The petitioner, who is a nominee of an auction-purchaser to the extent of 500 shares of the respondent-Company held by Behtreen Industries Ltd., a company being wound up, has challenged the refusal on the part of the directors of the respondent-Company to register him as o member. ,, The facts: leading to this case are that one Ch. Abdur Rahim Khan made the highest offer of Rs.
75,000- for the entire share holding of 14,250 of Behtreen Industries Ltd., in the respondent- Company; in an auction by the Liquidator. The offer was accepted. An agreement dated 20th October, 1962 was duly signed by the parties, auction-purchaser and the Liquidator. The sale was duly approved by the learned Company Judge vide order dated 22nd October, 1962.
3. It was a part of the order that Ch. Abdur Rahim will be liable to pay income-tax, if any, on those shares, to the Income-tax Department or the Combined Industries Ltd. And shall have also the right of representa--tion though the property and the shares would pass on payment of the full sale price. The learned Judge then directed the Official Liquidator to accept the offer and sell the shares in question to Ch. Abdur Rahim Khan in accordance with his written offer dated 20th October, 1962.
4. According to the learned counsel, the terms of the agreement signed between the Official Liquidator and Ch. Abdur Rahim Khan state specifically that the transfer-deeds shall be in favour of the purchaser or his nominee and the Official Liquidator shall have no responsibility to secure the transfer of the said shares by Messrs Combined Industries Ltd.
5. On 7th of November, 1971, the Official Liquidator, at the request of Ch. Abdur Rahim Khan, signed a transfer deed of 500 shares in favour of the petitioner. The petitioner delivered the transfer-deed in the office of the respondent on 14th November, 1981, for registering him as a share--holder. As he heard nothing for sometime from the respondent, he reminded it on 8th of February, 1982. On 21st of February, 1982, the petitioner received an intimation from the respondent-Company refusing to register the shares in petitioner's name,
6. It is contended by the learned counsel that the refusal of the respon--dent-Company, by taking refuge behind Articles 6 and 7 of its Articles of Association is unwarranted and illegal and that the directors can be directed to register the shares in the name of the petitioner. Reliance is placed on F. Narankari Motor Co. v. The Wahid Bux and Mailsi Transport Co. Ltd., Multan A.1 A 1949 Lab. 6The learned counsel for the respondent has relied on Articles 6 and 7 of the Articles of Association of the company and states that as it is a private company, the law has always given it protection to refuse to register such trans--ferees as shareholders whose presence may ruin or even impede the efficiency or the very working of the company. He has relied on Balwant Transport Co. Ltd.
Amraoti v. Y. H. Deshpande AIR 1956 Nat. 20The learned Judges surveyed the entire case-law available on the point to hold that the auction-purchaser of a Court did not have the right to get his share registered in case the directors bona fidely refused to do so.
7. It is admitted that the directors of a private company are entitled to refuse registration of a transfer of a share to a stranger. The transfer in this case is not made by a shareholder but by an order of Court. The first question arising here is whether the directors of a private company are entitled to refuse to register even an auction-purchasher of shares in a sale by the Liquidator, in view of the power given to them by the articles of association of a company. As the legal position in such a case is not so well established I think it will be proper to seek guidance from the case law on the point, first of all.
8. In F. Narankarf Motor Co., Multan v. The Wahid Bus and Mailsi Transport Co. 'Ltd., Multan a learned Single Judge of this Court held that there is a distinction between the transfer and ,transmission of shares. The transfer is by voluntary act of parties whereas transmission is by operation of law. A Court-sale is not a transfer. An article of association which gives the Directors absolute and an unrestricted discretion, to refuse to register a proposed transfer of shares, has no application to a Court-sale and the Directors cannot refuse to register a transfer of shares effected by a Court -- sale. It is to be noted that in that case the directors had, in the first instance, allowed the transfer but went back on it later. The Court, therefore, further held that even if it is supposed that the directors have an unfettered power in this matter, they should have exercised the same at the earliest opportunity but could in no case change their acceptance to register the shares which had been earlier communicated.
