ORDER
1. In this order we are considering two appeals filed under Section 111 of the Companies Act, 1956, involving 100 shares in Petition No. 155/111/ 92 and 3,050 shares in Company Petition No. 154/111/92 in Auto Lamps Ltd. (hereinafter referred to as “the company”). Since the facts and circumstances of both the cases are similar, we are disposing of these two petitions by this common order.
2. The 3,050 impugned shares were purchased by the petitioners in Company Petition No. 154/111/92 from one Shri R. Raghuraman, on March 20, 1990, and 100 shares on April 16, 1990, from one Shri Raghunath P. Aggarwal jointly with Mrs. Annu Gupta, Miss Vibha Aggarwal and Miss Shruti Aggarwal. These shares were lodged along with the instruments of transfer with the company on the dates of purchase itself. It is the case of the appellants that Shri Vimal K. Gupta, one of the appellants, in his capacity as a director of the company, raised the matter of transfer of these shares at various board meetings of the company and the petitioners had also sent reminders in writing about the registration of transfer a number of times but no action was taken by the company for nearly two years. On March 21, 1992, the appellants sent a notice to the company under Section 113(3) for return of the certificates and in response by a letter dated March 31, 1992, which was received by the appellants on April 4, 1992, the company informed them that the board of directors of the company had refused registration of the impugned shares. Aggrieved by the decision of the company, the instant appeals have been filed on April 22, 1992.
3. In the reply filed by the company, it is stated that the appeals are not maintainable under Section 111 for the reason that the board of directors of the company had refused registration of transfer of the impugned shares, at its meeting held on June 30, 1990, when Shri Vimal K. Gupta, one of the appellants, was present in his capacity as joint managing director. Therefore, he had notice of refusal of the registration of shares and as such should have come before the Company Law Board within a period of two months thereafter, which the appellants had failed to do. Since the appeals were filed only on April 22, 1992, the same are time barred under Section 111(2). Refusal was on the ground that the instruments of transfers were not properly stamped and executed and the transfers were likely to result in disproportionate shareholding and, therefore, be prejudicial to the interest of the company and its shareholders. It is further stated that this matter was once again considered on November 25, 1990, by the board of directors and it was resolved that since the legal infirmities regarding the transfer of shares have not been removed by Shri Gupta, the transferee, the same cannot be registered. Discussions on transfer of the said shares, it is further stated in the reply, were deferred for reasons stated at the above meetings held on February 15, 1991, April 17, 1991, May 15, 1991, and June 28, 1991. According to the company, it is, therefore, evident that the matter was finally decided by the board of directors of the company on June 30, 1990.
4. According to the company, the letter dated March 31, 1992, only conveyed the information which related to the decision as back as on June 30, 1990, when the board took the decision to refuse registration of transfer of shares and as such the letter dated March 31, 1992, itself is not a letter of rejection giving cause of action to the appellants to move these appeals. It is also stated that the instruments of transfers along with the share certificates were returned to Shri Vimal K. Gupta on June 30, 1990, during the board meeting itself and as such they are no longer with the company. Further, it is averred that the transfers were in violation of article 43 of the articles of association of the company, according to which the names of the transferees will have to be approved by the board of directors before transfer, which, in the present cases were not complied with. In addition, as the registration of transfers of the impugned shares in favour of the appellants would disturb the equilibrium of the present management of the company and as such the transfer will be against the interest of the company and its members, the same was refused and this decision of the board should not be disturbed.
