Luxmi
Tea Company Limited Vs. Pradip Kumar Sarkar [1989] INSC 332 (7 November 1989)
Ojha, N.D. (J) Ojha, N.D. (J) Venkatachalliah, M.N. (J) Verma,
Jagdish Saran (J)
CITATION:
1989 SCR Supl. (2) 82 1989 SCC Supl. (2) 656 JT 1989 (4) 350 1989 SCALE (2)1035
ACT:
Companies
Act, 1956: Section 108--Share Transfer--Consideration--Power of Company to
examine correctness--Company--Whether can refuse registration of transfer of
shares if transfer deeds are not properly stamped.
Section
111(2)/Article 42 of Articles of Association--Expression "Or
otherwise"--Scope of--Whether recognises existence of inherem power to
refuse registration of shares.
Company
Law--Share Transfer--Board of Directors--Whether has inherent power to refuse
registration of transfer of shares--Residuary, implied or incidental power of
corporate existence--Whether include power of refusal to register transfer of
shares.
Section
155--Share Register--Application for rectification of-Transferor--Whether a
necessary party.
HEAD NOTE:
The
respondent lodged certain fully paid-up shares with the appellant company for
transfer in his name. The Board of Directors of the Appellant company
disapproved the registration of the shares. The respondent filed an application
under section 155 of the Companies Act, 1956 for rectification of the share
register i.e. for inserting his name in the share register as a registered
share-holder which was allowed by a single judge of the High Court. The Company
preferred an appeal which was dismissed by the Division Bench of the High
Court.
In
appeal to this Court it was contended on behalf of the company that
(i) the
Company had residuary inherent power to refuse the registration of the transfer
of shares;
(ii)
the words "or otherwise" in Article 42 of the Articles of Association
and section I 11(2) of the Companies Act recognise the existence of an inherent
power to refuse registration of the transfer of shares;
(iii) the
application under section 155 was not maintainable as the transferor had not
been made parties therein; and
(iv) the
company was entitled to examine the correctness of transfer consi83 deration
shown in the transfer deeds and refuse registration of the transfer of shares
if the transfer deeds were not duly stamped.
Dismissing
the appeal, this Court,
HELD:
1. Unless there is any impediment in the transfer of a share of a public
limited company, a shareholder has the right to transfer his share.
Correspondingly, in the absence of any impediment in this behalf the transferee
of a share is entitled to have a rectification of the share register of the
company by inserting his name therein as a registered shareholder of the share
transferred to him. To have such rectification carried out is the right of the
transferee and can be defeated by the company or its Directors only in
pursuance of some power vested in them in this behalf. Such power has to be
specified and provided for. It may even be residuary but in that case too it
should be provided for and traceable either in the Act or the Articles of Association.
Even if the power of refusal is so specified and provided for the registration
of a transferred share cannot be refused arbitrarily or for any collateral
purpose, and can be refused only for a bona fide reason in the interest of the
company and the general interest of the shareholders. If neither a specific nor
residuary power of refusal has been so provided, such power cannot be exercised
on the basis of the so-called undeclared inherent power to refuse registration
on the ground that the company or its Directors take the view that in the
interest of the Company and the general interest of the shareholders,
registration of the transfer of shares should be refused. Indeed making a
provision in the Act or the Articles of Association etc.
conferring
power of refusal would become futile if existence of an inherent power is
assumed, for the simple reason that the amplitude of the so-called undeclared
inherent power would itself take care of every refusal to register the transfer
of share. Assumption of such a power would result in leaving the matter of
transfer of share and its registration at the mercy and sweet will of the
company or its Directors, as the case may be. [86E-H; 87A-B]
2. The
objects or purposes for which a company is created should be distinguished from
the powers which it can exercise. So far as refusal to register the transfer of
a share is concerned the power has to be specified and within the framework of
the said specification. There is no inherent power in this behalf. [90B] In re
Smith Knight & Co., IV Chancery Appeal Cases 20;
In re
National Provincial Marine Insurance Company, V Chancery Appeal Cases 559; Moffatt
v. Parqunar, VII Chancery Division 591; In re 84 Cawley & Co., XLH Chancery
Division 209; In re Discoverers Finance Corporation Ltd., [1910] 1 Chancery
Division 312 and Sadashiv v. Gandhi Sewa Samaj, AIR 1958 Bom. 247 followed.
Palmer's
Company Law 24th Edn. p. 121 referred to.
