1. This petition is filed under Section 155 of the Companies Act, 1956, for rectification of the register of the members of the Gudiyatham Textiles Private Ltd., the first respondent herein. Respondents Nos. 2 and 3 are the surviving directors of the company. To start with, there were four directors of whom one subsequently transferred his shares in favour of the other three directors, namely, Govindaraja Mudaliar (father of the petitioner), and respondents Nos. 2 and 3. Govindaraja Mudaliar died on September 6, 1964, leaving a will, under which he bequeathed his shares in the company in favour of the petitioner. The petitioner obtained succession certificate in O. P. No. 38 of 1968 on the file of the District Court, Vellore, in respect of the amount due by the first respondent-company to his deceased father. He has obtained an extension of the succession certificate to cover the shares of his deceased father in the first respondent-company. On October 5, 1964, the petitioner applied to the company to transmit the shares of his father to his name. He made another application on February 23, 1968, for the same purpose. A third and final application was made on November 4, 1968. He was called upon to produce the necessary succession certificate and other documents to snow his right, and on his producing the same on January 10, 1969, the directors, respondents Nos. 2 and 3, informed the petitioner by a letter dated March 31, 1969, declining to effect the transfer. The reason given was that in the opinion of the directors the activities of the petitioner were against the interest of the company, and that it was, therefore, not desirable or feasible, in the interest of the company, to permit the transmission of the shares to the name of the petitioner as requested by him. The petitioner was also informed that the company was agreeable to purchase the shares in question according to the prevailing value. It is in these circumstances that the petitioner has come forward with this petition praying for rectification of the register of the company, by the substitution of his name in the place of his father.
2. The respondents have filed a counter-affidavit reiterating the objections put forward in the communication sent to the petitioner declining to accede to his request for substitution of his name. Their contention is that under the articles of association of the company, they have got discretion to decide whether it would be proper, in the interest of the company, to recognise the transmission, that having regard to the conduct of the petitioner which was detrimental to the interest of the company, it was decided that the transmission should not be accepted. It is their contention that if the petitioner is admitted, it would be the beginning of the end of the company.
3. The first respondent-company was floated with certain objects, the chief of which were :
(i) to manage the affairs of Messrs. Rajeswari Mills Ltd., as managing agents, that company being a public limited company ;
(ii) to promote limited companies, mills, factories, cinema studios, etc ;
(iii) to buy or sell cotton, yarn, silk or cloth and to deal in the same ; and
(iv) to construct, build factories or godowns, etc. In the first respondent-company, out of the total of 20 shares, the petitioner's father has 6 2/3rd shares ; the remaining 13 1/3rd shares belong to equal moieties to respondents Nos. 2 and 3.
4. The main contention urged on behalf of the petitioner is that under the articles of association, there is no power conferred upon the board of directors to refuse recognition of the transmission of shares by operation of law in case of death of one of the directors. It is also contended on behalf of the petitioner that even if there was such a power, it has not been exercised bona fide, and that the exercise of power by respondents Nos. 2 and 3 is arbitrary and unjust and is maal fide. On the other hand, the contention urged on behalf of the respondents is that under the articles of association wide discretion is given to the board of directors to decide whether recognition of the transmission of shares even in the case of devolution by operation of law should be considered in the interest of the company. They contend that, in the instant case, they have taken into consideration all the relevant circumstances with regard to the interest of the company and have decided that the recognition of the petitioner with regard to his father's share would be detrimental to the interest of the company.
5. The articles of association are in Tamil, There are two articles of association, which require to be noted in this proceeding, and they are Articles 15 and 19. To understand the real import of these articles, I set them out fully and they are :
articles of association no power is conferred upon the board to examine the request for transmission of a share in case of devolution by operation of law.
6. The law relating to the right of the board of directors to refuse to register transfer of shares is well settled. Where the regulations confer a discretion on directors with regard to the acceptance of transfers, this discretion, like all the directors' powers, is a fiduciary one to be exercised bona fide in what they consider to be in the interest of the company. If, on a true construction of the regulations, the directors are only given power to reject on certain prescribed grounds and it is proved that on those grounds the request for transfer was rejected, the court would not substitute its opinion for the opinion of the directors. If the articles of association give an unfettered discretion, the court would interfere with it only on proof of bad faith. These principles have been enunciated in a number of decisions. In Moodie v. W. & J. Shepherd Book Binders Ltd., [1949] All E.R. 1044 (H.L.) (1) the articles of association provided that any person becoming entitled to a share in consequence of the death of a member shall have the right subject to the directors not exercising their powers as provided therein, to acquire the said shares, either to be registered as a member or to make such transfer of the share as the deceased person could have made. But the directors shall have the same right to decline or suspend registration. Another article provided that it shall be in the absolute discretion of the directors to refuse to register any transfer of shares of which they do not approve. The compay had three directors. On the death of one of them, his executors applied for transfer. Out of the two remaining directors, one was in favour of recognising the transfer and the other was opposed to it. But the directors did not pass any resolution. One of the articles of association required a resolution to be passed in case of rejection of request for transfer. As no such resolution had been passed, it was held that the executors were entitled to be recognised.
