Jalpaiguri Cinema Co. v. P.N Mukerjee

H.R Khanna, C.J:— This appeal under Clause 10 of the Letters Patent by the JALPAIGURI Cinema Company Limited is directed against the judgment of learned Single Judge whereby a petition under Articles 226 and 227 of the Constitution of India filed by the appellant against Pramatha Nath Mukherjee and five others for quashing the order of Member Company Law Board (respondent No. 6) was dismissed.

The appellant is a public limited company. It was incorporated in 1948 with a share capital of Rs. 10 lacs. The company owns a cinema house and is engaged in exhibition of films. Respondents 1 to 5 (hereinafter referred to as the respondents) belong to Mukherjee family. They purchased shares of the company from different share-holders. Out of those shares, we are in the present appeal concerned with the shares of the value of Rs. 1,90,000/-. When the respondents approached the appellant-company for the registration of the transfer of the shares in question, the Board of Directors declined to register the transfer of the said shares in favour of the respondents as per resolution dated March 23, 1967. The material part of that resolution reads as under: —

“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, Shri Monoranjan Mukherjee, is the brother's son of Shri 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 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, therefore, 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.”

The respondents filed appeals under sub-section (3) of Section 111 of the Companies Act, 1956, against the above decision of the Board of Directors. The appeals were allowed by the Member, Company Law Board, as per order dated December 19, 1969, and the appellant-company was directed to register the shares comprised in the appeals in the name of the respective transferees. The appellant-company thereupon filed petition under Articles 226 and 227 of the Constitution for quashing the above order.

The learned Single Judge dismissed the petition on the ground that under the Articles of Association of the Company the Board of Directors had no power in a case like the present to refuse to register the transfer of shares. The learned Judge declined to accept the contention that if the case was not covered by the Articles of Association of the Company even then the Company could decline to register the transfer. Argument was also advanced that the Company had a lien on the shares. It was observed in this connection by the learned Judge that no documents had been produced at the time of the hearing of the appeal before the Company Law Board to substantiate the allegation of lien. Reference was also made to a concession on behalf of the appellant that the claim for lien could not be sustained on the basis of certain documents. It was observed that the Company would not be deemed to have given up its lien, if any, because of the registration of the shares in question.

We have heard Mr. Sen on behalf of the appellant Company and Mr. Dutt on behalf of the respondents, and are of the view that there is no merit in the appeal. Article 42 of the Articles of Association of the Company specifies the circumstances under which the Directors may decline to register the transfer of shares and reads as under: —

“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.”

Bare perusal of the above goes to show that the Directors can decline to register transfer of shares in either of the two events: (1) where the transfer relates to shares upon which the company has a lien or (2) the transfer relates to shares which are not fully paid up and is made in favour of a transferee who is not approved by the Directors. It is the common case of the parties that the shares in question are fully paid up and as such the second of the above contingencies does not arise. Mr. Sen on behalf of the appellant-Company, however, urges that it has a lien on the shares in question and as such the Directors were well within their power in declining to register the transfer of the shares. As against that, the stand taken on behalf of the respondents is that there is no lien of the appellant-Company on the shares in question and that the claim for the alleged lien is the result of an afterthought. In this connection we find that in the impugned resolution dated March 23, 1967 of the Board of Directors there was no mention of any lien of the appellant-Company over the shares in question. Documents were also not produced before the Company Law Board to prove the existence of any lien. Reference was made to two documents before the Board and it was conceded on behalf of the Company that the claim for lien could not be sustained on the basis of those documents. The Company Law Board consequently came to the conclusion that the claim for the lien had not been substantiated and could not be sustained. The learned Single Judge took note of the fact that no other documents had been produced before the Board and observed that in view of the concession made on behalf of the appellant-Company the contention about a lien could not be raised. To relieve the Company of the consequences of the stand taken by it before the Company Law Board the learned Judge made it clear that the registration of the transfer would not affect the claim of the Company for its alleged lien.

As there is no material on the present record to show that the appellant-Company had any lien on the shares in question, we find no cogent ground to interfere with the order of the learned Single Judge in this respect. The present is not a case in which the appellant-Company had adduced some prima facie evidence to show the existence of a lien. Not only no such evidence was produced, there was even no reference to the alleged lien, as stated earlier, in the impugned resolution of the Board of Directors. In the circumstances, with a view to safeguard the interests of the Company, the learned Single Judge made the observation that the registration of the transfer would not affect the alleged lien of the Company over the shares in question.

It may also be observed that Mr. Dutt on behalf of the respondents has stated at the hearing of the appeal that though there is no lien of the appellant-Company on the shares in question in case such a claim is proved, the same would not be affected by the registration of the shares.

Mr. Sen next argues that if it be assumed that the present case is not covered by Article 42 of the Articles of Association, even then the Board of Directors of the Company had the power to decline to register the transfer. It is pointed out that an allegation was made on behalf of the respondents before the Company Law Board that the Board of Directors had acted mala fide in declining to register the transfer and that the Company Law Board did not go into that allegation. The failure of the Company Law Board to do so, it is urged by Mr. Sen, vitiated its order. Without a finding that the impugned resolution was mala fide the appeal, Mr. Sen submits, could not be allowed.

The above contention, in our opinion, is not well-founded. According to Section 82 of the Companies Act, the shares or other interests of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. Sub-section (1) and (2) of Section 111 read as under: —

“ (1) Nothing in sections 108, 109 and 110 shall prejudice any power of the company under its 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.

“ (2) 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.”