5. During the hearing, the authorised representative of the appellants, Shri Ashish Makhija submitted that the appellants issued a notice to the company under Section 113(3) for delivery of the share certificates as the company had failed to comply with the provisions of Section 113(1). On receipt of this notice, the company sent an intimation on March 31, 1992, communicating the rejection of registration. Immediately thereafter these appeals were filed on April 22, 1992, i.e., within a period of two months, from the date of communication of the rejection as provided in Section 111(3). He further stated that the said certificates along with the instruments of transfer continued to be with the company and that is the reason why notices under Section 113(3) were sent by the appellants. The transfer forms along with the share certificates were lodged with the company for 3,050 shares on March 20, 1990, and 100 shares on April 16, 1990, respectively, and were received by the accountant as evidenced by the endorsement of the accountant on the forwarding letters enclosing the share certificate and the transfer forms. He also relied on the legal opinion obtained by the company to the effect that the company was not barred from registering the shares in the name of the appellants. He further stated that there were no defects in the instruments of transfer and the petitioners’ acquisition of these impugned shares which constituted only about 5 per cent. of the paid-up capital of the company would not constitute any threat to the existing management and, therefore, both the grounds that the company had relied on for refusal do not stand.
6. According to Shri Chaudhary, counsel for the respondent-company, both the appeals are time-barred under Section 111(3) as the appellants, being on the board of directors, had constructive notice of refusal of registration of transfer of shares when the board took a decision to refuse the transfer of these shares at the meeting held on June 30, 1990. Therefore, according to him, the limit of two months from the date of notice of refusal expired on August 30, 1990. Even assuming that it was not a proper notice, the four-month limit from the date of lodgment of the transfer instruments, as provided in Section 111(3), expired on May 20, 1990, and June 16, 1990, respectively, for these lodgments and, therefore, the appellants have no locus standi to prefer the appeals in view of the limitation. He further submitted that the replies sent by the company in response to his notice under Section 113(2) cannot be construed as communication of rejection of these transfer of shares and also cannot be construed as the starting point for computing the period of limitation.
7. Continuing his arguments, Shri Chaudhary stated that neither the share certificates nor the transfer instruments were with the company but all the time they remained with the appellant as he was in charge of the secretarial work in the company. Referring to the minutes of the meeting dated June 30, 1990, Shri Chaudhary pointed out that the share transfer forms were presented to the board actually by the appellant in his capacity as joint managing director and at no time during the last two years, till he issued the notice under Section 113(3), did the appellant ever ask the company for return of the share certificates inasmuch as he was aware that they remained in his custody.
8. As, according to the pleadings of the petitioners, the transfer instruments were handed over to the accountant of the company, Shri Chaudhary offered to call the officials working in the accounts department of the company as witnesses, which was allowed by us. Shrimati Lila Jagwani, Mrs. Kamal Handa, Shri Rajagopalan Nair, the steno typist stated that none of them had any knowledge of these transfer instruments and share certificates nor were they in the custody of the same. The appellants did not choose to call any witness on their behalf.
9. As one of the grounds of rejection of the transfer was that the instruments of transfer were defective, we perused the copies of the instruments filed by the parties. The photostat copies of the transfer instruments filed by the appellants showed that the stamps had been cancelled while the copies furnished by the company, the stamps had not been cancelled. In the absence of the originals, which were also not available with either the appellants or with the company as per separate affidavits filed by them, we could not determine the correctness of the transfer instruments. Accordingly, we advised the company to issue duplicate certificates to the transferor and on production by the petitioner of new transfer forms along with duplicate certificates, the company may consider the registration of transfer. In the hearing on August 10/1993, it was reported that duplicate certificates in respect of the impugned shares had already been issued by the company in the name of the transferors and the appellant, as per the authority given by the transferors held the shares in his custody. It was also reported that the appellants would lodge the transfer forms along with the duplicate certificates and the c’ompany also agreed that it would look into the matter expeditiously by placing the request for transfer before the board of directors. In view of this, we directed the company to file a copy of the board resolutions on the decision taken in this regard in respect of these transfers.
10. Further hearing of the matter was also fixed on November 8, 1993. The company filed a copy of the minutes of the board dated October 30, 1993, on November 24, 1993. As per the minutes, it was seen that the board had refused registration of the impugned shares on the ground that the transfers, if approved, would be detrimental to the interest of the company and suck transfers shall cause imbalance in the management in favour of Shri Vimal K. Gupta disproportionately and further harassment to the company.