The
Conservators of the River Tone v. Ash, 109 English Reports 479;
Attorney-General v. The Lord Mayor etc. of the City of Leeds, [1929] 2 Chancery
Division 291; E.M. Muthappa Chettiar v. Salem Rajendra Mills Ltd., XXV Company
Cases 283; Life Insurance Corporation of India v. Escorts Ltd. & Ors.,
[1985] Suppl.3 S.C.R. 909 and Bajaj Auto Ltd. v. N.K. Firodia and Anr., 41
Comp. Cases 1, distinguished.
3. In
the context in which the words "or otherwise" have been used in
sub-section (2) of section 111, they only purport to cast a duty or impose an
obligation of giving notice of refusal to register the transfer of a share
irrespective of the fact whether such refusal is under the Articles of
Association of the Company or de hors the Articles, which would include even a
case where such refusal has been made arbitrarily or for any collateral
purpose. A fortiorari, this would be the interpretation of even Article 42 of
the Articles of Association of the Company inasmuch as on its plain language
which, except for the provision for punishment, is in pari materia with
sub-section (2) of Section 111 of the Act. The purpose of this Article is the
same as of the said sub-section (2). To introduce a concept of either
conferment or recognition of a right to refuse registration of the transfer of
a share in sub-section (2) militates against and runs counter to the very
texture and purpose of this subsection. [88A-C; 87E]
4. The
transferor is not a necessary party to an application under section 155 of the
Act unless the transfer was disputed by him. [92B-C]
5. In
the instant case, it has been found as a fact by the High Court that it had not
been proved that the respondent had paid higher prices for the shares than
those stated in the transfer deeds. Therefore, there is no justification for
interfering with the said finding of fact. On this finding the transfer deeds
could not be termed as unduly stamped and power to refuse the registration of
the transfer of shares contemplated by section 108 of the Act could not be
invoked. [92D-E]
CIVIL
APPELLATE JURISDICTION: Civil Appeal No. 4565 of 1989.
85
From the Judgment and Order dated 4.5.1988 of the Calcutta High Court in Appeal
No. 806 of 1987 A.K. Sen, P.L. Sen, Bhaskar Sen, D.K. Sinha, A.N. Chatterjee,
N.D.B. Raju and V.K. Jain for the Appellant.
F.S. Nariman,
R.C. Nag, S.B. Mukharjee, R.F. Nariman, Kusum Agarwal, O.C. Mathur and D.N. Misra
for the Respondent.
The
Judgment of the Court was delivered by OJHA, J. Special leave granted.
This
appeal by special leave has been preferred against the judgment dated May 4, 1988 of a Division Bench of the Calcutta High Court in
Appeal No. 806 of 1987. Facts in brief necessary for consideration of the
submissions made by learned counsel for the parties are that the respondent, Pradip
Kumar Sarkar made an application under section 155 of the Companies Act, 1956
(hereinafter referred to as the Act) for rectification of the share register of
the appellantcompany by inserting his name therein as a registered shareholder
of certain shares transferred in his favour. These shares were fully paid up
and the company had no lien over them. According to the respondent,
notwithstanding the shares being duly lodged with the Company along with the
transfer deeds and requisite fees for registration being paid the Board of
Directors of the Company disapproved of the registration of the said shares.
This disapproval led the respondent to make the application under section 155
of the Act for rectification of the share register. The case of the respondent
was that the shares in question being fully paid up and the company having no
lien over them the registration of the transfer of the shares in his favour
could not be refused under Article 39 of the Articles of Association of the
Company which was the article relevant for the purpose.
The
application aforesaid was contested by the Company on various grounds.
Overruling the objections raised by the Company a learned single judge allowed
the application.
Aggrieved,
the Company preferred the appeal aforesaid before a Division Bench of the High
Court which has been dismissed by the judgment appealed against.
It has
been urged by learned counsel for the appellant that even if the Articles of
Association do not make any specific provision in this behalf the Company had
residuary inherent power to refuse registra86 tion of the transfer of the
shares for the benefit of the Company and its existing sharesholders. Power of
refusal to register the transfer of shares was also sought to be derived from
the words "or otherwise" used in Article 42 of the Articles of
Association and section 111(2) of the Act.
The
transferor not being made a party to the application under section 155 of the
Act was also pleaded in justification of the submission that the said
application deserved to be dismissed. It was also urged that in view of section
108 of the Act the Company was entitled to go into the question as to whether
the consideration for transfer of shares as shown in the transfer deeds was
real consideration for purposes of finding out as to whether the transfer deeds
were duly stamped and refuse registration of the transfer of the shares if the
Company was of the view that the transfer deeds were not duly stamped. For the
respondent on the other hand it was urged by his learned counsel that in view
of the specific provision contained in this behalf in Article 39 of the
Articles of Association and no residuary power whatsoever having been conferred
on the Company or its Directors to refuse registration of the transfer of
shares it did not have the power claimed by it in aid of refusal of
registration of the shares transferred to the respondent.
