Mukundlal Manchanda And Another v. Prakash Roadlines Ltd. And Others

1. The petitioners seek rectification of the Register of Members of annulling Shares Transfer Register pursuant to the resolution of the Board of Directors of the first respondent company dated 31-3-1990. The petitioners also seek the enforcement of the procedure prescribed in Article 7 of the Articles of Association of the first respondent company.

2. The share holders of the first respondent company belonged to a family and are inter-related. The share capital is Rs. 50 lakhs consisting of 50,000 shares valued at Rs. 100/- each. The issued share capital is Rs. 30 lakhs. It is stated that petitioner-1 has 1500 shares and the 2nd petitioner has 743 shares. Petitioners-1 and 2 and the second respondent are brothers, 4th respondent is the son of the 2nd respondent, 3rd respondent is the son of the 5th respondent, 6th respondent is HUF of which the 2nd respondent is the kartha. On 31-3-1990 the Board of Directors resolved permitting the transfer of certain shares whereby the 6th respondent was permitted to transfer 1318 shares to the 3rd respondent; the 2nd respondent was permitted to transfer 175 and 1628 shares to the 4th respondent under two transfer deeds. Similarly the 5th respondent was permitted to transfer 900 shares to 3rd respondent. There is also no dispute that these transferees were already share holders of the company as is clear from Annexure-B (list of shareholders filed by the petitioners). The fact that these transferees are the existing share holders has relevancy while considering the applicability of Articles 7 and 8 of the Articles of Association of the first respondent company. These two petitioners attack the permission for transfer and the consequential transfer of the shares, registered in the register of shareholders on the following grounds:

(i) In effecting the transfer there was a violation of the provisions of Section 108 of the Companies Act, 1956 (for short ‘the Act’).

(ii) The transfer effected contravened the provisions of Article 7 of the Articles of Association of the Company; and

(iii) The transfers done by respondents-2, 5 and 6 were in bad faith.

3. It is stated that the 2nd respondent was the Managing Director of the Company and he used his position to have the resolution passed for the transfer in a hurry to meet the situation caused by the issuance of a registered notice by his wife (as per Annexure-H, dated 28-3-1990). In the aforesaid notice the wife of the second respondent claimed the entire shareholding of the 2nd respondent as her Streedhana property, i.e, those shares were acquired by the 2nd respondent out of the earnings of the Streedhana property and hence belonged to her. The notice is quite lengthy and avers several facts which are not necessary to be detailed here. By the said notice the wife of the 2nd respondent called upon him to return to her within 15 days her entire Streedhana which has been invested in various business. She also revoked all powers and power of attorney executed by her in favour of her husband, including the right of the second respondent to act as kartha of the HUF. A copy of the notice was sent to the first respondent company also with a note asking the company not to effect any transfer of the shares etc., held in the name of the 2nd respondent. This notice is dated 28-3-1990 and was issued from New Delhi. It is necessary to note here that, there is nothing to show that the notice was served on the 2nd respondent on 30-3-1990. The petitioners however assert that the said notice was served on the first respondent company on 30-3-1990 and was received by the 2nd petitioner and that he had conveyed the information of the notice to the 2nd respondent on the same date. In the course of the hearing of this petition, a copy of the delivery form of the courier service wherein the signature of the watchman for having received an envelope addressed to the first respondent company on 30-3-1990 was produced (vide Annexure-R3 filed along with the objection statement). Further, the notice bears the seal of the company and the signature of the 2nd petitioner. It is also necessary to note here itself that the proceedings of the Board's meeting held on 31-3-1990 do not include any reference to the aforesaid notice and the contesting respondents are justified in pointing out that in case really the notice had been served on 30th March, 1990 itself the 2nd respondent who was present as a special invitee, as well as the first petitioner, would have agitated the question before the Board or atleast immediately thereafter. The contesting respondents assert in their objection statement that this notice was delivered to Suresh Kumar Manchanda (2nd petitioner) at his residence and according to the information given to the contesting respondents (respondents-2 to 6) the envelope was addressed to the 2nd petitioner and not to Prakash Roadlines, i.e, the first respondent company. These respondents further pointed out that the notice was received by the company only on 2-4-1990 for which purpose they rely on the copy of the notice filed as Annexure-R4 bearing the seal of the company dated 2-4-1990. These respondents assert that the copy of the notice filed as Annexure-H was never served on the company and the copy produced by the petitioners is the one made out of the notice copy available with the petitioners to create an impression that the sale transactions in question were engineered to defeat the claim of the wife of the 2nd respondent. In the circumstances of the case, I am of the view that the notice issued by the wife of the 2nd respondent was not at all delivered at the company's office by 31-3-1990 and there is nothing on record to infer that the 2nd respondent was aware of the contents of the notice for the purpose of this proceeding. Anyhow, this is not a major question bearing any impact on the ultimate conclusion, necessary to decide the case. Before deciding other questions, it is convenient to decide the question raised with reference to Articles 7 and 8 of the Articles of Association. They read thus:

“7. Any member desiring to sell any of his shares must notify the Board of Directors of the number of shares, the market price and the name of the proposed transferee and the Board must offer to the other shareholders the number of shares referred at the market price and if the offer is accepted the shares shall be transferred to the acceptor or acceptors, and if the shares or any of them are not so accepted within one month from the date of notice to the Board, the holder may sell or transfer them or any of them at the same or higher price to third parties. In case of any dispute regarding the market price of the shares, it shall be decided and fixed by the Company's auditor whose decision shall be final.”

“8. No transfer of any shares shall be made or registered without the previous sanction of the Directors, except when transfer is made by one member of the company to another or to a member's wife or child or children or his heirs and the Directors may decline to give such sanction without assigning any reason and shall so decline in case of any transfer of which shall involve a contravention of Clause 3 of these Articles.”

4. Mr. Raghavan, learned counsel for the petitioner contended that as per Article 7 no member can sell any of his shares without first notifying the Board of Directors with the particulars stated therein. On receipt of such a notice the Board must offer those shares to other shareholders and if the offer of the Board is accepted by other shareholders it shall be transferred to the shareholder or shareholders who are willing to purchase the same. In case there is any dispute regarding the market price of the shares it shall be decided by the company's auditor. I find it difficult to accept this contention for the simple reason that when a share is proposed to be sold to another shareholder, question of offering it to other shareholders would not arise at all. The object of Article 7 is to preserve the shareholding to the members of the family and to the existing shareholders. Suppose, a shareholder wants to sell 3 or 4 shares to another shareholder and all other shareholders offer to purchase the same at the market price, how to effect the transfer by selling the share to other shareholders is not forthcoming in Article 7. The shares cannot be divided in proportion to the share holding of different shareholders who are willing to purchase the same. Further, what is the purpose of preventing one shareholder from purchasing the share of another is also not clear. The purposes behind Article 7 is clear when it is compared with Article 8. Article 8 states that shares shall not be transferred without the previous sanction of the Directors except when transfer is made by one member to another or to a member's wife or child etc. In other words, Article 8 does not bar the transfer of the share by one shareholder to another shareholder or to the relatives stated therein for which purpose sanction of the Directors is not necessary. Previous sanction of the Directors is not at all necessary for transfer of the shares by one shareholder to another falling within the enumerated clause in Article 8. Transfer includes sale. In fact, Article 7 also uses the word ‘sell’ or ‘transfer’. Article 8 should have an independent operation and Article 7 also should have an independent operation. Both Articles can have full play provided their, para-makers are understood. The sale or transfer of one shareholder to another shareholder or to the relatives mentioned in Article 8, is excluded from the operation of Article 7. Both Articles can act independently of each other. Further, nowhere Article 8 says, it is subject to the provision of Article 7. Therefore, it is clear that the transfer of shares in favour of the existing shareholders does not require to be effected after following the procedure stated in Article 7. Consequently the contention of the petitioners under this ground is liable to be rejected and accordingly it is rejected.

5. The bona fides of the sale transaction is questioned on the ground that the 2nd respondent wanted to defeat the claim of his wife, who has already filed a civil suit in Delhi High Court. This contention is liable to be rejected for the reason that the wife of the 2nd respondent has already filed a suit and it is for her to agitate her claim in the said suit. The petitioners need not agitate the case of the 2nd respondent's wife. Originally she was not impleaded in this proceeding. I had heard this matter on 11-1-1991 and the order was reserved. I could not write the order for a few days and to have the facts once again clarified, matter was posted for further arguments, and the matter came up before the Court on 15-2-1991 on which date Mr. Raghavan, the learned counsel for the petitioners, sought some more time to argue the matter again. That is how the petition came up before me on 22-2-1991. In the meanwhile the wife of the 2nd respondent filed an application (C.A No. 185/1991) on 13-2-1991 to come on record as a petitioner or as a respondent in this petition. In her application she has stated that she had already sent a notice to her husband on 28th March, 1990 and the notice was received by the company on 30-3-1990 at a time when the 2nd respondent was the Chairman and Managing Director of the company and she had made certain claims against the 2nd respondent as also regarding certain shares in the company. Subsequently she filed a suit in Delhi High Court bearing O.S No. 1779 of 1990 which is pending. Thus it is clear that the wife of the 2nd respondent has already taken steps to safeguard her alleged interest and the recourse to the filing of the original suit is certainly a very appropriate forum resorted by her rather than invoking the summary jurisdiction of this Court under Section 155 of the Act. Instead of making a separate order on the said application (C.A No. 185/1991) the said application is rejected here itself for the reasons stated herein above.