Sections 108 and 110 referred to in sub-section (1) of Section 111 deal with the technical formalities which have to be complied with before the transfer of shares can be registered. Section 109 pertains to transfer by legal representatives. Perusal of sub-section (1) of Section 111 makes it manifest that if the requisite legal formalities are complied with the power to refuse to register the transfer of shares can be exercised if such a power is warranted by the Articles of Association. If the Articles of Association restrict the exercise of such power to two contingencies, it is not open, in our opinion, to the Board of Directors to decline to register the transfer of shares in cases not covered by those two contingencies. The words “or otherwise” in sub-section (2) of Section 111 cannot have the effect of enlarging the power to refuse to register the transfer of shares at given by sub-section (1) of Section 111 of the Act. Sub-section (2) prescribes the procedure which has to be followed by the company in case it refuses to register the transfer of shares. Provision is also made in that sub-section for the punishment for failure to comply with that procedure. Sub-section (2) cannot, however, be construed so as to confer power upon a company to refuse registration of the transfer even though such a power is not conferred by the Articles of Association. We may in this connection refer to the Principles of Modern Company Law by Gower (Third Edition) wherein it is stated on page 392:

“Prima facie, companies shares are freely transferable; as we have seen, it is this feature which constitutes one of the great advantages of an incorporated company. Unless the company's regulations provide otherwise, the shareholder is entitled to transfer to whom he will.”

It is further stated on page 393:

“ (d) If, on the true construction of the regulations, the directors are only entitled to reject on certain prescribed grounds and it is proved that they have rejected on others, the court will interfere.”

So far as the contention is concerned that the Company Law Board should have gone into the question as to whether the Board of Directors had acted mala fide in passing the impugned resolution, we are of the opinion that it would have been necessary to do so if the Board of Directors had acted in a matter which was within their discretion. As in the present case that Board of Directors had declined to register the transfer on a ground not allowed by the Articles of Association, the occasion of going into the question whether the resolution of the Board was passed mala fide or bona fide did not arise. The two cases Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala and others, (1962) 2 SCR 339, (1) and Bajaj Auto Ltd., Poona v. N.K Firodia and another etc., AIR 1971 SC 321 (2), referred to on behalf of the appellant-Company, are of no material help to the appellant. In both these cases the Articles of Association gave the Directors absolute and uncontrolled discretion to decline to register transfer of shares. In that context it was held that there should be just and proper consideration of the proposal on the facts and circumstances of the case. It was further observed that the reasons of the Directors would have to be tested from three points of view. First, whether the Directors acted in the interest of the Company; secondly, whether they acted on a wrong principle, and, thirdly, whether they acted with an oblique motive or for a collateral purpose. The discretion of the Directors, according to their Lordships, would be nullified if the Court were satisfied that the Directors acted oppressively, capriciously, or corruptly, or in such other way mala fide. In the instant case, as would appear from the above, there was no discretion in the Board of Directors to decline to register the transfer. As such, there was no necessity of going into the mala fide nature of the impugned resolution.

Reference has been made on behalf of the appellant to the case of Nanalal Zayar and another v. The Bombay Life Assurance Co., Ltd. and others, AIR (37) 1950 SC 172. (3) This case pertained to Section 105C of Companies Act, 1913, relating to allotment of additional shares to the existing shareholders before offering them to outsiders. It was held that the Directors must exercise the power for the benefits of the company and if they did so the fact that they had a subsidiary motive in any way affecting the company or the interests of the existing shareholders would not induce the court to interfere. The dictum laid down in the above case, in our opinion, has no bearing on the present case.

Reference has also been made by Mr. Sen to observations on pages 520 and 524 of the Principles of Modern Company Law by Gower (Third Edition), Those observations are in the context of the fiduciary duties of the Directors and relate to matters which are intra vire. Indeed it has been expressly made clear on page 516 that in the following discussion it was assumed that the Directors were acting intra vires — that is, within their powers and those of the company. As would appear from the above, the Board of Directors in the present case acted beyond the scope of their powers. As such, the observations referred to above cannot be of much avail to the appellant.

Section 155 of the Companies Act was also referred to on behalf of the appellant. The said section relates to the powers of Court to rectify register of members. As observed in the case of Harinagar Sugar Mills Ltd. (1) a person aggrieved by the refusal to register transfer of shares has two remedies under the Act, viz., (1) to apply to the Court for rectification of the register under Section 155, or (2) to prefer an appeal under Section 111. In both the proceedings the matter has to be determined judicially. The Central Government must, therefore, give reasons while deciding the appeal under Section 111. In case it fails to do so its decision would be set aside and case remanded for rehearing. In the present case the order of the Company Law Board suffers from no such infirmity as reasons in support of the decision have been given.

Reference has been made on behalf of the appellant to Section 41 of the Companies Act which defines members of the company. Regulation 28 in Schedule I to the Act which deals with persons becoming entitled to shares by reason of death or insolvency of the holder, Section 247 which provides for inventigation of ownership of Company and Section 2 (30) of the Act which defines officers of the Company. None of these provisions, in our opinion, has any bearing on the present case wherein the short question is whether the Board of Directors can refuse registration of transfer in case such refusal is not warranted by the Articles of Association. The observations about the changing patterns of the functions, liabilities and duties of the company directors given in “The New Frontiers of Company Law” by Mr. S.C Sen to which also reference was made, do not advance the case of the appellant any further, because those observations are of general nature and do not deal with the precise question with which we are concerned in this appeal.

The appeal consequently fails and is dismissed, but in the circumstances without costs.

Appeal dismissed.