Having
heard learned counsel for the parties we are of the opinion that unless there
is any impediment in the transfer of a share of a public limited company, such
as the appellant, a shareholder has the right to transfer his share.
Correspondingly, in the absence of any impediment in this behalf the transferee
of a share, in order to enable him to exercise the rights of a sharesholder as
against the Company and third parties, which is not possible until the transfer
is registered in the company's register, is entitled to have a rectification of
the share register of the company by inserting his name therein as a registered
shareholder of the share transferred to him. To have such rectification carried
out is the right of the transferee and can be defeated by the company or its
Directors only in pursuance of some power vested in them in this behalf. Such
power has to be specified and provided for. It may even be residuary but in
that case too it should be provided for and traceable either in the Act or the
Articles of Association.
Even
if the power of refusal is so specified and provided for the registration of a
transferred share cannot be refused arbitrarily or for any collateral purpose,
and can be refused only for a bona fide reason in the interest of the company
and the general interest of the sharesholders. If neither a specific nor
residuary power of refusal has been so provided, such power cannot be exercised
on the basis of the so-called undeclared inherent power to refuse registration
on the ground that the 87 company or its Directors take the view that in the
interest of the company and the general interest of the shareholders,
registration of the transfer of shares should be refused.
Indeed
making a provision in the Act or the Articles of Association etc. conferring
power of refusal would become futile if existence of an inherent power such as
claimed by the company in the instant case is assumed, for the simple reason
that the amplitude of the so-called undeclared inherent power would itself take
care of every refusal to register the transfer of share. Assumption of such a
power would result in leaving the matter of transfer of share and its
registration at the mercy and sweet will of the company or its Directors, as the
case may be. In the absence of any valid and compelling reason it is difficult
to comprehend such a proposition.
Even
the submission based on the words "or otherwise" in subsection (2) of
Section 111 of the Act and in Article 42 of the Articles of Association to the
effect that these words recognise the existence of an inherent power to refuse
registration of the transfer of the share does not commend itself to us. The
words "or otherwise" were inserted in sub-section (2) of Section 111
of the Act in 1960 and it is this subsection so amended which is applicable to
the facts of the instant case. Sub-section (2) of Section 111 does not confer
any right but only casts a duty to give notice of refusal to register the
transfer of a share and provides for punishment in case of default in doing so.
Giving of notice is necessary, inter alia, to facilitate the exercise of the
right of appeal conferred by sub-section (3) and (4) of Section 111. To
introduce a concept of either conferment or recognition of a right to refuse
registration of the transfer of a share in sub-section (2) militates against
and runs counter to the very texture and purpose of this sub-section.
Such
an interpretation would have the effect of imputing to the legislature an
intention of making an effort to fix a square peg in a round hole, when the
purpose, if it was to confer or recognise any inherent power to refuse
registration of the transfer of a share, could plainly be achieved by inserting
the words "or otherwise" after the words "under its articles"
and before the words "to refuse to register" in sub-section (1) of
Section 111 which is the sub-section relevant for such purpose.
The
words "or otherwise" take colour from the context in which they are
used. In our opinion, the words "under its articles" in subsection
(2) of Section 111 of the 'Act have been used in the same sense as is expressed
in legal terminology by the familiar words "conferred by law".
Consequently, if the opening part of sub-section (2) is read as "If a
Company refuses, whether in pursuance of any power conferred by 88 law or
otherwise" it would be incongruous to suggest that the legislature in
using the words "or otherwise" intended to give recognition to a
power to refuse registration of the transfer of a share even otherwise than in
accordance with law. This would be tantamount to putting a premium on taking
the law into one's own hands. The legislature cannot be imputed with any such
intention. For these reasons, we are of the view that in the context in which
the words "or otherwise" have been used in sub-section (2) of Section
111, they only purport to cast a duty or impose an obligation of giving notice
of refusal to register the transfer of a share irrespective of the fact whether
such refusal is under the Articles of Association of the Company or de hors the
Articles, which would include even a case where such refusal has been made
arbitrarily or for any collateral purpose. A fortiorari, this would be the
interpretation of even Article 42 of the Articles of Association of the Company
inasmuch as on its plain language which, except for the provision for
punishment, is in pari materia with sub-section (2) of Section 111 of the Act,
the purpose of this Article is the same as of the said sub-section (2). Even
the marginal note of Article 42 lends support to this interpretation.