6. The contention of the petitioners questioning the bona fides of the 2nd respondent in effecting the share transfer also is similarly rejected as irrelevant for the purpose of this proceeding.

7. The substantial contention involves the application of Section 108 of the Act. On facts, the question raised is:— The transfer forms were presented for the stamping purposes earlier and they were stamped on 22-11-1989. Thereafter, after getting the share transfer forms duly stamped on 22-11-1989 these transfer forms were filled up and were delivered at the company's office on 30-3-1990. Under Section 108(1-A) of the Act, the duly executed deed of transfer will have to be delivered within two months from the date of stamping, which in this case will be 22-1-1990. Therefore the delivery of the instrument of transfer on 30th March, 1990 was not acceptable under law and therefore these instruments were not proper instruments referred in Section 108(1) and consequently they cannot be recognised; the Board should have rejected these instruments of transfer on 31-3-1990, instead of acting on the said instrument. Respondents-2 to 6 met this contention by putting forth two alternative answers; (i) in fact the instrument of transfer really acted upon by the Board on 31-3-1990 were not those produced by the petitioners as Annexures-‘D’, ‘E’, ‘F’ and ‘G’; that on 31-3-1990 new instruments of transfer were filed and they were substituted in the place of the aforesaid instruments of transfers when the then Secretary of the company pointed out that the delivery of the instruments of transfer will have to be within two months from the date of the presentation for stamping purposes. The respondents have filed the affidavit of the then Secretary of the company, by name Shreesha. They have also produced the copies of the fresh instruments of transfer which have been filed on 31-3-1990 and pointed out that the said Secretary to safeguard his own interest having regard to certain facts, had notarised the copies of the fresh instruments of transfer on 5-4-1990. These notarised copies are produced along with the affidavit of Shreesha. The alternative contention of respondents-2 to 6 is that the period within which the instruments of transfer should be delivered, after stamping as stated in Section 108(1-A)(b)(ii) of the Act is directory and a delayed delivery would not affect the validity of the instrument of transfer and if for any reason the company accepts such a delayed delivery and acts upon it, the rights of the transferee cannot be affected at all. Respondents-2 and 3 also point out that these petitioners were present as special invitees at the Board's meeting held on 31-3-1989 when the Board resolved to permit the share transfers. Thereafter on 14-4-1990 at a time when the petitioners were the Directors of the Company confirmed the Minutes of the meeting of the Board held on 31-3-1990. These respondents have produced the copy of the Minutes of the meeting held on 14-4-1990 as Annexure-R2. Therefore, these respondents contend that the petitioners were fully aware of the share transfers effected and they were parties to the transactions in question and therefore, they are estopped from contending that the shares were transferred illegally by filing this petition on 19th September, 1990. According to these respondents, the petitioners are trying to help the wife of the 2nd respondent, who failed to get any interim relief in the suit filed by her in the Delhi High Court and therefore, the present petition was filed in September, 1990. The conduct of the petitioners is such, it is contended, that the petitioners are not entitled to any discretionary relief under Section 155 of the Companies Act.

