1. The facts which led up to the suit out of which this appeal arises are not in dispute. Defendant 1 is a public limited company incorporated under the provisions of the Indian Companies Act. The plaintiff purchased from defendants 2 to 12, who were shareholders of the company, a total number of 172 shares and applied to the company to register the transfer of the shares in his name in the books of the company. On 9th January 1945, the company wrote to the plaintiff that the Board of Directors of the company had refused to register the shares purchased by the plaintiff in his name at a meeting held on 5th January 1945. The share certificates and the transfer deeds were therefore returned to the plaintiff On 19th January 1945 the plaintiff wrote to the company alleging that the Directors' refusal to register the transfers was arbitrary, unjust and opposed to law and gave them notice that unless they recognised the transits in his favour and registered them he would seek redress in a Court of law. To this the company replied that the Directors had acted in good faith and had refused to register the transfer after due deliberation and the transfer could not be given effect to. Thereupon the plaintiff filed the present suit in the Court of the Subordinate Judge of Coimbatore for a mandatory injunction directing the company to register the transfers in his favour of the shares mentioned in Schedule A to the plaint and to enter his name in the register of shareholders of the company in respect of the said shares in the place of the names of defendants 2 to 12. In his plaint he alleged that there was no lawful excuse or justification for the refusal of the company to register the transfers in his favour. They had been duly executed and stamped and the form of transfer prescribed by the articles of association had been followed and all material particulars had been furnished. The plaintiff stated that nothing was due to the company by the transferors or himself solely or jointly and that the company could have no personal objection to the transfers by reason of his status, education and business experience and also because he was already a shareholder of the company and they had registered the transfer of about 40 shares in his favour before the purchase of the shares in question. The plaintiff further stated that the action of the directors was not bona fide because the partners of the Managing Agency firm of defendant 1 company wanted the plaintiff to sell to them the shares purchased by him to enable them to secure an increasing control over the affairs of defendant 1 company, but he would not accede to their request, and mortified at this and with a view to coerce the plaintiff to sell the shares to them the directors of the Company were influenced to refuse the registry of the transfers sought by the plaintiff. The company in the written statement filed on its behalf pleaded in defence that under Article 37 of the Articles of Association of the company the directors were given powers to refuse registry of any transfer without assigning reasons therefor and that the directors had acted bona fide and in the best interests of the company. The company also denied that the action of the Directors was not bona fide. The learned Subordinate Judge who tried the suit held that the Directors must be deemed to have acted arbitrarily in refusing to register the transfer in favour of the plaintiff and that their action was not bona fide and could not be upheld. He came to this conclusion mainly on two grounds, (1) that five or six months before the date of his application for the transfer of registry in respect of the suit shares the company had no objection to the recognition of the transfer of certain other shares in his favour, and there was no suggestion that anything had taken place subsequent to the date of recognition of the prior transfers which made undesirable that the plaintiff should be a member of the company and (2) the conduct of the directors was due to a mala fide motive because the refusal was the result of the unwillingness on the part of the plaintiff to sell the shares which he had purchased to the Managing Director. The learned Judge incidentally was also inclined to hold that there could be no valid refusal on the ground that the Directors did not approve of the proposed transfers in the case of a person who was already a member of the company. He decreed the suit and defendant 1 is the appellant before us.
2. The material article is Article 37, and it runs as follows:
'The Directors may decline to register any transfer of shares in respect of which any member solely or jointly with others is indebted to the company in any manner whatsoever or if the directors shall not approve of the proposed transferee, and they shall not be obliged to give any reason for not approving the transferee.'
