is inapplicable to the instant case. The petitioner is not entitled to have the transfer effected in the register by virtue of the said article. Ext. A-5 decision dated November 11, 1982, conveyed to the second respondent was cancelled by Ext. B-7 on December 14, 1982. The letter dated February 14, 1982, was not received before September 24, 1982. The company had not received any reminder on July 29, 1982 (Ext. A-13), as alleged. The company had rejected the application for transfer under Article 40 of the articles of association. In such a case, Article 39 is inapplicable. The period of three months contemplated in Article 39 had not expired. Reading Artciles 39, 40 and 41 together, the claim made by the petitioner is untenable and the prayer in the petition cannot be allowed. The decision of the board of directors conveyed as per Ext. A-9(B-8) was taken ' bona fide ', considering all material facts and circumstances and also taking into account the interest of the company and the interest of the shareholders. Such exercise of discretion by the board of directors is not liable to be questioned by a shareholder or a transferee, nor liable to be canvassed against, in the present proceedings. The petition should be dismissed.

3. On behalf of the petitioner, P. W. 1 was examined and Exts. A-1 to A-13 were produced and marked. On behalf of the first respondent, R.W. 1 was examined and Exts. B-1 to B-18 were produced and marked as exhibits.

4. I heard Mr. T. L. Viswanatha Iyer, counsel for the petitioner, and Mr. C.M. Devan, counsel for the first respondent in the matter.

5. Exhibit A-l is the memorandum of the articles of association of the first respondent-company. For the purpose of this case, it will be sufficient to note Artciles 4, 33, 34, 35, 36, 39, 40 and 41. They are as follows :

' 4. The company shall be a private company and, accordingly, the following provisions shall have effect, namely :

(a) The number of the members of the company (exclusive of the persons in the employ of the company) shall be limited to 50, but where two or more persons hold one or more shares in the company jointly, they shall for the purpose of this paragraph be treated as a single member.

(b) No invitations shall be issued to the public to subscribe for any shares or .debentures of the company.

(c) The right to transfer share shall be restricted in manner hereinafter set forth.

33. No shareholder shall transfer, mortgage or create any interest with reference to his shares in this company without the consent of a majority of the directors and even if one member sells or transfers or creates any interest, it shall be only in favour of one or more members of this company.

34. A share may be transferred to a member selected by the transferor but save as aforesaid and as provided for by the articles hereof no share shall be transferred to any person who is not a member so long as any member is willing to purchase the same at a fair value which shall be determined by a general meeting of the shareholders.

35. Except where the transfer is made in pursuance of Artciles 33 and 42 hereof, the person proposing to transfer any share shall give notice, in writing, to the company that he desires to transfer the same. Such notice may state the sum he fixes as the fair value and shall constitute the board oE directors as his agent for the sale thereof at the price so fixed or at the option of the purchaser at the fair value ascertained in the manner hereinafter set forth.

36. If the directors within three months after being served with notice find a person or a member willing to purchase the same, they shall give notice thereof to the proposing transferor and he shall be bound upon payment of the stipulated money, to transfer the share to the purchaser within seven days of the last mentioned notice and the purchaser shall be bound to complete the purchase.

39. If the directors shall not within three months after being served with the first mentioned notice find a person or a member willing to purchase the shares and give notice in manner aforesaid, the proposing transferor shall at any time thereafter sell and transfer the shares to any person at any price. Then the company shall enter the name of such purchaser in the register.

40. The directors may at their own absolute and uncontrolled discretion decline to register any transfer of shares by a shareholder who is indebted to the company or upon whose shares the company have a lien or otherwise, or any transfer to any person not approved by them, and in no case shall a shareholder or proposed transferee be entitled to require the directors to state the reason of the refusal to register, but their refusal shall be absolute, and shall not be liable to be questioned.

41. To be executed by transferor and transferee.--Every instrument of transfer shall be in writing and signed by the transferror and transferee and in the case of share held by two or more joint holders, or to be transferred to the joint names of two or more transferees, by all such joint holders, or by all such transferees as the case may be and must be left at the office of the company to be registered, accompanied by the certificate for the shares to be transferred and by such evidence as the directors may reasonably require to prove the title of the transferor, and a fee of two rupees or such other sum as the directors shall from time to time determine must be paid to the company for the registration of every such transfer, and upon payment thereof the directors subject to the powers vested in them by Article 40 shall register the transferee as a shareholder and retain the instrument of transfer, but the transferor or the transferors, as the case may be, shall be deemed to retain the holder or holders of such share until the name or names of the transferees is or are entered in the register of members in respect thereof. '