8. In Muniyamma v. Messrs Arathi Cine Enterprises (P) Ltd.*, ILR 1991 KAR 527, I have already expressed my view that the jurisdiction under Section 155 of the Act is discretionary and while exercising the said jurisdiction this Court may take note of the conduct of the parties involved in relation to the subject matter in issue. The share transfers were resolved to be permitted at the Board's meeting held on 31-3-1990 (Annexure-C). There were six special invitees out of whom two were the present two petitioners. Therefore, the knowledge of the share transfers certainly was there with the two petitioners. If for any reason there was an illegality in permitting this transfer, the petitioners would have immediately protested then and there itself or subsequently by sending a protest letter. The petitioners, however, assert that they came to know of the illegality only in September, 1990 when the internal auditor of the company brought to their notice about the defect. It is a fact that these petitioners were the Directors immediately thereafter and affirmed the proceedings of the Board meeting held on 31-3-1990, in the subsequent Board meeting held on 14-4-1990. Whatever may be the position regarding the dates about the stamping of the share transfer forms and their delivery, the petitioners must be assumed as having known the provisions of Articles 7 and 8 of the Articles of Association. It is not their case also that these petitioners were unaware of the Articles 7 and 8. They are also aware that the shares were being transferred in favour of the other shareholders, i.e, respondents-3 and 4. If the petitioners were aggrieved by the transaction in question at that time they would not have hesitated atleast to raise the object ion by invoking Article 7 of the Articles of Association. The fact that they kept quiet and did not raise any objection immediately thereafter shows that at all the relevant point of time petitioners had no grievance against the transfer of shares in question al all. The present conduct of the petitioners in trying to establish that the second respondent received the notice issued by his wife on 30-3-1990 itself, by its service on the company, is an indication as to how the mind of the petitioners changed subsequently and that the present petition is nothing but the result of a change of attitude towards the 2nd respondent in recent times. As members of the Board of Directors, on 14-4-1990 the petitioners should have noticed the transfer deeds. In this connection affidavit of the then Secretary of the company Shreesha is quite relevant. In the said affidavit of Shreesha, filed along with the objection statement of respondents-2 to 6 dated 4th October, 1990, he has stated that four sets of share transfer forms were lodged with the company on 30-3-1990 and he gave the details of the same. On finding that the delivery was beyond two months of the stamping, Shreesha informed respondents-3 and 4 about it and therefore on the next day at about 10 A.M new sets of share transfer forms were lodged with the company through the Secretary (Shreesha). He further asserts that the original share certificates were taken back for the purpose of enclosing them to the newly filed share transfer forms and actually they were refiled as such. The Secretary states that he placed them before the Board of Directors at its meeting held on the same day and they were approved. He further states that by mistake he made endorsements on the first set of the share transfer forms and sent those transfer forms for the signatures of the Chairman and the Managing Director. On realising the mistake he sent the new forms again for signatures and obtained the requisite signatures. These sets of share transfers (old and the new ones) were kept in his office drawyer, a duplicate key of which was available with one Bharat Narang, a wholetime Director of the company and who was in-charge of the administration. On 2-4-1990 and 2nd petitioner called Shreesha to his chamber and informed the latter not to effect transfers in view of the notice received by him from an Advocate at Delhi. When the Secretary pointed out that there is no Court order against effecting the transfer, he was threatened by the 2nd petitioner. Immediately thereafter the Secretary (Shreesha) noticed that the set of transfer forms kept in his drawyer was missing), and this, read in the light of the threat received by him, made him to get the second set of share transfer forms Xeroxed and notarised and the notarised xerox copies were kept with him to safeguard his own interest; they were produced along with his affidavit in the Court. This affidavit of Shreesha will have to be accepted. This is an affidavit of an independent person not connected with the family affairs of the petitioners and the contesting respondents. May be, he has resigned now as the Secretary of the company. According to him, he has now started practising as an independent consultant. This affidavit of Shreesha is dated 16th October, 1990. In the reply statement filed by the petitioners on 15-2-1991, I do not find any specific allegation against Shreesha, except questioning his bona fides. It is clear that Shreesha was functioning as the company's secretary for nearly 2 months after 2-4-1990. The circumstances stated already about the presence of the petitioners at the Board meeting etc., corroborates the averments made by Shreesha in his affidavit. After the Board's meeting held on 31-3-1990, the Board seems to be under the control of the petitioners and therefore they were in a position to insert or take away any of the documents. Therefore on facts I am of the view that the share transfer forms were substituted on 31-3-1990 as stated in the affidavit of Shreesha and therefore, the contention of the petitioners under Section 108 against the validity of the transfer has no factual basis.