9. In Balwant Transport -Co. Ltd., Amraoti v. Y. H. Deshpande a Division Bench held that the directors enjoyed a vast power to refuse to register any transfer of shares whether fully paid or not if in the opinion of the directors, it was not in the interest of the company to admit the proposed transferee to its membership or increase his holding. Consequently, even if it can be shown that a power so vested in them was exercised mala fideor for any collateral purposes, the Court cannot overrule the decision of the directors and substitute its own judgment about the desirability of bringing the name of a person as a share-holder in the register. The Lahore case was cited before the learned Judges but they did not accept the contention that an auction-sale amounted to transmission of the shares. They sought support from Article 22 of Table `A' which deals with the transmission of shares in consequence of death or insolvency of a member and pointed out that even there the directors had the same right to decline or suspend the registration as they would have in the case of transfer of a share by a deceased or insolvent person before the death of insolvency. The learned Judges also referred to Order XXI, rules 79(3) and 80(1) to say that there the transfer deed is to be executed by- the Court or any officer appointed by it, in the place of the original owner/shareholder and there is no question of one becoming a share-holder automatically by purchase in a Court --auction. The Court also distinguished the following Madras case which was followed by a learned Single Judge of this Court in the case referred to in para. 8 above.
10. In T. A. K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. And others (1), a Division Bench ruled that the transferee's remedy is not limited to making an application to the District Court under S. 39, Companies Act, and that right of suit is open to him. Further, that in the absence of anything in the articles of association for bidding the same, a sale by Court of shares held by a member has the effect of transferring the shares to the purchaser. The Court also pointed out that the. Expression "transfer" by itself is not altogether appropriate to indicate a sale in invitum by the Court as the expression "transfers" has been used in such collocations as "transfers" by operation of law. At the same time the expression "transfer" is undoubtedly more appropriate to indicate what is effected or brought about by the will of the person in whom the property is vested, as in the Transfer of Property Act. According to the learned Judges the expression "transmission" is more appropriate than the word "transfer" for indicating assignment effected by some agency other than the transferor. In this case the learned Judges observed that it is not necessary in case of a sale in Court auction that the Court should execute a transfer under Order XXI,, rule 80 before the purchaser can be entitled to such share. Reliance was placed in the case on T. Nagabhushanam and others v. S. Rarnchandra Rao and others (2).
11. In T. Nagabhushanam and others v. S. Ramchandra Rao and others the Court considered the scope of Order XXI, rule 79(3) and found that where the law prescribes a mode of transfer, any transfer otherwise than by the manner prescribed by law will not confer a valid title. So far as the Madras High Court is concerned it has set its face against what may be called the equitable construction of statutes. The learned Judges referred to Kurri Veerareddi v. Kurri Bapireddi (3), where it was held that the provisions of section 54 of the Transfer of Property Act which provides for the mode of transfer of immovable property are imperative and that Courts would not be justified in disregarding them on equitable grounds. It was further held that:
(1) AIR 1928 Mad. 571.(2) AIR 1923 Mad: 241
(3) (1908) 29 Mad. 336 "As regards purchasers in Court sales where the. Sale is confirmed and the provisions of the Act are complied with there is nothing further to be done by the transferee or by the Court. When an order is issued under sub-clause (3) of rule 79 of Order XXI, C. P. C., the company acting through the secretary or proper officer could not make a transfer of the shares to any body else. It has either to recognise the transfer or refuse to recognise it. Form 34 of App. E of the Civil Procedure Code is the prohibitory order contemplated in rule 79, clause 3. It is addressed to the Secretary of the Company and recites the fact of the purchase by the auction-purchaser of the shares specified in the order and prohibits the Company from making any transfer of the shares to any person except the purchaser or from receiving any dividend thereon or from 'permitting' any transfer or from making any payments to any person except the purchaser. It is issued under the seal of the Court and signed by the Judge."
Thus the learned Judges found that on the confirmation of the sale and the issue of the order no further steps are required to be taken by the Code and there is no provision in it which requires the execution of any further documents by the Court.
12. In Mandal Brijlal Shah v. Gordon Spinning and Manufacturing Co. Ltd. (1), the Court held: "For the purposes of this argument, we must, of course, assume that the Directors would be within their powers in refusing to register the present appellant if he were a private purchaser, and not a Court --purchaser. Upon that assumption, I can see no reason why the Directors' powers should be curtailed merely because the appellant purchased at a Court-sale. For whether the sale is made by a private individual or by a Court, it seems to me clear that the thing sold and transferred from the seller to the buyer is merely the property in the share plus a limited, not an absolute, right to have the transfer registered. The learned Judges held that the Court never auctioned an absolute right in his favour to register him as a share-holder against the wishes of directors who thought that he might ruin the whole company." .
The Court agreed with the learned Single Judge to say if a person whose professed object might be to wreck or damage the company, he could nevertheless oust the directors' discretion, and compel them to register him, by the simple process of purchasing through the Court after a collusive decree. The Nagpur High Court in a later case In re: Balwant Transport Ltd. has upheld its previous view. Following the view of the Madras and Bombay High Courts, the Calcutta High Court in Mahadeo v. New Darjeeling U. Ten Co. (2), held that section 28 of the Companies Act and articles of association of a company laying down that a transferee can obtain transfer only on the basis of a transfer deed, does not apply to Court-sales.