7. In Smith and Fawcett Ltd, In re, [1942] Ch. D. 304 (C.A.), one of the articles of association provided :
" The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares."
On the death of one of the two directors, his executor applied to have his name registered. The other director refused to consent for the registration but offered to register some shares and to buy the remaining shares at a fixed price. The executor applied to the court by way of motion that the register of members of the company might be rectified by inserting his name as the holder of all the shares held by the deceased. The court held that the articles of association gave the directors the widest powers to refuse to register a transfer and that while such powers are of a fiduciary nature and must be exercised in the interest of the company, there was nothing to show that they had been otherwise exercised. In Babulal Choukhani v. Western India Theatres Ltd., , the relevant articles of association gave absolute and uncontrolled discretion to the directors to decline to register transfer of shares. It was held that the directors were not bound to give reasons for their refusal.
8. In Coimbatore Kamala Mills Ltd. v. T. Sundaram, [1950] 20 Comp. Cas. 61 (Mad.), the articles of association of the company provided :
"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."
9. The company did not specify in their letter the ground upon which they refused to accept the plaintiff's application for transfer. It was held :
"1. that 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 ;
2. that if the ground was that they did not approve of him they were not obliged to give the reasons for not approving him ;
3. that because the directors did not specify the ground on which they had declined to register the transfer, the court should not draw unfavourable inferences against them ; and
4. that the presumption would be that the directors had acted bona fide and the onus would be on the person challenging their action to establish the lack of bona fides and the impropriety on their part."
In Muthappa Chettiar v. Salem Rajendra Mills Ltd., , it is pointed out that if a discretion as to registering transfers of shares of a company is given by the articles of association of the company to the directors, the court would not control the exercise of such discretion unless it is proved that the directors are not exercising the discretion bona fide or are acting in other ways oppressively, capriciously or corruptly or in some way mala fide. It is also pointed out that if the directors give their reasons, the court should consider whether they are legitimate or not, that is, with a view to find out whether the directors acted on right or wrong principles. The Supreme Court has pointed out in Harinagar Sugar Mills Ltd. v. S. S. Jhunjhunwala, that rectification of the register of members of a company under Section 155 of the Companies Act, 1956, can be granted only if it is established that the directors had, in refusing to register the shares in the names of the transferee, acted oppressively, capriciously or corruptly, or in some way mala fide and not in the interest of the company. It is also pointed out that such a plea has, in a petition for rectification, to be expressly raised and affirmatively proved by evidence and that, normally, the court would presume, where the directors have refused to register the transfer of shares when they have been invested with absolute discretion to refuse registration, that the exercise of the power was bona fide. In Indian Chemical Products Ltd. v. Stale of Orissa, [1966] 36 ;Comp. Cas. 592 ; [1966] Supp. S.C.R. 380 (S.C.), the articles of association gave power to the directors to refuse registration of transfer without showing any cause. But on facts it was found that the refusal to register was mala fide. It was held that though there was power to refuse registration without showing any cause, the power had been exercised capriciously and in bad faith and that, therefore, the refusal would not be sustained. In Thenappa Chettiar v. Indian Overseas Bank, [1943] 13 Comp. Cas. 202 ; A.I.R. 1943 Mad. 743, the question arose for consideration in a regularly framed suit ; the court found that the objections to recognise the transfer were capricious and untenable. It is pointed out that though the articles of association may confer absolute power on the directors, the refusal must not be arbitrary.
10. Keeping the foregoing principles in view, the facts of this case may be examined. The petitioner's father died on September 6, 1964. At that time, the first respondent-company was functioning as the managing agents of Rajeswari Mills Ltd. The agreement under which the said managing agency was created was to expire on 15th August, 1965. The petitioner was appointed as the director-in-charge of the day to day management of the Rajeswari Mills after the death of his father. In that capacity, he called for a meeting of that company on November 11, 1964, and a resolution was passed in that meeting removing the first respondent-company from the office of managing agents. The petitioner got himself appointed as the managing director. This gave rise to institution of a suit, O.S. No. 132 of 1964, on the file of the Sub-Court, Vellore, by the first respondent-company challenging the action of the petitioner in passing the resolution. Certain shareholders of Rajeswari Mills themselves questioned the validity of the resolution and instituted O.S. No. 140 of 1964 on the file of the same court for certain reliefs. Alleging that the action of the petitioner in causing the removal of the first respondent from being the managing agents had caused substantial loss to the first respondent-company, the first respondent-company instituted 0. S. No. 132 of 1964 claiming damages against the petitioner and Rajeswari Mills Ltd. It appears that the said suit has been dismissed so far as the petitioner is concerned, but has been decreed for a smaller amount than the amount claimed as against Rajeswari Mills Ltd. It is represented on behalf of the respondent that the first respondent-company is intending to file an appeal not only with regard to the disallowed portion against the Rajeswari Mills but also against the petitioner.
