PETITIONER: SHAILESH PRABHUDAS MEHTA Vs. RESPONDENT: CALICO DYEING & PRINTING MILLS LTD. DATE OF JUDGMENT15/02/1994 BENCH: REDDY, K. JAYACHANDRA (J) BENCH: REDDY, K. JAYACHANDRA (J) RAY, G.N. (J) CITATION: 1994 SCC (3) 339 JT 1994 (1) 671 1994 SCALE (1)624 ACT: HEADNOTE: JUDGMENT:
The Judgment of the Court was delivered by
K. JAYACHANDRA REDDY, J.- Special leave granted.
2. This appeal arises out of Company Petition No. 39 of
1985 which was dismissed by a learned Single Judge of the
Bombay High Court by his order dated February 27, 1987 and
an appeal filed against the said order was also dismissed by
a Division Bench. The order of the Division Bench is
impugned in this appeal.
3.The appellants are the son, widow and married daughter
of one late Shri Prabhudas V. Mehta who was holding 100
equity shares of the respondent Calico Dyeing & Printing
Mills Ltd. (‘Company’ for short) of the face value of Rs 100
each. Shri Prabhudas V. Mehta died on August 26,
341
1974 without leaving any will. The appellants are the only
legal heirs and representatives of Shri Prabhudas Mehta and
they filed a company petition for rectification of the
register of members of the Company by deleting the name of
Shri Prabhudas V. Mehta and substituting in its place the
names of the appellants in respect of those 100 shares in
the Company bearing Distinctive Nos. 9101 to 9200. Prior to
his death the deceased Shri Prabhudas V. Mehta was holding
these shares and was working as an employee of the Company.
It appears that there were certain disputes between Shri
Prabhudas V. Mehta and the Directors of the Company who made
efforts to purchase the said shares. The negotiations in
this regard could not be completed in view of the sudden
death of Shri Prabhudas V. Mehta. It is also alleged that
the appellants entered into negotiations for sale of shares
which were carried on for several years. Extensive
correspondence ensued between the appellants and the
Company. However, as no positive reply was forthcoming for
the transmission of shares, the appellants sent a letter to
the Company on May 28, 1977 for transmission of shares and
for the notice of the annual general meeting stating that
they were entitled to the same even in the absence of their
names being taken on the register of members by virtue of
Articles of Association and the provisions of the Companies
Act. On June 27, 1977 a reminder was sent to the Company.
On July 9, 1977 a reply was given by the Company stating
inter alia that the appellants were not entitled to exercise
any voting right in any of the meetings of the Company. On
September 21, 1977 the then existing Articles of Association
were replaced by a new set of Articles of Association
wherein new articles were introduced conferring power on the
Company to reject any application for transfer or
transmission without assigning any reason in that behalf.
According to the appellants this was done mainly with an
intention of defeating the appellants’ rights as
shareholders-cum-beneficiaries of the said shares. In the
month of March 1984 the Company closed down its operations
and by arriving at a settlement with the workers retrenched
all the workmen obtaining voluntary resignations from them.
It is alleged by the appellants that this was done with the
motive of making huge profits by the Directors and their
related shareholders by disposing of the plants, machinery
etc. On or about June 23, 1984 the Company requested the
appellants to approach the Company for transmission of
shares after obtaining the succession certificate in respect
of the estate of the deceased Shri Prabhudas V. Mehta. On
August 21, 1984 the appellants received the heirship
certificate in which 100 shares were mentioned as one of the
assets standing in the name of Shri Prabhudas V. Mehta in
the Company. On August 31, 1984 the appellants sent a
letter to the Company intimating that heirship certificate-
cum-letter of administration has been received by them and
therefore the Company should give to them the details about
the formalities to be complied with for the purpose of
effecting the transmission of the said shares in their
favour. On September 16, 1984 since there was no response
from the Company a reminder was sent. On September 19, 1984
the Company requested the
342
appellants to send certified true copy of the heirship
certificate to do the needful. On September 21, 1984 the
appellants addressed a letter to the Company requesting to
furnish the details of the procedure so as to comply with
the prerequisites of transmission of shares. On November
21, 1984 the appellants forwarded a true copy of the
heirship certificate and requested the company to do the
needful. A reminder also was sent on December 29, 1984.