6. As stated, the first respondent is a private limited company. It is what is sometimes called ' a close corporation ', The transfer of shares therein is subject to the restrictions contained in the articles of association of the company which is a contract governing the relationship between the members. The discretion of the directors in the matter of registration of transfers in a private limited company has been lucidly stated in Palmer's Company Law, 23rd edn. (1982), at page 481, as follows :

'Where a discretion as to registering transfers is given by the articles to the directors/the court will not control the exercise of this discretion, unless it is proved that the directors are not exercising it bona fide ; in other words, that they are acting oppressively, capriciously or corruptly or in some way mala fide. In re Smith & Fawcett Ltd. [1942] Ch 304, the court would not find mala fides where, on the death of a member who held half the company's shares, the surviving director, who held the other half of the shares, refused to register the executors except in respect of part of the holding and upon condition that the balance be transferred to himself.

It is common for articles to provide that the directors shall have the power of declining to register a transfer 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 unfavourable inferences against 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 transfer, 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.'

7. In Mathew Michael v. Teekoy Rubber (India) Ltd. [1983] 54 Comp Cas 88 (Ker), after a review of the relevant decisions of the Supreme Court and other courts, my learned brother, M. P. Menon J., has observed as follows at-p. 92 :

' The jurisdiction conferred by Section 155(3) is wide and comprehensive, and I am in respectful agreement with the view taken in Gulabrai's case [1978] 48 Comp Cas 438 (Guj), that it is not summary.

The fact, however, remains that irrespective of the nature of the jurisdiction, courts have been reluctant to interfere with the decision of the directors in the matter of registering transfers, where the articles of association confer on them an absolute discretion. Decided cases show that the power to refuse to register a transfer is always presumed to have been exercised bona fide, and that unless the articles otherwise provide, the directors are not bound the disclose their reasons. The presumption will be replaced when a petitioner positively proves that the power has been used without bona fides, i.e., when he succeeds in showing that the directors have acted ' oppressively, capriciously or corruptly or in some way mala fide'.'

8. At p. 93, the learned judge held :

' The memorandum and articles of association of a company bind the company and the shareholders, and where such a binding contract invests the directors with discretion to refuse to register a transfer of shares without assigning reasons, the directors can rest on the contract and refuse to disclose their reasons ; and in view of the contract again, the shareholder also cannot attack the exercise of discretion, unless it be on grounds of equity and breach of trust. The contract will be enforced and the directors relieved of the duty to disclose, so long as it is not shown affirmatively that the power is exercised capriciously, wantonly or oppressively. '

9. Proceeding further, in p. 94, the learned judge observed :

' But the regulation clearly provides that the directors are not bound to disclose any reason for disapproving of the transferee. Of course, if they disclose the reason, the court can go into the question whether they are good reasons, i.e., reasons in law. But where no such disclosure is made, 'the authorities seem to take the view that the court will not compel them to make a clean breast of it, in rectification proceedings. The presumption is that the directors have acted bona fide, and the burden of displacing it by cogent evidence will be on the complaining transferee. '

10. In Balwant Transport Co. Ltd. v. Deshpande, AIR 1956 Nag 20, speaking for the Division Bench, Hidayatullah J. (as he then was) said at p. 22) :

' ...it is well settled that the onus is on the shareholder to prove that the action of the directors (in refusing to register transfer of shares) was mala fide.'

11. It was further held as follows (as extracted from the headnote) :

' Where the articles of association of a private company confer on the directors an absolute and uncontrolled discretion to rejuse to register any transfer of a share whether fully paid or not, where in the opinion of the directors it is not to the interest of the company to admit the proposed transferee to membership or (if he is already a member) to allow him to increase his holding, and the directors in the exercise of that discretion refuse to register a transfer of a share, then unless it can be shown that a power so vested in them was exercised mala fide or for any 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.'

12. It is also important to note in this connection that the conditions imposed or the formalities enjoined in connection with the transfer of shares as provided in the relevant articles of association read with Section 108 of the Companies Act are mandatory. Failure to strictly comply with the same is fatal. This follows from the decision of the Supreme Court in Mannalal Khetan v. Kadar Nath Khetan [1977] 47 Comp Cas 185 (SC).

