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Indian Chemical Products, Ltd. v. State Of Orissa And Another
Factual and Procedural Background
The Indian Chemical Products Ltd. was incorporated on 29 November 1947 with an authorised share capital of Rs 25 lakhs. The Maharaja of Mayurbhanj subscribed to 7,500 shares, while six other shareholders held 150 shares in total. Following India’s independence and the subsequent constitutional changes, the State of Orissa asserted that the Maharaja’s shares had vested in it by operation of law and, alternatively, under a formal transfer deed executed by the Maharaja.
On 16 March 1950 the Government of Orissa lodged the share scrip and transfer deed with the company and repeatedly requested rectification of the share register. After more than three years of correspondence, the Board of Directors refused registration on 16 May 1953. The State of Orissa filed an application under Section 38 of the Indian Companies Act, 1913 before the High Court of Orissa on 9 February 1955, naming both the company and the Maharaja as respondents. Ray, J. allowed the application on 22 November 1956 and passed a supplemental order on 13 September 1957. A Division Bench dismissed the company’s appeal on 5 September 1960. The company then appealed to the Supreme Court on a certificate granted by the High Court.
Legal Issues Presented
- Whether the 7,500 shares originally held by the Maharaja of Mayurbhanj had vested in the State of Orissa by operation of law following constitutional changes.
- Whether, under Article 11 of the company’s articles of association, the Board of Directors possessed a lawful power to refuse registration of a share transfer effected by operation of law.
- Whether the refusal of the Board of Directors to register the State of Orissa as shareholder was bona fide.
- Whether the petition for rectification should fail because the State initially asked that the shares be registered in the name of the Secretary, Finance Department, instead of in its own name.
Arguments of the Parties
Company (Appellant)
- Relied on Article 11 of its articles of association, claiming an unfettered right to refuse registration of “any share or shares to any person without showing any cause”.
- Asserted that the Board’s refusal was justified because the Maharaja (and hence the State) had not honoured an alleged obligation to execute an agreement conferring valuable rights on the company, purportedly contemplated in clause 6 of the memorandum of association.
- Contended that the petition should be dismissed because the State had sought registration in the name of the Secretary, Finance Department.
State of Orissa (Respondent)
- Maintained that the shares had devolved upon it by operation of law after the merger of the Mayurbhanj State and subsequent constitutional instruments, making it the legal owner.
- Submitted, in the alternative, that a duly stamped transfer deed executed by the Maharaja was lodged with the company, satisfying any formal requirements for registration.
- Argued that the directors’ refusal was mala fide and contrary to Section 38 of the Indian Companies Act, 1913.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Bentham Mills Spinning Company (1879) 11 Ch D 900 | Distinction between “transfer” and “transmission” of shares; transmission occurs by operation of law, whereas transfer is a voluntary act requiring execution by transferor and transferee. | Used to interpret Article 11; the Court held that Article 11 applies only to voluntary transfers and not to devolutions by operation of law. |
Court's Reasoning and Analysis
Both lower courts found, and the Supreme Court accepted, that the Maharaja held the shares in his capacity as sovereign ruler. Upon the cession of sovereignty to the Dominion of India (Agreement of 17 October 1948) and subsequent constitutional instruments—including delegation under the Extra Provincial Jurisdiction Act and the States Merger (Governors' Provinces) Order, 1949—the shares vested first in the Dominion and then in the State of Orissa.
Article 11 of the company’s articles concerns voluntary transfers; applying the principle from In re Bentham Mills, the Court concluded that a transmission by operation of law is outside its scope. The directors therefore lacked authority to refuse registration based on Article 11. Even treating the stamped transfer deed as a voluntary transfer, the Court upheld concurrent findings that the refusal was mala fide: the directors delayed for over three years, raised frivolous objections about stamping that were later satisfied, and belatedly invoked an unexecuted, non-binding draft agreement as justification.
The Court rejected the procedural objection regarding the Secretary, Finance Department, noting that the company had never raised it in the correspondence and that the State had expressly requested registration in its own name on 1 December 1953.
Finding that the State’s name had been omitted without sufficient cause, the Court held that the conditions for rectification under Section 38 were met. It emphasised that Section 38 confers a beneficial jurisdiction that should be liberally exercised to prevent obstruction of legal rights.
Holding and Implications
APPEAL DISMISSED WITH COSTS. The company is directed to carry out forthwith the rectification of its register of members to show the State of Orissa as holder of the 7,500 shares in place of the Maharaja of Mayurbhanj.
Implications: The decision confirms that directors of a company cannot invoke discretionary powers under articles of association to block a transmission of shares effected by operation of law, and it underscores the liberal exercise of the High Court’s rectification powers under Section 38 of the Indian Companies Act, 1913. No new precedent was set beyond the immediate confirmation of the State of Orissa’s ownership and entitlement to membership.