11. When we considered the board resolution at the hearing on March 13, 1995, Miss Richa Maini, counsel for the company, raised an objection that any grievance against the refusal by the board resolution dated October 13, 1993, should be agitated through a fresh appeal and cannot form part of the earlier appeals as the cause of action for the appeals arose, even according to the appellants, on the basis of the company’s letter dated March 31, 1992. We informed her that this objection has no basis inasmuch as the issue of duplicate certificates and consideration of the subsequent transfer arose out of our own directions in the instant appeals and these appeals had not been disposed of by us. Even these directions had to be issued only because the company was not in a position to produce the transfer instruments whatever may be the reasons, for our perusal as the alleged defects in the instruments was one of the grounds for the earlier refusal.
12. Since We have held that the consideration of the board resolution dated October 13, 1993, is within our competence in the instant appeals and as the question of limitation was raised in regard to these appeals initially, it is necessary for us to deal with the same.
13. Admittedly, the petition was filed on April 22, 1992. The cause of action for the appellants to file these appeals, according to the appellants, was the letter dated March 31, 1992, conveying the decision of the board to refuse registration. Therefore, according to the appellants, the appeals had been filed within a period of two months from the date of receipt of that communication. The company contended that the appellant was aware of the decision of refusal on June 30, 1990, itself when the board took the decision in his presence. It is seen from various minutes of the board that even later after June 30, 1990, the matter relating to the transfer of the impugned shares had been raised by Shri Vimal K. Gupta and it was found to have been rejected on November 25, 1990, and in the meeting on April 17, 1991, it is stated in the minutes that tbe matter of transfer of the said shares was deferred. In the minutes dated May 15, 1991, it is stated since there was no material before the board, the earlier decision stands. At a subsequent meeting, it is stated that as Shri Vimal Gupta could not produce any material regarding transfer, it was decided to defer the matter.
14. Thus, it is evident from the minutes of the various board meetings that the board of directors did not seem to have put any finality to the matter. Even assuming that the rejection was done on June 30, 1990, later minutes show that the board was considering revising its decision. Even assuming that, as long as the decision taken on June 30, 1990, was not revised by the board, that decision should stand, we have to keep in mind that even if a shareholder is a director and is aware of the decision taken in the board, as per Section 111(2), the transferor/transferee are bound to be sent notices of refusal. In this case, the company conveyed the decision of the board regarding refusal only on March 31, 1992, and the appeals were filed within two months from the date of receipt of communication. The second limb of the argument of the company, is that, in the absence of any communication, the appellants should have filed the appeals within a period of four months from the date of lodgment, as per Section 111(2). We are of the view this issue has to be examined in the light of the decision of the Supreme Court in Shailesh Prabhudas Mehta v. Calico Dyeing and Printing Mills Ltd [1994] 80 Comp Cas 64, in which the Supreme Court has held that a company does not lose its right of refusal after a period of two months from lodgment except that it may become liable for penalty for not complying with the provisions of Section 111(1), as provided in Sub-section (12) of Section 111.
15. Therefore, we have to extend the same logic with regard to the applicability of the time limit specified in Sub-section (3) of Section 111, for the transferee/transferors especially relating to the period of four months. Since admittedly in this case, the appeals have been filed within a period of two months from the date of receipt of the letter of refusal, we hold that, these appeals are maintainable.
16. Now, the only issue before us is regarding the resolution of the board dated October 13, 1993, according to which the board refused the registration of the impugned shares in favour of Shri Vimal K. Gupta for the reasons stated therein.
17. The company is a public limited company having nearly 60 members. There are three identifiable groups of shareholders other than outsiders. The members of these three groups are closely related in that they are brothers, sisters, sisters-in-law and brothers-in-law of Shri Gupta. While Shri Vimal K. Gupta group holds 9.68 per cent. shares, the other two groups hold 70 per cent. of the shares. The transfer of the impugned shares which account for about 3.81 per cent. of the total share capital of the company would make the holding of Shri Gupta to nearly 13 per cent. This company, not being a listed company is governed by the provisions of its articles in relation to the powers of the board in respect of refusal of transfer of shares. It is seen from Article 44 of the articles of association, that the directors have absolute and uncontrolled discretion in the matter of registration of the transfers and without assigning any reason, they can decline registration. When discretion is vested in the board to refuse registration of transfer, we have only to see whether the reasons given are legitimate, bona fide and are in the interest of the company.