13. In the light of the above principles of law and the relevant articles of association of the first respondent-company, let us consider how far the petitioner is entitled to the relief prayed for in the company application. It is the definite case of the first respondent in paragraphs 13, 14 and 16 of the counter-affidavit that the petitioner had not sent along with his letter dated November 19, 1982, Ext. A-7, the share certificates which were sought to be transferred, nor had he remitted Rs. 2 to the company for transfer, as enjoined by Article 41 of the articles of association. The petitioner did not deny this by filing a replication. On the other hand, after the arguments were heard in this case on June 12, 1984, and the judgment was reserved, the petitioner filed Company Application No. 157 of 1984 on June 18, 1984 (dated June 16, 1984), praying for an order that this court may be pleased to receive the share certificates produced and described in the schedule and also a demand draft for Rs. 2 for compliance with Article 41 of the memorandum of the articles of association of the first respondent-company, condoning the delay, if any, in producing the same. It cannot admit of any doubt (it is practically conceded) that the mandatory requirement of Article 41 has not been complied with by' the petitioner when he applied for the transfer of shares in his name. The share certificates and the registration fee of Rs. 2 were not filed along with the application requesting for the transfer to be made. Article 41 of the articles of association read with Section 108 of the Companies Act enjoins that along with the transfer application, the certificate for the shares to be transferred and fee of Rs. 2 should be left at the office of the company. Admittedly this has not been complied with. If so, the first respondent is well justified in rejecting the transfer application. Ext. A-9 (B-8) communication is valid, legal and proper. In view of the decision of the Supreme Court in Mannalal Khetan's case [1977] 47 Comp Cas 185 (SC), the non-compliance with the provisions of Article 41 of the articles of association read with Section 108 of the Companies Act is fatal. The petitioner is not entitled to any relief as prayed for in this petition since it should be held that he has not made a proper transfer application in the eye of law. The belated application filed in this court, C.A. No. 157 of 1984, praying that this court may receive the share certificates and also the demand draft for Rs. 2 in compliance with Article 41 of the articles of association, condoning the delay, if any, caused in the matter, is not maintainable. It is for the petitioner to comply with all the conditions and stipulations contained in the articles of association, at the time of filing the application, before the first respondent. Having failed to do so, it is not open to the petitioner to file a belated application in this court and that too after the entire arguments in the case were over. The first respondent has taken this objection specifically at the earliest opportunity at the time of filing the counter-affidavit. For reasons best known to him, the petitioner did not comply with Article 41 read with Section 108 of the Companies Act at the appropriate time. The non-compliance is fatal. It cannot be cured by filing the share certificates and the demand draft in this court and in these proceedings. This court has no jurisdiction either to accept the documents and the fee. I hold that Company Petition No. 4 of 1983 is not maintainable and deserves to be rejected for failure to comply with the mandatory requirements of law as enjoined by Article 41 of the articles of association read with Section 108 of the Companies Act. It is a condition precedent for getting the shares transferred, that the instrument of transfer should be executed by the transferor and the transferee, and it should be left at the office of the company to be registered, accompanied by the certificates for the shares to be transferred and the fee of Rs. 2, The directors are obliged to consider only a valid application filed in accordance with law under the articles of association. The petitioner has obviously not filed such a valid application at all which is a condition precedent to enable the directors to consider an application and register the transfer of shares. On this short ground, the jurisdiction of this court under Section 155(2) of the Companies Act itself is not properly or validy invoked by the petitioner, nor attracted. I hold that the company petition filed is misconceived and should fail.

14. On merits, it should be stated that the directors of a private limited company have got a very wide discretion in the matter of registration of transfers. It has not been proved in this case by the petitioner that the directors failed to exercise the discretion vested with them bona fide or they acted oppressively, capriciously or corruptly or mala fide. In the absence of a plea and proof in that behalf as stated in Palmer's Company Law, 23rd Edn., at p. 481, quoted in para 6 supra, this petition is not maintainable. The decision reported in Balwant Transport Co. Ltd's case, AIR 1956 Nag 20, is also to the same effect. In this case, there is no allegation or proof on that score. On this ground also, this petition is not sustainable. The main plank of attack was based on the basis of rights of the petitioner on an interpretation of Article 39 of the articles of association. That is separately considered in the following paragraphs.

15. The petitioner's counsel argued that Article 39 of the articles of association applies to the instant case. A notice as envisaged therein was given to the first respondent as per Ext. A-4 (B-3) dated February 14, 1982. The directors should within three months thereafter find a person or member willing to purchase the shares. In this case, the directors have not done so till May 14, 1982, Thereafter, the company has no option but to enter the name of the purchaser in the register. Article 39 is absolute in its terms in that regard. So, the petitioner is entitled to have the relief and the company shall enter the name of the petitioner as purchaser of the shares in the register.

