Report No. 70
109.41. Hardship.-
One may readily accept the principle that conflict between interest and duty ought to be avoided. But, unfortunately, after the amendment of 1900, the section has gone much further. It has often been felt that the section, as it now stands, causes hardship. It was noted in a Madras judgment1 that in other countries, there is no such absolute provision. It was noted in that judgment that the New York Civil Procedure Code prohibits the purchase of actionable claims and negotiable instruments (by legal practitioners) only where it is made with the intention and for the purpose of bringing a suit therein.
It was also noted in the same judgment2 that in the French Civil Code, the prohibition is confined to claims falling within the jurisdiction of the court where the pleader is practising. This, in fact, was the substance3 of section 136 before its amendment in 1900. The section was widened in 1900, apparently to meet cases where the person concerned is transferred'. Perhaps the legislature was anxious to provide that there should be no loop hole permitting a person otherwise disqualified, to enter into a questionable transaction apparently dated after the transfer of that person but really conceived before it.
There was really no need for even this amendment, since the wording even at that time was elastic.
1. Muni Reddi v. Venkata Rao, AIR 1914 Mad 512 (519) (FB).
2. Muni Reddi v. Venkata Rao, AIR 1914 Mad 512 (519) (FB).
3. Para. 109.40, supra.
109.42. Section wider than required.-
In any case, the section as it now stands appears to be much wider than is required as a matter of public policy. In a Patna case,1 the High Court had to invalidate the transfer of a vakil of a right to recover arrears of rent of an immovable property even though the transfer was incidental to the transfer of that immovable property to the vakil. Dawson Miller, C.J. expressed a doubt whether the legislature had in view a case such as the present, but observed that he was bound to construe the section in its ordinary natural sense.
1. Sheo Govind Singh v. Gouri Prasad, AIR 1925 Pat 310 (312).
109.43. Other illustrative cases.-
We have drawn upon these reported cases to show the hardship felt by the wide scope of the section. Let us also take a few hypothetical situations. The present section, if construed literally, would bar the acquisition by a legal practitioner of units in the Unit Trust of India by transfer, since a unit is an "actionable claim". A woman lawyer cannot, under the section, accept transfer of a gift cheque from her husband-unless she can rely on the provision in section 137 which excludes negotiable instruments from the provisions of the Chapter.
In any case, she cannot "agree to receive" a gift cheque. A son who has recently started legal practice cannot "agree to receive" from his father the transfer of money represented by fixed deposit receipts in banks even where the transfer is bona fide intended to set him up in the profession, and no question of the son taking any undue advantage of his position as a lawyer is involved.
109.44. Constitutional aspect.-
One could possibly consider the question how far the section can be treated as unconstitutional on the ground that the restriction thereby imposed on the right to acquire, hold and dispose of property is, by reason of its over-breadth, unreasonable and that it goes beyond what the public interest requires. That aspect, however, need not be discussed. Even if there is no constitutional impediment, the section appears to be defective on the merits and there is, in our opinion, need for narrowing down its scope in view of what we have already stated.
109.45. Provision in C.P.C.-
It may be of interest to point out that the provision in the Code of Civil Procedure prohibiting certain persons from bidding at auction sales in execution of a decree is much narrower than section 136. The relevant rule1 provides that no officer or other person having any duty to perform in connection with any sale shall, either directly or indirectly, bid for acquire or attempt to acquire any interest in the property sold.
Whether a pleader engaged by a party to a suit falls within this rule is not a matter which needs to be considered for the present purpose.2 But it is pertinent to point out that by virtue of his professional duty a pleader engaged in the suit who purchases the property for himself is open to censure if the purchase is likely to be detrimental to the interest of the client. This position, it would be noted, is much narrower than what is provided in section 136 of the Act.
The following is a suggested redraft of section 136:
"136. (1) No Judge, legal practitioner, or officer connected with any Court of Justice shall buy, or traffic in, or stipulate for, or agree to receive, any share of, or interest in, any actionable claim, in respect of which a legal proceeding is pending, being a legal proceeding with which the Judge, legal practitioner or officer is concerned in his judicial, professional or official capacity.
(2) No Court shall enforce, at the instance of a Judge, legal practitioner or officer connected with any Court of Justice, or at the instance of any person claiming by or through him, any actionable claim so dealt with by him as aforesaid."
1. Order 21, rule 73, Code of Civil Procedure, 1908.
2. see discussion in Jamuna v. Motilal, AIR 1950 Cal 63 and AIR 1927 All 76.
109.47. Section 137.-
In regard to the mode of transfer of certain special classes of actionable claims, there are special rules-statutory or non-statutorywhich, the legislature thought, should continue to apply. Accordingly, section 137 provides as follows:
"137. Nothing in the foregoing sections of this Chapter applies to stocks, shares or debentures, or to instruments which are for the time being, by law or custom, negotiable, or to any mercantile document of title to goods.