9. However, I am also expressing my views about the scope of Section 108 of the Act. The mandatory character of Section 108 is now firmly established by the decision of the Supreme Court in Mannalal Khetan, etc., etc. v. Kedar Nath Khetan, etc., etc., (1977) 2 SCC 424 : AIR 1977 SC 536; this is relied upon by Mr. Raghavan to contend that delivery of instrument of transfers beyond two months after their stamping of the transfer form is invalid and therefore, the resolution of the Board made on 31-3-1990 was illegal. The Supreme Court held that provisions of Section 108 are mandatory. The transactions in question were prior to the amendment made to the Act in the years of 1965 and 1966. Sub-section (1-A), (1-C) and (1-D) were inserted for the first time by the amending Act of 31 of 1965. The Supreme Court was interpreting the provisions of Section 108 as it stood at the time of the impugned transaction therein and the Supreme Court has no occasion therefore to make any observation concerning sub-section (1-A) of Section 108. Section 108 as it then stood is similar to the present Section 108(1) only; this provision bars the company against registering a transfer of shares unless a proper instrument of transfer duly signed by both set of parties and delivered to the company with the certificate of shares. Nowhere this prescribes a period of limitation within which the transfer forms had to be delivered to the company, to cause the registration of the transfer. The impugned transfers therein were without any proper instrument of transfer etc.

10. In the instant case, I am concerned with the effect of sub-section (1-A)(b)(ii) of Section 108. The purpose of sub-section (1-A) is stated to restrict the period of currency of a blank transfer form (vide Notes on clauses attached to the Amendment Bill, resulting in the Act 31 of 1965 and the objects and reasons for the further amendment, as per Amendment Act 37 of 1966).

11. Sub-section (1-A) directs as to the form of instrument of transfer, its presentation for stamping and its stamping and the execution of the transfer by due signing by the transferor and the transferee; thereafter, the delivery of the instrument of transfer to the company ‘within’ the time stated in sub-clause (i) or (ii) of sub-section (1-A)(b), as the case may be.

12. Section 108(1) of the Act was not amended to say that delivery of transfer forms should be within the period stated in Section 108(1-A) of the Act. If any such words had been inserted in Section 108(1) of the Act, the bar against effecting the transfer would cover the delayed delivery of transfer forms.

13. Question therefore is, whether the bar under Section 108(1) is attracted to the requirements as to the period staled in clause (b) of sub-section (1-A). Can it be said that, when a blank transfer form is stamped, and thereafter it is signed by the transferor and the transferee, the form still continues to be blank? I think not.

14. Delivery of instrument of transfer to the company, no doubt, is a mandatory requirement as per Section 108(1). But the time limit of two months stated in sub-section (1-A)(b)(ii) does not say that the company shall not accept the instrument of transfer delivered thereafter. The stipulation of time for the performance of an act is not read as a mandatory stipulation under certain circumstances. If the person who has to perform the act has no control over the event which would result in the expiry of the period, then, he cannot be defeated of his rights by insisting on the performance to be within the prescribed period. Cases may arise when delay may occur in transit i.e, eventhough instrument of transfer is sent immediately on execution, it is not delivered by the postal department or the courier, or the movement is delayed for reasons beyond the control of the person sending the instrument; it is also possible to happen that the company's office is closed due to strike or for some other reason resulting in the non-delivery of the instrument of transfer, in time. It is not possible to foresee the several factors which may cause the delay in the delivery of the instrument. In these circumstances, requirement of sub-section (1-A)(b)(ii) has to be read reasonably, so as to enable its smooth functioning; a delivery of an instrument of transfer within a reasonable time should be held as a proper delivery. It is only where the company opines that the instrument of transfer has become stale and it is improper to act upon it, instrument of transfer has to be held as liable to be ignored.

15. Nowhere the Companies Act declares that a duly executed instrument of transfer ceases to be effective or becomes void after the period referred to in sub-section (1-A) of Section 108. In fact, under certain circumstances, those instruments can be acted upon by moving the Central Government under sub-section (1-D) of Section 108. The reasonable mode of understanding the scheme of Section 108 will be, not to render delivery of an instrument of transfer after the period specified in sub-section (1-A) as invalid, but as vesting a discretion in the company cither to recognise the transfer or not to recognise it depending upon the staleness of the instrument, and even in the latter case, the affected person may move the Central Government under sub-section (1-D) by explaining the circumstances under which the delay occurred and the hardship that results by the non-recognition of the transfer. While understanding the scheme of Section 108, Court has to bear in mind that trivialities would not render an act futile and technical formalities required to be complied with for a valid transaction, cannot outweigh the importance to be given to the substance of the transaction. Therefore, I conclude that the petitioners are not entitled to invoke the discretionary jurisdiction of this Court under Section 155 of the Act and even-otherwise their contention under Section 108 of the Act has no factual basis. Similarly, the transactions in question do not contravene Article 7 of the Articles of Association.

16. Consequently this petition fails and is dismissed, but without any order as to costs. C.A No. 185/1991 also is rejected.