11. It appears that the first respondent-company was indebted to the late father of the petitioner. The petitioner instituted C.P, No. 49 of 1966 on the file of this court to wind up the company alleging that the company was unable to pay its debts and that the substratum of the company had disappeared. That matter was ultimately compromised. Under the compromise, the petitioner was allowed to draw a particular amount without prejudice to his rights to institute fresh proceedings to recover the balance due to him. It was also agreed that the petitioner's rights as a shareholder were left open. Ultimately, the petition was dismissed as not pressed and withdrawn. The contention urged on behalf of the respondents is that the institution of this petition reveals the attitude of the petitioner. Their submission is that the petitioner is bent upon seeing that the first respondent-company is wound up. It is represented that there are some more suits pending between the petitioner on the one hand and the respondents on the other.
12. From the foregoing facts, it is clear that the conduct of the petitioner has been such that it is inconsistent with his profession of being interested in the affairs of the first respondent-company. The fact that money was due to him from the company does not necessarily mean that he should rush to court with a petition to wind up the company on the serious allegation that the substratum of the company had disappeared. The contention urged on his behalf that as a creditor he was entitled to take all such steps as were open to him according to law, has no substance in the consideration of the question whether his conduct was for the benefit of the company. The board of directors have taken into consideration the relevant circumstances and come to the conclusion that the activities of the petitioner were against the interest of the company, and that it was, therefore, not desirable in the interest of the company to permit transmission of the shares of his father to his name. It cannot be said that this reason is capricious or arbitrary or mala fide. The decision taken by the board of directors is in the best interest of the company and, therefore, even if it is conceded for the sake of argument that the court is entitled to go into the question of validity or otherwise of the reasons given by the directors, the evidence on record amply justified the view taken by the board of directors. All that the articles of association says is that the board of directors may admit the transmission if they see no objection. The board had sufficient and valid reasons for rejecting the request of the petitioner.
13. Mr. Gopalarathnam, appearing for the petitioner, faintly suggested that on account of the inordinate delay in considering the application of the petitioner by the board, it should be deemed that the petition was allowed. No such claim is put forward in the petition, and there is also no merit in this submission. It is true that the petitioner had applied twice on previous occasions, once on October 5, 1964, and again on February 23, 1968. On these occasions, he had not obtained the necessary proof by way of extension of succession certificate to cover his claim to the rights in the shares of his deceased father. It was only in August, 1968, that the petitioner obtained extension of succession certificate and he made a third application on November 4, 1968, for recognition of transmission of his right. The board of directors called upon the petitioner to produce proof and he furnished proof on January 10, 1969. On March 31, 1969, the board decided to reject the request. Thus there was no delay in disposing of the petitioner's application.
14. Mr. Gopalarathnam next contended that under the compromise arrived at between the petitioner on the one hand and the first respondent on the other in C.P. No. 49 of 1966 it was expressly stipulated that the petitioner's right as a shareholder was left open. On the basis of that stipulation it is contended that it should be deemed that the petitioner's right as a shareholder was accepted. There is no merit in this argument. The fact that his right was left open does not mean that his right was recognised. It is obvious that the question of the petitioner's right as a shareholder was not decided, but it was merely left open. The compromise does not in any way advance the petitioner's claim.
15. Lastly, Mr. Gopalarathnam contended that, after all, the petitioner is only a minority shareholder having 6 2/3rd shares, and that recognition of his share as a shareholder would not in any way affect the working of the company inasmuch as the two majority shareholders are going together. On this aspect also I find no substance. From the mere fact that the petitioner is only a minority shareholder it does not mean that the decision of the board rejecting his request for transmission is in any way vitiated. It is rightly contended on behalf of the respondents that the petitioner, even though a minority shareholder, can give trouble to the working of the company, if he wants to do, as there are adequate provisions in the companies act under which the petitioner can come up to this court. It is undoubtedly so. The petitioner, as a minority shareholder, can approach this court under Sections 397 and 398 alleging that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to him. By this way, he can drag the company to court. Therefore, the fact that the petitioner is a minority shareholder does not mean that he cannot take any action against the company.
16. In the result, the petition fails and is dismissed. There will be no order as to costs.