Since there was no reply from the Company, Company Petition
No. 39 of 1985 was filed in the High Court of Bombay praying
for rectification of the register of members. The Company
filed an affidavit opposing the grant of the relief prayed
for, stating that the Directors of the Company have decided
to refuse to register the appellants as members of the
Company in exercise of the powers conferred under the
Articles of Association of the Company. The appellants
filed a rejoinder. On April 17, 1985 the Company filed an
additional affidavit purporting to enclose therewith a
resolution of the Company dated April 9, 1985 by which the
Board of Directors declined to register the shares of the
appellants as the owners thereof and to admit them as
members. On April 17, 1985 the learned Single Judge of the
High Court dismissed the petition on the ground that
alternative remedy was available under Section 111 of the
Companies Act. Questioning the same the appellants
preferred an appeal which was admitted. Pending the
disposal of the appeal, the appellants took out notice of
motion and the interim order was passed directing the
Company not to dispose of its assets and that the Company
should give notice of each and every general meeting to the
appellants. The Division Bench ultimately allowed the
appeal and the matter was remanded back to the learned
Single Judge to decide the same afresh. Further affidavits
were filed. The company petition again after remand came up
for hearing before the learned Single Judge and the same was
again dismissed on the ground that the appellants should
file either an appeal under Section 111 of the Companies Act
or file a separate suit to agitate the issues involved in
view of the diverse disputes raised between the appellants
and the Company. Being aggrieved by the said order the
appellants again filed an Appeal No. 516 of 1987. Pending
the said appeal various applications were made for diverse
interim reliefs. In respect of some of the reliefs that
were refused the appellants filed a Special Leave Petition
(Civil) No. 13605 of 1988 in this Court but before the same
came up for hearing, the Division Bench of the High Court
completed the hearing of the main appeal and dismissed the
appeal on December 22, 1989. Questioning the same the
present appeal is filed.
4.The Division Bench of the High Court mainly considered two
questions namely (1) whether the Board of Directors lost its
powers to refuse to transmit the shares to the names of the
appellants after a lapse of two months and (2) whether the
Board’s failure to register the transmission within the
period of two months and the subsequent decision taken on
April 9, 1985 was mala fide and not taken in the interest of
the Company. The Division Bench observed that the first
contention is obviously based on the provisions of the
English Companies Act and cases decided thereunder and
343
after referring to some decided cases held that they do not
lay down that on the expiry of period of two months the
power would be lost and the whole question would be exercise
of discretion rather than any alleged loss of power and for
that purpose the factual position in the case has to be
examined. Relying on Section III of the Companies Act, the
Division Bench observed as under :
“Certainly, if there is inaction beyond the
period of two monts the delay, if unexplained,
may influence the Appellate Authority or the
Court whilst considering the question whether
discretion has been exercised bona fide or not
but cannot imply, in our opinion, loss of
power in the Board of Directors. If that was
to be the consequence, then, in our opinion,
it was obligatory for the legislature to have
provided the same specifically by enacting a
specific deeming provision to that effect and
not leaving it for argument or a fiction to be
implied by reading of the provisions.”
Having thus disposed of the first issue, the Division Bench
adverted to the second question namely whether the action of
the Directors was mala fide? The Division Bench also
considered the question whether the Directors have acted in
the interest of the Company? Having examined the materials
on record and the ratio laid down in several cases, the
Division Bench ultimately held that : “It is not possible on
the material shown to us to characterise the decision as
capricious or perverse or mala fide and that it is a
commercial decision taken honestly by businessmen in the
interest of the Company and its shareholders.” The Division
Bench concluded that subject to the rights of the
petitioners to adopt such appropriate proceedings as may be
available to them, the appeal was dismissed.
5.Shri A.M. Singhvi, learned Senior Counsel appearing for
the appellants submitted that the Company has no power to
refuse registration or transmission in absence of specific
provision in the Articles of Association empowering the
Company for the same and that transmission of shares is by
operation of law and was completed in 1974 itself i.e. on
the death of Shri Prabhudas V. Mehta and that the subsequent
amendment of Article 29 to deny registration of transmission
is invalid and ineffective. His further submission is that
in any event non-refusal within the statutory period of two
months renders such power ineffective and exhausted. But
even otherwise, according to the learned counsel, the
refusal of registration by the Board was wrongful and mala
fide exercise of discretion. Shri Ashok Desai, learned
Senior Counsel appearing for the respondent-Company, on the
other hand, submitted that there are concurrent findings of
fact that the refusal was not a mala fide action and it was
a proper exercise of discretion in the interest of the
Company and that the Company in the instant case is only a
private company in the nature of partnership and that the
appellants cannot force themselves to be partners.