16. The argument of the petitioner that Article 39 applies to the instant case should fail for more reasons than one. P. W. 1 states that Ext. A-4 (B-3) dated February 14, 1982, was delivered to R.W, 1 at his residence by him, in person, the next day. He did not obtain an acknowledgment therefor. In the counter-affidavit filed by the first respondent, it is stated that Ext. A-4 (B-3) was received in the office only on September 24, 1982. R. W. 1 has also categorically affirmed this during his examination. Nothing has been brought out in the case to disbelieve or to discard the testimony of R. W. 1 in this regard. As to when Ext. A-4 or Ext. B-3 dated February 14, 1982, was delivered to the company is a matter depending entirely on oral evidence ; whereas P.W. 1 would have it that it was delivered the next day at the residence of R.W. 1, R.W. 1 categorically states that it was received by the company only on September 24, 1982. This was stated in paragraph 3 of the counter also. I had occasion to watch the demeanour of both P.W. 1 and R.W. 1 while in the box, when they were examined. I should state that the evidence of R.W. 1 impressed me. His answers were spontaneous and straight forward. He appeared to me to be a respectable person, speaking the truth. On the other hand, P.W. 1 was on many occasions evasive in his answers. I have no hesitation to accept the testimony of R.W. 1 when he states that Ext. A-4 (B-3) was seen by him or received in the office only on September 24, 1982, in preference to the testimony of P.W. 1. I also believe R.W. 1 when he states that Ext, A-13, dated July 29, 1982, was not received by the first respondent company at all. In the case of Ext. A-13 also, the petitioner has not obtained any acknowledgment. It is difficult to believe that for delivery of such important communications, Ext. A-4 (B-3) and Ext. A-13, any reasonable person would ordinarily fail to obtain acknowledgments. On these premises, it follows that three months have not elapsed when the petitioner filed Ext, A-7 dated November 19, 1982, along with Ext. A-6(B-6), for the transfer of shares in his name. The first respondent-company had time till December 24, 1982. Article 39 of the articles of association will not enable the petitioner to get his name registered as the purchaser. It should be noted that within three months of the receipt of Ext. A-4 (B-3) by the first respondent-company, the transferor (second respondent) has sold and transferred the shares to the petitioner. The first respondent-company should find a person only within three months after the receipt/service of Ext. A-4 (B-3) on September 24, 1982. It is only, at any time thereafter, the proposed transferor shall sell and transfer the shares to any person, at any price. It is only then, the company shall enter the name of such purchaser in the register. None of these requirements are satisfied in this case, obviously. No right flows to the petitioner by virtue of Article 39 of the articles of association. Reliance placed on Article 39 of the articles of association is misconceived and is to be rejected. . I hereby do so.

17. Even otherwise, I am of the opinion that the construction placed on Article 39 of the articles of association by the petitioner's counsel is not logically in accord with the well-settled principles of construction of statutes and deeds. In my opinion, Artciles 33, 34, 35, 39, 40 and 41 should be considered together, and should be construed reasonably. It is only after the instrument of transfer along with the certificates of shares to be transferred and the fee of Rs. 2 are delivered or left at the office of the company duly, the directors should consider the matter, subject to the powers vested in them under Article 40. Under Article 40, the discretion of the directors is absolute and uncontrolled. The discretion to decline the request for the transfer of shares is uncontrolled. The refusal shall be absolute and shall not be liable to be questioned. It is obvious that Article 39 should be read along with Article 41 of the articles of association. In that view, it will be subject to Article 40, which has an overriding effect. In other words, Article 39 itself is subject to Article 40 of the articles of association. Article 40 will prevail under any circumstances. The reasons or the circumstances which resulted in the decision of the directors in declining to register any transfer of shares shall not be questioned. The decision of the directors shall prevail. So considered, I am of the opinion that the first respondent being a private limited company, whatever may be the reason for rejection of the transfer 6f shares or under whatever circumstance it so resulted, the petitioner is not entitled to question the same. The action of the first respondent in - rejecting the transfer application filed by the petitioner is well justified on the merits. Reliance placed on Article 39 of the articles of association is misplaced. In this view of the matter also, the company petition deserves to be dismissed.

18. For the reasons stated above, C. P. No. 4 of 1983 is dismissed with costs.


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