18. The question relating to the powers of court in dealing with the decisions of the board of directors of companies to refuse registration has been dealt with in a number of cases by various High Courts and the Supreme Court. In Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp Cas 19, the Supreme Court observed “where the directors have uncontrolled and absolute discretion in regard to declining registration of transfer of shares, the court will consider if the reasons are legitimate if the directors have acted on a wrong principle or from corrupt motive. If the court found that the directors gave reasons which were legitimate, the court would not overrule that decision merely on the ground that the court would not have come to the same conclusion”. In Luxmi Tea Co. Ltd. v. Pradip Kumar Sarkar [1990] 67 Comp Cas 518, the Supreme Court observed that the power to refuse cannot be exercised arbitrarily or for any collateral purposes and can be exercised only for a bona fide reason in the interest of the company and the general interest of the shareholders.
19. There are various other judicial decisions laying down the principle that as long as the decision of the board to refuse is for legitimate reasons, bona fide and in the interest of the company, the court should not interfere with the decision of the directors.
20. Keeping these principles in mind we have to examine the reasons given by the directors in refusing the registration in the present appeals.
1. That these shares were acquired with the understanding that they were to be distributed among three groups. But Shri Vimal Gutpa has sought to register all the shares in his name in violation of the understanding.
2. Shri Vimal K. Gupta is a man of litigating nature and has done considerable damage to the company by dragging the company into many litigations on very petty matters.
3. In a case before the Delhi High Court, wherein, after making a statement that he was not interested in acquiring any part of the shares in dispute in the case, he later prayed for transfer for the entire quantity of the shares and, therefore, the court observed that his prayer was with ulterior motive.
4. Taking all the above into consideration, it is stated in the board resolution, the board found that the transfer of the impugned shares would be detrimental to the interest of the company and would cause a tilt of balance in the management in favour of Shri Vimal K. Gupta and further harassment to the company.
21. If we look into these grounds, we find that there is no evidence to show that there was any agreement regarding distribution of these shares among the three groups and no evidence was produced regarding various litigations initiated by Shri Vimal K. Gupta against the company. Even assuming that he has done so, if he is not already a member, the company might be justified in not admitting him as a member consequent on transfer ‘ of shares in his name. But he is already a member. Even the observation of the High Court relates to the acquisition of nearly 30 per cent. of shares in the company covered in that proceeding (26,840 shares) and not the shares in question in these appeals. It is an admitted fact that Shri Vimal Gupta was the joint managing director of the company for nearly four years. Even when he was in that position and in spite of his repeated requests for registration of transfer of the impugned shares in his name, the board refused to concede to his request. Therefore, it is obvious that it is the estrangement of relationship within the family that seems to have been the paramount reason for refusal of registration of the impugned shares. In a private limited company, the atmosphere of cordial relationship among the members is absolutely essential in the interest of. the company and in such a situation the board of directors may be justified in refusing registration of shares in certain given circumstances. In the present case, the company is a public limited company even assuming that it is a family managed company, Shri Vimal Gupta is already a shareholder holding more than 9.5 per cent. shares. He is not on the board. The transfer of the impugned shares in his name would take his total holding only to 13 per cent. as against 70 per cent. held by the other two groups. His holding of 13 per cent. cannot in any way affect the composition of the board of directors as apprehended by the board. Therefore, we are of the view that the reasons given by the board to refuse registration are not legitimate and as such the same cannot be sustained and the appeals should be allowed. We order so. Accordingly, we hereby direct that the impugned shares be registered in the name of the transferees within 30 days from the date of receipt of this order.
22. Before parting with this case, it is essential to record that in view of the close relationship between the parties, we advised the appellants to transfer all their shares in the company to the other two groups so that the entire dispute could be resolved. While the appellants showed their willingness to do so, it was later reported to us that there was no agreement regarding the quantum of consideration and as such our suggestions could not be given effect to.