Admittedly the company did not specify either in their letter to the plaintiff or in their written statement the ground of their rejection of the plaintiff's application for registry of the shares. Mr. Pattabhiraman, learned counsel for the company, contended that the company was not bound to specify the ground, and he relied on the language of the article and certain decisions of the English Courts. In our opinion the company was bound to specify which of the two grounds mentioned in the article was the ground on which the Directors declined to register the transfer. This they were bound to do, but what they were certainly not bound to do is, they were not bound to give reasons for not approving the transferee. The distinction between the grounds on which the directors decline to register the transfer and the reasons for one of the grounds is clear, and they should not be mixed up. The decisions in Sutherland (Duke) v. British Dominions Land Settlement Corporation (1926) 1 Ch. 746: 95 L. J. Ch. 542 and Berry and Stewart v. Tottenham Hotspur, etc., Co., 1935 1 Ch. 718 ; 104 L. J. Ch. 342 bring out this distinction. In the former case the relevant article was as follows :
'The Directors may, without assigning any reason decline to register any transfer of shares not fully paid up made to any person not approved by them or made by any member jointly or alone indebted or under any liability to the company.' (The article is very similar to that in the present case.)
The company had refused to register certain shares in favour of the plaintiff and the plaintiff's case was that the directors had not exercised proper discretion under the articles. The Directors had not revealed on which of the grounds they had declined to register the transfer. The plaintiff sought to interrogate the defendant company by asking (1) whether the company said that the directors had declined registration in exercise of the power to declineto register any transfer made to any person not approved by them or in exercise of the power to decline to register any transfer by a member jointly or alone indebted to the company; (2) whether they said that the transfer was to a person of whom the directors did not approve ; and (3) whether they said the plaintiff was in fact a person jointly or alone indebted to the company. It was held by Tomlin J. that interrogatories were proper to be allowed and the defendant company was not entitled to refuse to state which of the grounds mentioned in the article the directors had acted under, although it might refuse to say what reasons influenced them in exercising their discretion upon that ground. The learned Judge pointed out that the reason for exercising the power is a distinct thing from the grounds which gave rise to its exercise, and the words 'without assigning any reason' have reference to the reasons which move the Directors in coming to such conclusion they may see fit to reach and have not reference to the circumstances in which the power is Exercisable. The plaintiff was entitled to know on which ground they had exercised the power to decline registry and this right did not conflict with the general rule of company law that prima facie the Directors are assumed to act bona fide and if anybody alleges the contrary the onus is on him to prove it. In the later case in Berry and Stewart v. Tottenham, Hotspur, etc., Co., 1935 1 Ch. 718: 104 L. J. Ch. 342 the distinction made by Tomlin J. was accepted by Crossman J. In that case the relevant article provided that the Director shall not be bound to specify the grounds upon which the registration of any transfer is declined under that article. He, therefore, held that the directors were excused from naming the species of ground under which they bad acted. The article with which we have to deal in this case does not say that the directors shall not be obliged to give the ground for declining to register. What they are not obliged is to give reasons for not approving the transferee. We, therefore, think that it was the duty of the Directors to have informed the plaintiff the ground on which they decided to decline to register the transfer. Of course, if the ground was that they did not approve of him, they certainly are not obliged to give reasons for not approving.
3. But we agree with the learned counsel for the appellant that because the directors did not specify she ground on which they had declined to register the transfer no adverse inference should be drawn against them. If they refrained from stating the ground, it was open to the plaintiff to have administered interrogatories to the company. The plaintiff did not follow this course evidently because it was assumed by both sides that the directors had declined on the ground that they did not approve of the plaintiff. We also agree with the learned counsel for the appellant that because the directors have tot chosen to assign any reasons for their action the Court should not draw unfavourable inferences against them. As Chitty J. observed In re Bell Bros. Ltd., Ex-parte Hodgson, (1892) 65 L. T. 245 :
'The Directors are not bound out of Court to assign their reasons for disapproving. If they decline to do so, or if their decision is challenged in Court and they refrain from giving evidence, upon which a cross-examination may take place as to their reasons, or if, giving such evidence, they refrain from stating their reasons, the Court will not, merely on that account draw unfavourable inferences against them.'
