TMI Blog1927 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ny has a paramount lien upon the shares in question for moneys due to it from the registered holders of the shares. Alternatively, it is contended in reliance on article 34 that the board may refuse to register a transfer without giving any reason, if they disapprove of the proposed transferee. 3. Mr. Justice Taraporewala decided the case in favour of the petitioners, and ordered the rectification to be made. The company now appeals. 4. In our judgments of August 16 and 26, 1926 51 Bom. 267; 100 Ind. Cas. 941; 29 Bom. L.R. 126; AIR 1927 Bom. 113, we have explained the circumstances under which we have no formal judgment of the learned Judge setting out his reasons. We have, however, a transcript of the notes which he dictated to his shorthand clerk. These notes were never signed, but they will be found at p. 56 of the appeal paper book, and I will refer to them as the provisional judgment. 5. The main facts are set out in the provisional judgment and in the judgment of my brother Kemp which I have had the advantage of reading. I need not, therefore, recapitulate them. The position, shortly, stated is this. The company was incorporated about the year 1908, and its share capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished his right to be considered an equitable mortgagee of those 1990 shares, and to have the same transferred to his own name. A large sum is still due to Mr. Dinshaw under this agreement, and it is alleged that the security is insufficient to meet the amount of the debt. 7. As regards Sir Adamji and his six sons, Sir Adamji died in 1913 and Abdul Husein in 1918. The five remaining sons have become insolvent. I have already dealt with Peerbhoy Adamji. The remaining four, viz. , Mahomedalli, Karimbhoy, Ebrahim, and Allibhoy became insolvent in 1924, and all their estate and effects became vested in the first petitioner, the Official Assignee. Of the 1990 shares mortgaged to Sir Shapurji, these four sons had each held 284 shares, making in all 1136. Of these 1136 shares, 1134 have been transferred to the name of the Official Assignee with the consent of Mr. Dinshaw as mortgagee and the remaining two have been transferred to the names of Mr. Dinshaw and Mr. N.M. Raiji. Apart, then, from these 1136 shares, there are still 854 shares out of the original 1990 mortgaged. It is these 854 shares which have been transferred to Mr. Dinshaw and which are now asked by prayer ( a ) of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat debit was wiped out by subsequent credits, and in particular by a credit item on March 1, 1914, of Rs. 1,02,500. Consequently, although the agency firm remained indebted to the company it was in respect of items occurring after the date of that agreement, having regard to the rule in Clayton's case ( See Deeley ) v. Lloyds Bank, Limited [1912] A.G. 756; 81 L.J. Ch. 697; 107 L.T. 465; 56 S.J. 734; 29 TLR 4. It is also material to observe that if Mr. Dinshaw as mortgagee was entitled to hold 199/200ths of the company's share capital, then, even if any money was recovered by the company in respect of the debt owing by the agency firm, it would in effect only go as to 199/200ths to Mr. Dinshaw subject to a due declaration of dividend. 11. As regards the refusal to register the transferee, I may clear the ground by saying that no suggestion is made on personal grounds against the proposed transferees. It is not suggested that they are not respectable and responsible persons; and indeed Mr. Dinshaw is already a registered shareholder. In the correspondence prior to these proceedings, the only reference to any reason for the refusal is that contained in the chairman's letter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93;85 L.J.Ch.601; 115 L.T. 107 ; 32 TLR 521 Mr. Justice Peterson had to consider a case where articles 9 and 12 of the articles of association closely resembled article 23 and the first portion of article 21 in the present case. There it was held that articles of that nature do not protect a company which in the face of notice that a shareholder is not the beneficial owner of the share, makes advances or gives credit to the shareholder, and that consequently the company was wrong in asserting a lien. The argument of counsel (Mr. Tomlin, K.C., as he then was) is, I think, useful to refer to. There, after referring to section 27 of the English Companies Act, 1908, which corresponds to section 33 of the Indian Companies Act, 1913, he states (p. 298): "That section and articles of association to the articles of this company material to this case have been the subject of legal decisions, and the result of those decisions is that in disputes between third parties as to their rights inter se to shares, a company is not to be put in any worse position by reason of the fiduciary character of the registered holders, but in disputes between the company and other persons the company is su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority for a secured advance under article 21. And indeed the decision of Sir George Jessel in In re Stockton Malleable Iron Company ( supra p. 213) goes to show that the two sections should be construed together. There, at pages 102-103, that eminent Judge says: "It appears to me that the 16th is a mere supplement to the 7th, that is, they refer to the same thing. It is not to be supposed, as far as I can see, that they are independent articles in the sense that the members whose shares can be dealt with under the 7th are different from the members whose shares can be dealt with under the 16th. It would be monstrous if it were so. It appears to me that the 16th is a security for the 7th, so to say." Then lower down he says (p. 103): "Then, as I read the 16th article, it is that they may decline to register that for which they have a lien under the 7th article. The 16th article says they may decline to register any transfer of shares by a man who is indebted to them. Why may they decline to register ? Because they have a lien. That seems to me the only reason why they may decline to register But is it reasonable to suppose the company intend to fetter a transfer when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares in respect of which the company was proposing to make new advances in respect of fresh transactions between itself and the agency firm. For instance, supposing the mortgagor had been beem some third party X, and the agents in their capacity as such knew that X had mortgaged the shares to some bank, then surely it would be the duty of the agents to tell the company of this mortgage before they caused the company to advance moneys to X in reliance in part on the security of these shares. If that is so, then, a fortiori, this would be the duty of the agents where they themselves were the borrowers. 