BACHAWAT, J.— On November 29, 1947, the Indian Chemical Products, Ltd., a limited company, was incorporated having its registered offices in Baripada, Mayurbhanj and in the town of Calcutta. Its authorised capital is Rs 25 lakhs divided into 25,000 shares of Rs 100 each. The company has seven shareholders. The Maharaja of Mayurbhanj subscribed and paid for 7500 shares. The remaining six shareholders hold 150 shares only. All the shareholders are signatories to the memorandum of association of the company. The State of Orissa claims that by reason of the constitutional changes since the declaration of independence, all the shares held by the Maharaja of Mayurbhanj have now vested in it by operation of law. The State also based its claim to the shares on a formal instrument of transfer executed by the Maharaja. On March 16, 1950, the Government of Orissa lodged the share scrip and the transfer deed with the company, and requested it to make the necessary changes in the share register. The Government as also the Maharaja, through his agent, the Imperial Bank of India, repeatedly requested the company to register the Secretary to the Government of Orissa, Finance Department as the holder of the shares in place of the Maharaja. There was protracted correspondence in the matter for over three years and eventually on May 16, 1953, the Board of Directors of the company refused to register the transfer. On December 1, 1953, Sri S.K Mandal, Attorney for the State of Orissa, requested the company to record the name of the State as the owner of the shares in the share register, but the company declined to do so. On February 9, 1955, the State of Orissa filed an application under Section 38 of the Indian Companies Act, 1913 in the High Court of Orissa asking for rectification of the share register by inserting its name as the holder of the shares in place of the Maharaja. The company and the Maharaja were impleaded as respondents. The application was contested by the company only. On November 22, 1956, Ray, J. allowed the application. On September 13, 1957, he passed a supplemental order directing the filing of the notice of rectification with the Registrar within a fortnight. On September 5, 1960, a Division Bench of the High Court dismissed the appeal preferred by the company. The company now appeals to this Court on a certificate granted by the High Court.
2. Both Courts concurrently held that (1) the title to the shares vested in the State of Orissa by operation of law; (2) the refusal of the Board of Directors to register the transfer was mala fide; (3) the State of Orissa was entitled to rectification of the share register and a proper case for the exercise of the Court's jurisdiction under Section 38 of the Indian Companies Act, 1913 had been made out; (4) the petition was not liable to be dismissed on the ground that the State had asked the company to register the name of the Secretary to the Government of Orissa, as the shareholder in place of the Maharaja. The appellate court also held that under the articles of association of the company the Board of Directors had no power to refuse registration of a transfer where the transfer was by operation of law. The appellant challenges the correctness of these findings.
3. The Courts below concurrently found that the 7500 shares were held by the Maharaja in his capacity as ruler of the State of Mayurbhanj. Thisfinding is amply supported by the documentary evidence on the record and is no longer challenged. The State of Mayurbhanj was one of the feudatory States of Orissa under the suzerainty of the British Crown. As from August 15, 1947, with the declaration of independence the paramountcy of the British Crown lapsed. Thereafter, steps were taken for the integration of the State with the Dominion of India. On October 17, 1948, the Maharaja of Mayurbhanj signed an agreement for the merger of the State with the Dominion. By Article 1 of this agreement, the Maharaja completely ceded to the Dominion his sovereignty over the State of Mayurbhanj as from November 9, 1948. Article 4 of the agreement allowed the Maharaja to retain the ownership of his private properties only as distinct from the State properties. On and from November 9, 1948, as a necessary consequence of the cesser of sovereignty all the public properties of the State including the 7500 shares in the company vested in the Dominion. By operation of law in consequence of the change of sovereignty, all the public properties of the State which were vested in the Maharaja as the sovereign ruler devolved on the Dominion as the succeeding sovereign.
4. As from January 1, 1949, the Government of India in exercise of its powers under Section 3(2) of the Extra Provincial Jurisdiction, Act (47 of 1947) delegated to the Government of Orissa the power to administer the territories of the merged State. On August 1, 1949, the States Merger (Governors' Provinces) Order, 1949 came into force, and in consequence of Section 5(1) of the Order, all property vested in the Dominion Government for purposes of governance of the merged State become from that date vested in the Government of Orissa, unless the purposes for which the property was held were central purposes. By a certificate dated November 10, 1953 the Government of India declared that the 7500 shares were not held for central purposes. Under the Constitution which came into force on January 26, 1950, the territories of the merged State were included in the State of Orissa. By reason of these successive constitutional changes, the shares became vested in the State of Orissa. The State is now the legal owner of the shares and the Directors of the company are bound to enter its name in the register of members, unless there is some restrictive provision in the articles authorising them to refuse the registration.
5. The company contends that under its articles the Directors have the power to refuse the registration. It relies on Article 11, which reads:
“The Board of Directors shall have full right to refuse to register the transfer of any share or shares to any person without showing any cause or sending any notice to the transferee or transferor.
The Board may refuse to register any transfer of shares on which the Company has lien.”