At
this place, we may point out that it has not been disputed before us by learned
counsel for the appellant that the shares in question having been fully paid up
and the Company having no lien over them, Article 39 of the Articles of
Association could not be invoked to refuse registration of the transfer of
these shares.
We may
now advert to the text books and the decided cases on which reliance has been
placed by learned counsel for the appellant in support of the submission that
the Company had an inherent power to refuse registration of the transfer of the
shares. It was pointed out that the board of directors is now the principal
organ of a company. The management of the affairs of the company is vested in
the board of directors and all powers excepting those which are specifically
reserved for the general meeting by the act or the articles or memorandum of
association or otherwise must now be done by the board of directors vide
section 291 of the Act (The New Frontiers of Company Law by S.C. Sen 1971
Edition Page 51). Whatever may fairly be regarded as incidental to the objects
for which the Corporation was created is not to be taken as prohibited. The
incidental power is one that is directly and immediately appropriate to the
execution of the specific power created and not one that has a slight or remote
relation to it. Furthermore, the want of an express enumeration of powers does
not exclude such incidental powers as are reasonably 89 necessary to accomplish
the corporate purpose. The mere creation of a corporation was alone sufficient,
in the absence of prohibition, to confer upon such corporation all those powers
which are regarded as incident to corporate existence. (Thomsons' Commentaries
on the Law of Corporation 3rd Edition Vol. 3 Pages 820 to 822) As to the
relationship between the general meeting and the directors to some extent a
more exact analogy would be with the division of powers between the Federal and
State Legislatures under a Federal Constitution and the residual powers are in
this case with the directors (Gower's Principles of Modern Company Law 4th
Edition Page 147). Corporate authority (powers) are determined by reference to
(1) charter,
(2) incorporation
law or act,
(3) general
and special corporation statutes relevant,
(4) other
applicable statutes,
(5) case
decisions
(6) customary
practices, and
(7) treatises
and other discussions.
They
include
(1) general
powers usually recognized in all corporations,
(2) general
powers usually recognized in corporations of the particular type,
(3) powers
inherent in or limited by the purposes or business as stated in the charter,
and
(4) implied
powers to do all things reasonably and properly incidental to the specified
purpose and business. (Modern Corporation Law by Howard L. Oleck Vol. 1 Page
865) It is a well-recognised rule that a Corporation is not restricted to the
exercise of the powers expressly conferred upon it by its charter but has the
implied or incidental power to do whatever is 'reasonably necessary to
effectuate the powers expressly granted and to accomplish the purposes for
which it was conferred unless a particular act sought to be done is prohibited
by the law or its charter. (American Jurisprudence 2nd Edition Vol. 19 Page
431) Every corporation is of course created with certain express powers but in
addition to those every corporation has also certain powers which attach to it
as an incident to its corporate existence. The powers which are incidental to
corporate existence and which are always implied in the absence of express
restrictions are:
(1)
The power to have perpetual succession, or succession during the period for
which the corporation is created which includes the power to elect members in
the place of those who are removed by death or otherwise,
(2)
The power to have a corporate name,
(3)
The power to purchase and hold land and chattels for authorised corporate
purposes,
(4)
The power to have a common seal,
(5)
The power to make by-laws for the government of the corporation,
(6)
The power to disfranchisement or removal of members except in the case of
modern joint-stock corporations. (Corpus Juris Secundum Vol. XlX Pages 372-373)
Suffice it to say in this behalf that what has been stated above with regard to
residuary, implied or incidental powers is calculated to 90 accomplish the
objects, the corporate purpose or corporate existence of the corporation.
Refusal to register the transfer of a share obviously does not fall in this
category.
As has
been pointed out in Palmer's Company Law 24th Edition Page 121 the objects or
purposes for which a company is created should be distinguished from the powers
which it can exercise. So far as refusal to register the transfer of a share is
concerned it is almost the consistent view in decided cases that the power has
to be specified and can be exercised only in the manner specified and within
the framework of the said specification. There is no inherent power in this
behalf. (See: In re Smith, Knight, & Co., IV Chancery Appeal Cases Page 20;
In re National Provincial Marine Insurance Company, V Chancery Appeal Cases
Page 559; Moffatt v. Parqunar, V11 Chancery Division Page 59 1; In re Cawley
& Co., XLII Chancery Division Page 209; In re Discovers Finance Corporation,
Limited, [1910] 1 Chancery Division Page 312 and Sadashiv v. Gandhi Sewa Samaj,
A.1.R. 1958 Bombay Page 247) Reliance was then placed by learned counsel for
the appellant on The Conservators of the River Tone v. Ash, 109 English Reports
Page 479. In that case by an Act for making and keeping the river Tone
navigable, it was enacted, that the thirty persons therein named and their
successors should be conservators of the river; and should have various powers
referred to therein. By a subsequent Act some more powers were conferred on
them. A question arose as to whether the conservators were entitled to sue in
their corporate name for an injury done to their real property. It was held
that as it manifestly appeared from the different clauses of the Acts of
Parliament that the conservators should take land by succession and not by
inheritance, although they were not created a corporation by express words they
were so by implication and that being so they were entitled to sue in their
corporate name for an injury done to their real property. In our opinion, on
the basis of this decision it is difficult to cull out any power in the board
of directors of the company in the instant case to refuse to register the
transfer of a share by implication.