344
6.The first and second submissions can be dealt with
together as they are very much based on the provisions of
the Companies Act and Articles of Association. Articles 26
and 34 of the Articles of Association of the respondent-
Company are relevant in this regard. Article 26 lays down
that subject to the provisions of Section 111 of the
Companies Act, the Directors may in their absolute
discretion and without assigning any reason decline to
register any transfer of any share and if the Directors
decline to register a transfer of any share, they shall,
within two months after the date on which the transfer was
lodged with the company, send to the transferee and the
transferor notice of the refusal. Article 34 is to the
effect that any person becoming entitled to a share in
consequence of the death or insolvency of a member may, upon
such evidence as may be produced and as required from time
to time by the Directors may elect either to be registered
himself as holder of the share or to make such transfer of
share as the deceased or insolvent member could have made
and that the Directors shall, in either case, have the same
right to decline or suspend registration as they would have
had, if the deceased or insolvent member had transferred the
share before his death or insolvency. Section 111 of the
Companies Act gives the power to refuse registration and
also provides for an appeal against such refusal. Section
111(1) lays down that nothing in Sections 108, 109 and 110
shall prejudice any power of the Company under its articles
to refuse to register the transfer of, or the transmission
by operation of law of the right to, any shares or interest
of a member in, or debentures of, the Company. Sub-section
(2) is to the effect that if the Company refuses, whether in
pursuance of any power under its articles or otherwise, to
register any such transfer or transmission of rights, it
shall within two months from the date on which the
instrument of transfer, or the intimation of such
transmission, as the case may be, was delivered to the
Company, send notice of the refusal to the transferee and
the transferor. The later part of this sub-section reads as
under :
” If default is made in complying with this
sub-section, the Company, and every officer of
the Company who is in default, shall be
punishable with fine which may extend to fifty
rupees for every day during which the default
continues.”
Then sub-section (4) provides for an appeal against such
refusal to the Central Government. Relying on these
provisions Shri Singhvi submitted that the appellants are
the persons entitled to the shares and that since a notice
of intimation of refusal has to be compulsorily sent within
a period of two months, it automatically follows that the
right of refusal must be exercised within the period of two
months and since the Directors have not exercised this right
of refusal within the prescribed period of two months, then
the said right is lost forever and therefore the appellants
get an absolute and unrestricted right to have the shares
transferred in their names and accordingly correct the
shares register. In this context reliance is placed on
345
Swaledale Cleaners Ltd., Re’ and some of the observations
made by Pennycuick, LJ. thereunder. In that case it was
held that :
“(i) The period of two months mentioned in
Clause 19 of Table A under the Act of 1929,
and specified in Section 78 of the Act of
1948, may safely be taken as the outside limit
after which there is unnecessary delay.
(ii)The power of veto is a restriction on
the right of alienation and as such must be
exercised at the proper time for its exercise,
if it is to be exercised at all. For this
purpose the proper time is the occasion on
which the transfers are placed before the
board for confirmation if and it seems only
if they are so placed without unnecessary
delay. If there is unnecessary delay in
placing the transfers before the board, the
power of veto must be regarded as lost, so
that the right of transfer becomes
unrestricted. It cannot be the law that the
Board of a Company can improperly delay
considering a transfer and then when driven to
do so, as for instance here, by the launching
of a motion, exercise the power of veto.”
Learned counsel placed strong reliance on
these observations.
7.But the observations made in this case
were later considered in Swaledale Cleaners
Ltd., Re2 and they have been diluted and it
was held by the Court of Appeal as under :
“As to unreasonable delay, I take the view of
the judge (and it seems to me merely, if I may
say so, common sense), that, as there is an
obligation on directors who refuse to register
a transfer to inform the persons who are
aggrieved within two months of such a refusal,
the Act of 1948 quite clearly indicates that a
reasonable time, other things being equal,
within which Directors must make up their
minds either to accept the transfer or to
refuse it must be the two months within which
they have to make an answer. Therefore, it
does seem to me that waiting four months
without any decision at all was an
unreasonable delay. One has, however, to go
one step further than that; one has to say
that unreasonable delay has destroyed the
right so that when, in December 1967, the new
board purported to refuse, they were no longer
in a position to exercise that discretion
which, if they had acted promptly, undoubtedly
would have been theirs, to consider and, if
they thought fit in the interests of the
company, to refuse registration of the
transfers.”
These observations make it clear that the appellate court
did not confirm the opinion of Pennycuick, LJ. that on the
expiry of the period of two months, the power would be lost.
In this case the scope of Section 78 of the English
1 (1968)IAIIER1132(ChD)
2 (1968) 3 All ER 619 (CA)
346
Companies Act was being considered and the said provision
reads as follows:
” (1) If a company refuses to register a
transfer of any shares or debentures the
company shall, within two months after the
date on which the transfer was lodged with the
company, send to the transferee notice of the
refusal.”
We find that the language of Section 78 of the English
Companies Act is not the same as Section 111 of our
Companies Act and Section 7 8 does not provide for any
penalty or for any appeal. It is necessary to note that if
the right to refuse was to come to an end, as contended by
the learned counsel, after the expiry of two months and that
an absolute right was created in favour of transferee then
the Legislature would have so categorically provided. But,
on the other hand, the section provides for penalty if there
is failure on the part of the Company to send such an
intimation within two months and that itself shows that no
absolute right was to be created in favour of the
transferee. Further Section 111 of the Act provides for a
right of appeal to the Central Government and if as
contended by the learned counsel that on a mere failure to
send an intimation within two months an absolute right came
to be vested in transferee then the question of transferee
filing an appeal would not arise at all. Thus this section
mainly deals with right to receive a notice and the
consequence of non-sending of such a notice results in
penalty. These provisions would go to show that what was
intended was to provide for a notice of refusal to be sent
and that failure thereof only resulting in levying penalty.