Explanation.-The expression 'mercantile' document of title to goods includes a bill of lading, dock-warrant, warehouse-keeper's certificate, railway 'receipt, warrant or order for the delivery of goods, and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by delivery or endorsement, the possessor of the document to transfer or receive goods thereby represented."
109.48. Other Negotiable instruments.-
Apart from instruments governed by the Negotiable Instruments Act, there are other instruments e.g. hundis, debentures payable to bearer, or scrips or bonds, which have been regarded as negotiable instruments by the custom of trade. Indeed, with the growth of trade and wide expansion of commerce, new kinds of securities emerge and claim recognition from the courts of law as negotiable instruments.
These instruments owe their validity to the Law Merchant, which is "neither more nor less than the usages of merchants and traders in different departments of trade, ratified by the decisions of Courts of Law, which upon such usages being proved before them, have adopted them as settled law with a view to the interests of trade and public convenience.1
1. Halsbury Laws of England, 3rd Edn., Vol. 2, para. 775.
109.49. Shares.-
The section expressly excludes shares. In England, a share is regarded as a chose in action. Technically, "chose-in-action" is an expression large enough to include shares.1 In India, the Sale of Goods Act defines 'goods" as including shares. However, shares still continue to be an actionable claims as defined in the Transfer of Property Act.
1. Torkington v. Magee, (1902) 2 KB 427 (430, 431), per Channell, J. (reversed on facts, 1903 KB 644); and see Tolhurst v. Associated Portland Cement Manufacturers, 1903 AC 415.
109.50 Transfer of shares.-
As to the question of transfer of shares, it may be of interest to note that the law on the subject seems to be enriched with certain subtleties. A question that has caused the courts great difficulty is that of deciding what precisely is the legal effect of a transfer executed by the transferor and delivered to the transferee, but not yet registered by the company. Knowledgeable writers on the subject1 emphasise that in considering this question, it is essential to keep in mind the dual nature of the transaction.
On the one hand, it is a straightaway assignment of personal property (movable property in India), but, on the other hand, it is the release of one person from membership and the admission of another in his place. As between the transferor and the transferee, it is the first aspect that is important, while as between the parties and the company in regard to liability, it is the second. When, however, third parties other than the company are involved, even this distinction in itself may not solve the problem.
So far as the transfer of the shares is concerned, the transaction is complete as between the transferor and the transferee, when he hands over the duly executed transfer certificate. The beneficial ownership then passes.2 Of course, difficulties could arise where the directors have a power to refuse to register the transfer-a power sometimes given by the articles. But these difficulties are common to all modes of transfer of shares. In the meantime, that is to say, even while the transfer is not registered by the company, the seller, according to the better opinion, has no beneficial interest in the shares.3
1. L.C.B. Gower Principles of Modern Company Law, (3rd Edn.), p. 401, cited in Pran Lal v. Vasudev, (1973) 14 Guj LR 363 (369), para. 24 (Divan & Shah, JJ.).
2. L.C.B. Gower Principles of Modern Company Law, 3rd Edn., p. 401, cited in Pran Lal v. Vasudev, (1973) 14 Guj LR 363 (369), para. 24 (Divan & Shah, JJ.).
3. See (a) M.K. Sugar Mills v. J.K. Sugar Mills, AIR 1965 All 535 (540); (b) Bank of Hyderabad v. S., AIR 1957 Mad 702 (703).
109.50A. Lahore case.-
In a Lahore case,1 the plaintiff sold some shares of a Bank to the defendant, but did not take the purchase-money. A deed of transfer was duly executed and signed by the parties and was made over to the defendant to enable him to have his name registered in the books of the Bank in place of the transferor. Later on, the Bank failed and went into liquidation before the transferee had presented his deed of transfer to the Bank and thus the shares continued to stand in the name of the transferor, as before.
It was held, that the contract was complete on the day that the deed of transfer was signed by both parties, and that by virtue of that the defendant stepped into the shoes of the transferor and became an owner of the shares in the company in his place, with all the advantages and disadvantages attached to that status. In another Lahore case,2 certain shares of a company were transferred and the necessary documents properly executed and presented to the Company as required by their articles, but they refused registration stating that they had been instructed by the transferor that he had been made to part with the shares by misrepresentation.
It was held, that the directors were not purporting to act under the powers given to them by the Articles, powers to be exercised in the interest of the company but at the instance of the transferor who had actually signed a request for the transfer, and that the shares should be registered in the name of the transferee.
1. Sawan Mal Gopi Chand v. Shiv Charan Das, AIR 1924 Lah 173 (174) (DB).
2. AIR 1935 Lah 23.
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