Reliance
was also placed on Attorney-General v. The Lord Mayor Etc. of the City of
Leeds, [1929] 2 Chancery Division Page 291 where it was pointed out that a
corporation incorporated by royal charter stands on a different footing from a
statutory corporation, the difference being that the latter species of
corporation can do only such acts as are authorised directly or indirectly by
the statute creating it whereas the former can, speaking generally, do anything
that an ordinary individual can do. If, however, the corporation by charter be
a 91 municipal corporation then it is subject to the restriction imposed by the
Municipal Corporations Act, 1882. The question in connection with which the
above observations were made was whether the Corporation of Leeds, a municipal
corporation, was entitled to work or run certain omnibuses along any route
whether within or without the boundaries of the City of Leeds. This again was
obviously a question relating to the business of the corporation to work or run
omnibuses and has no bearing on the question as to whether the directors of the
appellant-company in the instant case had inherent power to refuse to register
the transfer of shares.
In
E.M. Muthappa Chettiar v. Salem Rajendra Mills Ltd.
XXV
Company Cases Page 283 it was held that if a person is of such a character as
to throw their company into confusion and if he was not a desirable one, then
the Board of Directors would certainly be acting in the best interests of the
company in refusing to register the shares in his name and such a reason is
quite a valid reason. Suffice it to say so far as this case is concerned that
Article 56 which was the relevant article dealing with the refusal to register
the transfer of a share itself clearly conferred power on the board of directors
to refuse to register the transfer of a share inter alia "if the
transferee of the share is not approved". It was thus a case where power
had been conferred by an article and was not a case of refusal to register
under any inherent power.
Lastly,
reliance was placed on Life Insurance Corporation of India v. Escorts Ltd. & Ors., [1985]
Supp. 3 S.C.R. Page 909. In that case with reference to an earlier decision of
this Court in Bajaj Auto Ltd. v. N K. Firodia and Another, 41 Company Cases
page 1, it was held that where the articles permitted the directors to decline
to register the transfer of shares without assigning reasons the court would
not necessarily draw adverse inference against the directors but will assume
that they acted reasonably and bona fide.
Here
again, as is apparent from the decision in the case of Bajaj Auto Ltd. (supra)
Article 52 of the appellant-company in that case provided that the directors
might at their absolute and uncontrolled discretion decline to register any
transfer of shares. This too was, therefore, a case of power being conferred by
the articles of association and not a case of exercise of inherent power. We
may also point out that at page 997 of the Reports of Escorts Ltd. (Supra) it
was held that even though it was open to the company and indeed it was bound to
refuse to register the transfer of shares of an Indian company in favour of a
non-resident where the requisite permission under the FERA was not obtained but
92 once permission was obtained whether before or after the purchase the
shares, the company could not thereafter refuse to register the transfer of
shares.
The
third submission made by learned counsel for the appellant that the application
under section 155 of the Act was not maintainable as the transferors had not
been made parties therein, may now be considered. A similar submission had been
made before the Division Bench of the High Court also and was repelled by
holding that the transferor is not a necessary party to an application under
section 155 of the Act unless the transfer was disputed by him. It was pointed
out that even though in the instant case the transferors had been served with
notice and in any event had knowledge of the proceedings for registration of
transfer of shares they had not disputed the transfer of the shares. We do not
find any infirmity in the order of the High Court on this point.
Likewise,
we find no substance even in the submission made by learned counsel for the
appellant based on section 108 of the Act for the simple reason that after
taking into consideration the evidence produced by the parties it has been
found as a fact by the High Court that it had not been proved that the
respondent had paid higher prices for the shares than those stated in the
transfer deeds. We find no justification for interferring with the said finding
of fact in the present appeal. On this finding the transfer deeds could not be
termed as unduly stamped and power to refuse the registration of the transfer
of shares contemplated by section 108 of the Act would not be invoked.
In the
result, we find no substance in this appeal and it is accordingly dismissed
with costs assessed at Rs.2,000.
T.N.A.
Appeal dismissed.
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