8.The submission that the Company had no power to refuse
registration of transmission of shares in the absence of a
specific provision in the Articles of Association is also
untenable. According to the learned counsel, the Articles
of Association at the time of death of deceased did not
provide for such a refusal and that even if there is an
amendment later the same cannot empower the Board to refuse
the registration of the shares. In our view particularly in
view of the facts of this case, the Board had such power
when the registration and transfer was sought in 1984. Even
otherwise the facts show that the registration and
transmission was sought only in 1984 as mentioned above. By
then the articles were amended and the Board was given power
to refuse registration or transmission. Therefore we are
not able to see any irregularity or lack of bona fide
action, as contended, in bringing about those amendments.
However we notice that before the learned Single Judge as
well as before the Division Bench of the High Court, the
main question urged was that of limitation of two months and
for the aforesaid reasons, we are of the view that the High
Court has rightly held that the right to refuse is not lost.
9.At this stage we may refer to the factual background in
the instant case. Initially the company petition was
dismissed by the Company Judge on April 17, 1985 on the
preliminary ground. As against that the appellants went in
appeal and in that appeal the order of dismissal of the
company
347
petition was set aside and a remand was ordered for disposal
on merits and that the appellate court also permitted for
filing further affidavits and they were in fact filed before
the matter came up for rehearing before the Company Judge on
remand. It must further be remembered that the appellants
moved the High Court even before the expiry of the period of
two months and from the dates mentioned above it can be seen
that the appellants complied with the requirements namely
sending the heirship certificate etc. only after 6 or 7
years from the date of their letter to the Company seeking
transmission. Therefore it has to be concluded that some
time after November 21, 1984 when the appellants’ letter
with necessary enclosures was received by the Company,
necessary formalities to become heirs had been completed.
The appellants without waiting for the expiry of period of
two months filed the company petition on January 14, 1985
for rectifying the shares register by bringing them on
record. From these facts it can broadly be accepted that
the power or discretion vests in the Board of Directors for
two months after submission of the proper application
supported by the necessary documents. However, that does
not mean that right would be lost after the expiry of two
months and what all that is necessary to see is whether the
Board has acted in a bona fide manner in rejecting the
transmission of the shares.
10.We shall now therefore deal with the other submission
namely whetherthe action of the Board of Directors was mala
fide. In Bajaj Auto Ltd. v.N.K. Firodia3 it was laid down
that the Court can consider whether the Directors acted in
the interest of the Company. This case was cited in Life
Insurance Corpn. v. Escorts4 with approval and in that case
the nature of the power of the Directors and scope of
scrutiny by the court were explained and it was observed as
under: (SCC pp. 554-55, para 12)
“Discretion implies just and proper
consideration of the proposal in the facts and
circumstances of the case. In the exercise of
that discretion the Directors will act for the
paramount interest of the company and for the
general interest of the shareholders because
the Directors are in a fiduciary position both
towards the company and towards every
shareholder. The Directors are therefore
required to act bona fide and not arbitrarily
and not for any collateral motive.”
Keeping these principles in mind we shall examine the
reasons that weighed with the Board of Directors for
refusing transmission. The Board of Directors have stated
in the affidavits and also appended the copies of the
earlier correspondence including the proceedings of the
mediator and the history of the disputes originally between
late Shri Prabhudas V. Mehta and the Management of the
Company and subsequently between the heirs of Shri Prabhudas
V. Mehta and the Management of the Company. The learned
Single Judge as well as the Division Bench have exhaustively
examined the correspondence and the affidavits and have
given a concurrent finding that
3 (1970) 2 SCC 550
4 (1986) 1 SCC 264
348
there is animosity between the parties and that the decision
of the Management was a proper and commercial decision
keeping in view the interest of the Management of the
Company. Therefore it cannot be said that there was
dishonest intention. In any event this is a concurrent
finding of fact based on the affidavits and records in which
we need not interfere.
11. We have already held that the decision of the Directors
was a commercial decision made in the interest of the
Management of the Company. It is also significant to note
that the appellants have only 100 shares which are only
insignificant as compared to the total shares and the
contention that the relevant articles were amended only to
defeat the rights of the appellants in respect of those 100
shares, is wholly untenable.
12.For all these reasons, the appeal is dismissed. In the
circumstances of the case, there will be no order as to
costs.
350