4. The question then is whether the Directors can be said to have acted improperly and in a manner not bona fide in declining to register the transfer. To decide this question, it is necessary to examine the language of the article which gives the directors the power to refuse any application for registry. The important words are 'if the directors shall not approve of the proposed transferee.' Words of similar import have been construed by Courts in England as referring to the transferee personally. In the exercise of a power to approve or disapprove a transferee, the directors are confined to the transferee himself. They are not concerned with matters extraneous to this enquiry (See Re Bell Bros. Ltd., Ex parte Hodgson, (1892) 65 L. T. 245 ; Moffatt v. Farquhar, (1878) 7 Ch. D. 591: 47 L. J. Ch. 355; In re Bede Steam Shipping Co. Ltd., (1917) 1 Ch. 123 : 86 L. J. Ch. 65 and the Muir Mills Co. Ltd., Cawnpore v. T.H. Candon and A. Butterworth, 22 ALL. 410 : 1900 A. W. N. 139. If it is established in this case that the rejection of the plaintiff's application was not on the ground of personal disapproval of the plaintiff, it follows that the action of the directors was not bona fide, and in any event was arbitrary and illegal. On this aspect of the case we consider the fact that a few months before the date of his application to register the shares in suit certain other shares were registered by the company in his name to be of great importance and significance. We agree with the learned trial Judge that the prior recognition of the transfer of shares in favour of the plaintiff prima facie precludes the possibility of a disapproval of the plaintiff on personal grounds. It was not suggested that anything had happened which justified the directors or at any rate influenced the directors to cease to treat the plaintiff as a person who could be approved. Mr. Pattabhiraman urged that this might mean that the Directors wouldbe compelled to state the reasons which they were not obliged to under the article. We do not think that the provisions of the article need be infringed. It was open to the directors to say that something did occur, without signifying what, which made them change their opinion of the plaintiff personally. In the absence of any such suggestion, it must be held that the disapproval by the directors could not have been on any ground personal to the plaintiff. Disapproval on other grounds would not be open to them to clothe them with the power under Article 37. This circumstance itself would make their action improper.
5. Evidence was adduced on behalf of the plaintiff that in December 1944 a clerk in Saroja Mills of which the plaintiff was the General Manager saw one Lakshmiah Naidu, the Managing Director of the company in connection with the registration of the shares which the plaintiff had purchased. He was told that the transfers would not be registered. The witness deposed that Lakshmiah Naidu wanted the shares to be sold to himself, but the witness informed him that the plaintiff would not be willing to do so. This evidence on behalf of the plaintiff was uncontradicted. Neither Lakshmiah Naidu nor any other person on behalf of the company went into the box to deny the truth of the statement made by the plaintiff's witness. The learned trial Judge was therefore right in acting upon his uncontradicted evidence and concluding therefrom that the conduct of the Directors could not be said to be bona fide.
6. Taking both the circumstances above mentioned, it must be held that the refusal by the Directors of defendant 1 company to register the transfer of the suit shares in favour of the plaintiff was improper and not bona fide and could not therefore be upheld.
7. Mr. Pattabhiraman, learned counsel for the company, relied upon decisions of the English Courts which generally lay down the proposition summed up in Palmer's Company Law, Edn. 17 at p. 114 thus :
'Where a discretion as to registering transfers is by the articles given to the directors, the Court will not control the exercise of such discretion, unless it is proved that the directors are not exercising it bona fide or are acting, in other words, oppressively, capriciously or corruptly or in some way mala fide.' There is no need to quarrel with this proposition and we can also add that the presumption would be that the directors had acted bona fide and the onus would be on the parson challenging their action to establish the lack of bona fides and the impropriety on their part. In this case the onus has been discharged. We do not think any useful purpose would be served by dealing with cases like Re : Smith and Fawcett Ltd, (1942) 1 ALL E. R. 542 : 1942 Ch. 304, in which the material article was in the following wide terms, namely :'The directors may at any time in their absolute and uncontrolled discretion refuse to register anytransfer of shares.'
In the result the appeal fails and is dismissed with the costs of the plaintiff respondent.