TMI Blog1956 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... face value of Rs. 5,00,000, in the defendant company bearing Nos. 30057 to 35056 together with blank transfer deed duly executed and completed and transferred by the defendant Hemmad. The transfer was made on or about the 27th April, 1950, and is said to be for the consideration of debts owed by defendant Hemmad to plaintiff Choukhani. It is the plaintiff's case in the plaint that Hemmad executed the relevant transfer deed in favour of the plaintiff in respect of the said shares and also completed the same. The plaintiff thereupon applied to the defendant company for registration of those shares in his name, but at meetings held on the 5th June, 1950, and 30th June, 1950, the board of directors of the defendant company refused to register such transfer of shares in the name of the plaintiff. The plaintiff challenges such refusal as wrongful and not bona fide. He pleads that there is no valid reason for such refusal. In paragraph 16 of the plaint the plaintiff states that the directors of the defendant company did not exercise their powers bona fide under the articles of association of the defendant company in refusing to register the shares. He then proceeds to set out in di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arter of large powers given to the directors of the company to decline to register shares and also gives them the power to withhold reasons for such refusal to register. Expressly the power is said to be absolute and uncontrolled. The directors' discretion is uncontrolled and absolute. But if it is shown that there has been no exercise of any discretion but an exercise of a whim or a caprice, then such purported exercise of power under such an article can be examined by the court. The test of "discretion" is not satisfied if the act or the decision of the directors declining to register is oppressive, capricious, corrupt or mala fide or not in the interest of the company at all. But once it is shown to the court that the directors have exercised their discretion, then this court does not sit as a court of appeal reviewing or revising that discretion. This court in that event will not set aside that discretion of the directors even though it would have come to a different conclusion on the same set of facts. It has been held that such a power is not illegal and under such power the directors are not bound to give reasons for their refusal. Cases have gone so far as to lay down the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke into account any matter which they conceive to be in the interests of the company, and thereby to admit or not to admit a particular person and to allow or not to allow a particular transfer for reasons not personal to the transferee but bearing on the general interests of the company as a whole such matters, for instance, as whether by their passing a particular transfer the transferee would obtain too great a weight in the councils of the company or might even perhaps obtain control. The question, therefore, simply is whether on the true construction of the particular article the directors are limited by anything except their bona fide view as to the interests of the company. In the present case the article is drafted in the widest possible terms, and I decline to write into that clear language any limitation other than a limitation, which is implicit by law, that a fiduciary power of this kind must be exercised bona fide in the interests of the company. Subject to that qualification, an article in this form appears to me to give the directors what it says, namely, an absolute and uncontrolled discretion," It is, therefore, clear on the construction of this article in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, other features in respect of this draft which show that it does not achieve the purpose for which it was attempted to be used by the appellant before the learned trial Judge. To appreciate that aspect of the case it is necessary to state the circumstances in which this draft came to be used at the trial court. According to the usual practice on the original side of this court an admitted brief of documents containing this draft was prepared and was sent by the plaintiff's attorneys to the defendant company's attorneys for comparison. At that stage the defendant company's attorneys put the words "Western India Theatres Limited" in pencil on that draft signifying that the draft had been signed by the company. Then the plaintiff's attorneys asked the defendant company's attorneys to initial that copy draft when they replied that they would take instructions on the matter from the defendant company. Subsequently, the draft was initialled by the attorneys of the defendant company and the brief of documents containing this draft was admitted. At the trial the learned Advocate-General who appeared on behalf of the defendant company admitted that brief of documents without taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of shares under article 52 of the company's articles of association and the managing agents were asked to inform the applicant accordingly. (Sd). K.M. Modi, Chairman. (Sd). C.L. Diwan, Secretary." It is clear from the actual terms of the resolution that no reason whatever was disclosed or stated by the board of directors for refusing to register this transfer. Hemmad's indebtedness to the company is not one of the reasons on which the refusal was made according to the terms of the resolution of the board of directors. The letter of the defendant company dated 5th July, 1950, conveying the unanimous and considered opinion of the board of directors arrived at on 30th June, 1950, also does not state Hemmad's indebtedness as one of the grounds or as any ground for refusing to register the shares. The whole object of this argument was that the statement of Hemmad's indebtedness to the company in that draft showed that the company was prepared to put forward a false reason as a ground for refusing to register and, therefore, being based on a false reason the company was not acting in bona fide exercise of its powers under article 52 of the articles of associati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact a letter duly signed and despatched to the plaintiff. In fact, it is now common ground that this letter was never sent to the plaintiff, nor even signed by the defendant company. We, therefore, find ourselves in agreement with the conclusion of the learned trial Judge on this point. Before leaving this branch of the case, a reference perhaps will not be inappropriate to a certain distinction which has been made in some of the decisions between grounds and reasons in considering articles of association of similar import although not couched in the same language. The cases that we have in view are Duke of Sutherland v. British Dominions Land Settlement Corporation Ltd. [1926] 1 Ch. 746 and Berry and Stewart v. Tottenham Hotspur Football and Athletic Co. Ltd. [1935] 1 Ch. 718; 5Comp. Cas. 472, 475. In the first case Tomlin J. said, on the construction of the article and the expression there "without assigning any reason/' that the reason for exercising the power is a distinct thing from the grounds which give rise to its exercise. In that case the interrogatories, therefore, on the grounds as distinguished from the reasons were allowed. The ratio of that decision was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to register the shares. The more fundamental attack of the appellant is based on the ground of mala fides. The gist of the appellant's case is that the real object of the defendant company's refusal to register the transfer was that Modi wanted to buy the shares himself and as the plaintiff had refused to sell the