(1) AIR 1916 Born. 147(2) (1951) 55 C W N 408
13. The above discussion shows the sharp conflict between the views taken by Madras, Calcutta and Lahore High Courts on one side and the 14agpur and Bombay High Courts on the other.
According to the former, the auction sale is a transmission of shares while the power of the directors is to refuse transfer and not transmission. The Madras view which was followed by Calcutta and Lahore High Courts did not consider the effect of regula--tions 22 and 23 of Table 'A' according to which even transmission of shares, in the wake of death or insolvency, is subject to the discretion of the directors as also said in para. 9 above. The controversy seems to rest mainly on the point whether the sale of shares by or under the orders of. The Court ousts the discretion of the directors of a private company.
14. It is well-established that articles of association of a company have the force of an agreement between the members inter se or the company and the members. Reference be made to section 21 under which the articles bind the company and its members, his heirs and legal representatives to the same extent as if they had also signed the same and they are required to observe all the provisions of memorandum and of the articles, subject to the provisions of the Companies Act.
Reference be also made to Sardar Gulab Singh v. Punjab Zamindara Bank Limited (1). The third persons are not bound by it as the articles of association merely lay down how administration of the company shall be carried on. See Pritchard's case (2). Again, any--thing in the articles which is inconsistent with the Act is void as held in Walton v. Saffery (3). It is a statutory requirement of a company registered under the Companies Act to have its articles of association and get them registered with the Registrar, according to sections 17 and 18. Section 28 provides that the shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the Company. The title will pass to the vendee on payment of purchase money under Order XXI, rule 77 and as held in Lokman Chhabilal Jain Bani v. Motilal Tulsiram Agarwa!a and another, Decree-holder (4). No further order is, therefore, necessary by the Court to confer title.
15. The definition of the 'private company' in section 2(13)(a) is, that it means a company which by its articles restricts the right to transfer the shares, it any ...It means that what is given in regulation 22 of Table 'A' or in the articles of association of a company is a legal obligation to be carried out by the directors of the company. Consequently, there must be an equal or higher provision to ignore or by-pass the obligation or to confer a legal right on the transferee. The Companies Act is a special enactment and has to prevail unless some express law orders otherwise. It is admittedly nowhere given in Companies Act that an auction sale of shares by the Court or through the Liquidator shall be compulsorily -registrable in the name of auction-purchaser even if the directors object. Rather, according to rule 80 of Order XXI, C. P. C. The execution or endorsement by the Court or on its behalf on a transfer deed shall have the same effect as an execution or endorsement by the party. Thus Court acts at the most for or on behalf of the transferor. It was held in Debendra Nath Bera (5), that a sale by an Official Receiver acting under the powers conferred by section 59 of the Provincial Insolvency Act is a voluntary transfer and affects pre-emption and subject to sections 26-A, 26-C and 26-F of the Bengal Tenancy Act. Thus even the Court-sale does not stand on a higher footing.
(1) AIR 1940 Lah. 243 (2) (1873) 3 Ch. App. 956
(3) (1897) A C 299 (4) AIR 1939 Nag. 269
(5) (1948)
53. C N W 107
16. The settled law on the other hand is that a transfer is complete when the transferor has done everything he was required to do. It was further held that pending the exercise of discretionary power by the directors the transferor was a trustee. Reference is made to Midland Bank Executor Trustee Co. Ltd. v. Rose (1949) 1 Ch. 78, Rose v. Inland Revenue Commr. (1952) 1 Ch. 499, and Moodie etc. v. W: J. Shepherd (1949) 2 All E R 1044. Again, a transfer not approved' by the directors does not divest the transferee of his right. Reference is made toregulation 23 of Table `A'. Section 33 also recognises trusts or equitable interests though the same cannot be entered on the register of the company and company cannot acknowledge the beneficiary as 'a shareholder. Under regulation 18 of Table `A' shares remain in the name of transferor till transferee is entered in the register of members. Thus notionally the shares shall stand in the name of the transferor as trustee but the transferee shall be entitled to give directions to the bankrupt and receive dividends. The view was approved in Morgan v. Gray (1) and B. Mathalone v. Bombay Life Assurance Co. (2). It was held in Re: Butt v. Kelson (3), that the rights of the beneficiaries as a whole were that they should be treated as though they were the registered shareholders in respect of trust shares with the advantages and disadvantages and they could compel the trustee directors, if necessary, to use their votes as the beneficiary thought proper, even to the extent of altering the articles of association. Thus the transferor as trustee, is obliged to comply with all the reasonable directions, including .Those for voting, of the transferee in case the shares are not registered, despite all the possible steps taken by the transferee.