6. Articles l-A attracts the regulations in Table A of the First Schedule to the Indian Companies Act, 1913 so far as they are applicable to private companies and are not inconsistent with the articles. The regulations in Table A make a distinction between transfer and transmission of shares. In respect of a transfer, they require that the instrument of transfer shall be executed both by the transferor and the transferee. A transmission by operation of law is not such a transfer. In re Bentham Mills Spinning Company (1879) 11 Ch D 900, James, L.J said: “In Table A the word ‘transmission' is put in contradistinction to the word ‘transfer'. One means a transfer by the act of the partners, the other means transmission by devolution of law”. Article 11 refers to transfers. A devolution of title by operation of law is not within its purview. Being a restrictive provision, the article must be strictly construed. In the instant case, the title to the shares vested in the State of Orissa by operation of law, and the State did not require an instrument of transfer from the Maharaja to complete its title. Article 11 does not confer upon the Board of Directors a power to refuse recognition of such a devolution of title. We may add that we express no opinion on the question whether such an article applies to an involuntary transfer of shares by a Court sale having regard to the provisions of Order 21 Rule 80 of the Code of Civil Procedure with regard to the execution of necessary documents of transfer.
7. Clause 22 of the regulations in Table A read with Article 1-A confers power upon the Board of Directors to decline registration of transmission of title in consequence of the death or insolvency of a member. In the instant case, there is no transmission of title in consequence of death or insolvency, and clause 22 has no application. Under the articles, the Directors had therefore no power to refuse registration of the devolution of title on the State of Orissa by operation of law in consequence of the constitutional changes.
8. Though the State of Orissa had acquired title to the shares by operation of law, by way of abundant caution it obtained a deed of transfer and lodged it with the company together with the share scrip. The transfer deed was duly stamped and complied with all the formalities required by law. The calim of the State of Orissa based upon the transfer deed was within the purview of Article 11. Even with regard to this claim, the Courts below concurrently held that the Board of Directors acted mala fide in refusing to register the transfer. This finding is amply supported by the materials on the record. In spite of the fact that the State had filed with the company a certificate of the Collector of Stamp Revenue, West Bengal that no stamp duty was payable on the transfer, the company raised the objection that the transfer deed must be stamped. To avoid this objection, the Government stamped the deed and again lodged it with the company. For over three years, the Directors delayed registration of the transfer on frivolous pretexts. On May 16, 1953, the Directors without assigning any reason declined to register the transfer. Before the High Court, the company asserted that the registration was refused because the Maharaja of Mayurbhanj was under an obligation to execute an agreement conferring valuable rights on the company and the State of Orissa had failed to honour this obligation. Reliance was placed on clause 6 of the company's memorandum of association, which stated that the company and the Maharaja proposed to enter into an agreement and a copy of the proposed agreement was annexed. Clause 6 shows that there was a proposal between the parties to enter into an agreement, but there was no concluded agreement between them, nor was there any binding obligation on the Maharaja to execute an agreement. The Directors could not use their power of declining to register the transfer under Article 11 for the purpose of forcing the State of Orissa to enter into the proposed agreement. Actually, the reason given at the trial was an afterthought. The Imperial Bank of India representing the Maharaja was pressing for registration of the transfer. By its letter dated March 17, 1953, the company assured the Bank that the registration would be effected shortly. Nevertheless, on May 16, 1953 the Directors capriciously refused to register the transfer.
9. The power under Article 11 to refuse registration of the transfer is a discretionary power. The Directors must exercise this power reasonably and in good faith. The Court can control their discretion if they act capriciously or in bad faith. The Directors cannot refuse to register the transfer because the transferee will not enter into an agreement which the Directors conceive it to be for the interests of the company.
10. We cannot accept the contention that the petition was liable to be dismissed because the State of Orissa had asked for registration in the name of the Secretary, Finance Department. No such objection was taken by the company, although it had taken numerous other objections. Moreover, by letter dated December 1, 1953, Shri S.K Mandal, the Attorney for the State of Orissa, had definitely called upon the company to record the name of the State as the owner of the shares in the share register. In spite of this letter, the company refused to make the necessary registration.
11. The Maharaja of Mayurbhanj has ceased to be the owner of the shares. The State of Orissa is now their owner, and has the legal right to be a member of the company and is entitled to say that the company should recognise its membership and make an entry on the register of the fact of its becoming a member and its predecessor-in-title having ceased to be a member. The name of the State of Orissa has, without sufficient reason been omitted from the register and there is default in not entering on the register the fact of the Maharaja having ceased to be a member. The Court's jurisdiction under Section 38 is, therefore, attracted. The High Court rightly ordered the rectification in the exercise of its summary powers under Section 38. The jurisdiction created by Section 38 is very beneficial and should be liberally exercised. We see no reason why the Court should deny the applicant relief under Section 38. The Directors of the appellant company on the most frivolous of objections have prevented the State of Orissa from becoming a member for the last 16, years. It is a matter of regret that justice has been obstructed so long. There is no merit in this appeal.
12. The appeal is dismissed with costs. The appellant company do forth with carry out the order of rectification passed by the Courts below, in case the order has not been carried out yet.
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