19. There is also the additional circumstance here, as pointed out by Mr. Justice Taraporewala, that under clause 7 of the agreement. Exhibit I, the managing agents had agreed to procure the company itself to execute a mortgage of its property as security for the loan to them, and that they had there fore in this way agreed co give the company express notice of the agreement in question. In my judgment then, the company must be taken to have had notice of this agreement prior to the dates of the advances now relied on by the company. 20. It was next said that this was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be sufficient to justify their past action if in fact they did not act under article 31. Accordingly, it may well be that, as stated in the provisional judgment, this point was not pressed much before Mr. Justice Taraporewala by the company. In my judgment, then, the true view is that article 31 cannot now be relied on as the directors in fact did not act under it. 24. But even if they did, the company has yet another difficulty to face, viz. , that their decision was not bona fide. The law on this point has been concisely stated by Lord Atkinson in Weinberger v. Inglis [1919] A.C. 606 ; 88 L.J. Ch. 287; 121 L.T. 65; 63 S.J. 461; 35 TLR 399 , as follows (p. 626): "Assuming that the Committee in this matter of reelection of a former member of the Stock Exchange stands in a position analogous to that of directors refusing to consent to the assignment by a shareholder of his shares to a transferee, what are the principles established by these last-mentioned authorities ? They are, it appears to me, the following : First, that directors refusing to consent to the transfer are not bound to state their reasons for so refusing. Second, that if they do not state their rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pen to the petitioners to show that their action was arbitrary and capricious, and should therefore be overruled by the Court. The onus is, I agree, strongly on the petitioners to prove this, but under all the circumstances of the case they have, in my opinion, discharged the onus. 26. The only suggestions put forward to us for thus defeating the rights of the holders of 199-200ths of the share capital is that thereby the interest of the holders of the remaining 1-200th might be protected ; and that Mr. Dinshaw was objected to because he was a mortgagee. I do not think that any reasonable and fair-minded directors would accept either suggestion. If these other few shareholders who are not actually before us are in some way to be damnified by the proposed registration, then I take it would still be open to them by proper proceedings to enforce their rights. But so far they have not done so, and, as at present advised, the damage to them, if any, would seem to be lacking in substance. On the evidence before us I have no doubt in my own mind that the present directors are the mere nominees of the Peerbhoy family and that the attitude they have adopted is not one in the interest of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. The remaining 10 shares remained with Sir Adamji Peerbhoy and his sons to enable them to have the necessary qualifications as directors. The mortgagors handed over to Sir Shapurji certificates of the said 1990 shares with a power of attorney to execute transfers in favour of Sir Shapurji or any one on his behalf. Here it may be mentioned that by an agreement of even date, Rs. 50,000 were to be advanced to the company and by clause 7 of the agreement between Sir Adamji Peerbhoy and his sons and Sir Shapurji the borrowers undertook to execute a legal and proper mortgage of their property as well for the loan of rupees seven and a half lacs as for the loan of Rs. 50,000 to be made to the company. The second petitioner, Mr. F.E. Dinshaw, is the person in whom the right to the said loan and to the said securities is now vested. On March 9, 1924, Rs. 5,06,259-1-3 were due in respect of the loan and further interest from March 9, 1924. On February 19, 1925, by a deed of consolidation of the mortgage, the sum of rupees seven and a half lacs and other loans and all securities in respect of the same, were consolidated as one single debt and the amount due to the petitioner now exceeds tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a requisition to the directors to call a general meeting to remove the present directors. But owing to the lack of a quorum no resolution could be passed at that meeting. As a matter of fact the nominees of the old directors constitute seven of the shareholders out of the eleven living shareholders now on the register, so that it is impossible to form a quorum under article 74 of the articles of association without their assistance. In 1924, Mr. Dinshaw had filed a suit against the mortgagors and the company, being suit No. 2581 of 1224. In this suit it was held that he was an equitable mortgagee of the 1990 shares and was entitled at any time to call for a transfer. This petition was thereafter filed under the Indian Companies Act for rectifying the register and inserting therein the names of Mr. Dinshaw and Mr. Lang. The learned Chamber Judge, Mr. Justice Taraporewala, held that on a construction of articles 21 and 30 of the articles of association, the company, before it can refuse to register a transfer under article 30, must have a paramount lien on the shares for money due to the company. It is to be noted that the company claimed that rupees three lacs were due to them i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 213) per Lord Blackburn at p. 36. In fact, it appears that where any question of the priority of claims in such cases is concerned, the company cannot by making advances after they have notice of an equitable claim on the share, obtain priority for its advances. Ordinarily, therefore, if the matter before us was the question to be tried in an action. I would be inclined to hold that the company in this case had no paramount lien to Mr. Dinshaw provided that the company had notice of the mortgagee's interest prior to the date of the advances made by it. But Mr. Jinnah for the directors contends that the question before the Chamber Judge was merely the directors' right to refuse to register the transfer and that in such a proceeding the question of priority of one claim over another is not gone into, but all that is determined is the right of refusing the transfer. He maintains that article 30 stands alone and must not be read with article 21 and that any indebtedness to the company is enough to justify a refusal to transfer. He says that under article 21 the company has a lien, although not necessarily a lien paramount to that of the 3 mortgagor of these shares and that is sufficie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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