17. Consequently, it is reasonable for the directors of a private limited company to bona fidely seek shelter behind the usual articles conferring jurisdiction on them to oust such strangers whose presence, they might think, would be dangerous to the existence or the working of the company.
Any order passed by this Court, therefore, compelling them to do so, would amount to defeating the very intention of the Legislature and purpose of law. The only restriction on this power recognised by law is that the refusal must not be arbitrary or mall fide though the onus of it will be on the person so alleging. Reference be made to Muthukaruppa Pillar v. Annamalai Chettlar (4) and M. S. Ganesa Ayyar v. Indian Overseas Bank Ltd. (5). It was held in Kaikhosro Muncherji Heeramaneck v. Coorla Spinning and Weaving Co. (6), that objections not personal to the transferee do not constitute valid reasons and may amount to abuse of power. An English Court in re: Smith and Fawcett Ltd. (7), did not interfere where the directors exercised their discretion bona fide or did not act oppressively, capriciously or in some other male fide way. Again, it is not for this Court to decide whether a particular person will be useful to the company or he might make it difficult for the company to carry on its business:
18. The other aspect of the case pointed out by the petitioner is that armed with such unfettered powers of refusing to approve transfer of shares, the directors may, in a situation of a genuine nature, defeat or frustrate the very purpose of the Legislature, of disallowing sale of shares. This plea on the face of it, has much weight. However, the law and the articles of association generally take care of the same. It is usually provided that any shareholder intending to sell his shares has to offer, firstly the same to the existing shareholders, through the directors and is case no one is prepared to buy ,the same,. He can sell it to others. Articles 6 and 7 of the respondent-Company may be reproduced with advantage:- "6. No transfer of any shares - in the capital of the Company shall be made or registered without the previous sanction of the "Directors who may decline any transfer without giving any reasons and shall so decline in case of any transfer registration of which would involve contravention of Article 2.
(1) 1953 Ch. 83(2) (1953) SC 385
(3) (1952)1 All E R 167(4) AIR 1935 Mad. 784
(5) AIR 1943 Mad. 743 (6) (1891) 16 Bom. 80
(7) (1942) 1 All E R 542
7. No shareholder will be entitled to transfer his shares to any outsider. He will be given one month's notice of his intention to sell, and if the directors fail to get the shares transferred to their nominee(s) within two months of such notice, then he will have the right to transfer the shares to any of his relative or friend, as approved by the Directors."
19. In this view of the matter, the only lawful, reasonable and useful thing for any Court-auctioneer is to give notice to the directors of a company, of the auction, and in case they are not prepared to purchase those shares in an open auction, and if they or other members are also not willing to purchase or pre-empt, on a notice of the sale immediately thereafter, then the Court may direct the directors to register the auction-purchaser as a share. 'bolder on the assumption that the directors' refusal was arbitrary or male fide.
20. In the case in hand, Abdul Rahim.Kban was the auction-purchaser. According to the order dated 22nd October, 1960, of this Court, it was Abdur Rahim Khan who was made liable to the balance of call money of these shares or of other liability and he was to be considered a purchaser and given a right of representation in respect of the shares. It was undoubtedly stated in para. 4 of the offer that Official Liquidator shall sign the transfer deed in favour of purchaser or his nominee but it was further expressly provided that Official Liquidator shall have no responsibility to secure the registration of the shares in his name. The learned Judge in para. 3 of his order also approved the sale in terms of the offer. The petitioner thus cannot seek any assistance of this Court even on this basis.
21. . In any case, as discussed above, Abdul Rabim Khan has no right in law to compel the directors to register him as a shareholder. No notice of the auction or the sale is said to have been given to the directors or the members at that time either. Specific objections to the inclusion of the petitioner as a member of the private limited company have been taken in the reply to the- application. It is stated, however, in para. 7(d) of the reply that the Directors are willing to accept the transmission of shares 'in favour of Abdul Rahim. On the face of the record, therefore, it cannot be said that refusal on the part of the directors is male fide. The offer of the directors of the respondent company to purchase the shares now on the price on which they were sold in 1962, may help .Them to prove further their bona fides, but it does not appear to be just or reasonable, after about 20 years when prices have considerably escalated.
22. Be that as it may, it is quite clear from the above that petitioner as nominee of Abdur Rabim Khan has no case for a direction to the directors. ~B He will, however, as the holder of the shares, remain the beneficial owner only.
The result is that there is no merit in this petition and the same is dismissed with costs.