shares to Modi he, that is Modi, was exercising his influence and control over the board of directors and by practising such influence and control denied registration of these shares. In support of this contention the appellant urged a number of reasons. He tried to show that Modi has been attempting to corner the shares of the company for some time past. In fact, the appellant also urged that the shares of this company when transferred to the name of some persons were refused registration and ultimately were allowed to be registered when they were retransferred in the name of Modi. The outstanding incident which the appellant relies in proof of this contention is the transfer of certain shares to the Sahas. In support of this branch of the appellant's case it has also been argued that most of the directors were under the influence and control of Modi. These direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred by Hemmad. So long as the transfer was to other persons they could not be registered, but the same when transferred in favour of Modi or his nominees the company found no difficulty in registering such transfers. For that purpose our attention has also been drawn to the actual attempt at transfer by Hari Bhusan Ghose to such persons as Mohanlal Tarachand Shah and Ramniklal Nanchand whose names had been crossed out in the transfer deeds to be subsequently replaced by the names of Modi and his wife. Our attention has also been drawn to Mr. Modi's evidence on this subject of transfer of shares in the name of the Sahas. Modi's evidence appears in his answers to questions 321 to 334 as also 240 to 262. Modi's evidence is that a public auction was held with regard to these shares and that he purchased those shares at Rs. 50 per share. On this evidence and on those facts it was contended on behalf of the appellant that a glance at the transfer deeds showed that the shares had been or originally sold to the Sahas for Rs. 75 and, therefore, the Sahas had not voluntarily sold the shares but were in fact compelled or forced to sell the shares to Modi. Before considering how far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue as to form part of the same transaction and thereby become relevant like the fact in issue. By that standard the transaction of the Sahas cannot be said to be so connected with the transaction of the plaintiff which is in issue in the case as to form part of the same transaction. In fact there is no connection between the transaction of the Sahas and the transaction of the plaintiff in suit, and these two transactions in shares are independent transactions. The Evidence Act goes on to provide in section 8 that any fact is relevant which shows or constitutes a motive or preparation for any fact in issue or relevant fact. We cannot imagine how bad faith, assuming it to exist, in the case of the transfer regarding the Sahas can be a motive or preparation of bad faith for the plaintiff's transaction. Whether the evidence relating to the transaction of the Sahas could be evidence on other points such as cornering of shares by Modi we need not pause to enquire. We are, however, satisfied that the transaction of the Sahas cannot be used as evidence of mala fides or bad faith in the transaction in respect of the plaintiff. The only other section of the Evidence Act to which reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le the holder of one share had one vote, the holder of 5 shares had 2 votes and there was an additional vote for every additional 10 shares, with the result that by splitting a holding of shares, the voting power could be increased. It was alleged that the directors had systematically rejected transfers in order to prevent an increase in the voting power of the shareholders. The plaintiff brought an action to enforce registration of the transfer and there attempted to adduce evidence to show that the directors had refused registration in accordance with that systematic practice. Clauson J. expresses his decision on this particular point, at page 556 of that report, in his judgment in this manner: "The plaintiffs sought to establish their case by putting in certain evidence which was directed to show that on certain previous occasions the directors had rejected other transfers for reasons which would not justify the rejection and were not within the terms of the article. I rejected that evidence on the ground that the issue before me was as to what the directors did on November 5,1935, and that I was not entitled to listen to evidence as to what took place on other occasions, as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the creditor. The fact that the other directors are indebted is in our opinion not sufficient to induce the conclusion that the creditor director exercised the biggest influence even in this particular matter in suit. Even then one of the directors was in fact not indebted to Modi. There is in our opinion hardly any real or substantial evidence to show first that Modi had such influence over the other directors and, secondly, that even if he had exercised such influence, all the other directors in fact were so overcome as to act in fraud of the power contained in the article and not in the best interests of the company. After all, these other directors were also interested in the company and they had their stakes. It is difficult to believe how they could surrender all their interests to Modi. In fact, the conclusion would appear to be the other way and if some of them were indebted to Modi, then far from surrendering the rest of their interests to Modi the natural instinct would impel them to protect such of the remaining rights and interests which they had and stick on to them. In fact, this is the inherent contradiction in the appellant's case to which reference has been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors to take legal proceedings. To make the charge of mala fides and bad faith and not to put forward the main act of bad faith which was the attempt of Modi to buy the plaintiff's shares at an under-value and the plaintiff's refusal to sell the same to Modi is inexplicable and must be taken as the most cogent evidence disproving the plaintiff's contention on this most material allegation of bad faith against the defendant company. We, therefore, hold that the charge of bad faith and mala fides has not been established against the defendant company. The charge, of bad faith and mala fides is against the defendant company and it is not proved by creating what at best may be called suspicion against the conduct of one individual director, Modi. The hurdles the plaintiff had to overcome in proving fraud and mala fides are (1) that Modi had the requisite influence over each one of the other directors and (2) that Modi in fact successfully exercised that influence and (3) that in pursuance of such influence all the other directors of the company acted in the way that Modi had suggested. We are of opinion that the plaintiff had failed on these hurdles. The onus of proving fraud, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y stamp duty in the case of an instrument of transfer is upon the executant. Mr. Gupta arguing for the appellant submitted that the point that the transfer deed was not duly stamped was not one of the grounds or reasons in article 52 of the articles of association of the company on which the company has refused registration. The main thesis of his argument was tint article 53 naturally operated in a field of discretion, but where the law required the doing of an act it was not a matter of discretion at all but of legal compulsion. As article 52 uses the word "discretion" the legal requirement of stamp cannot come under article 52 of the ankles of association. We are unable to accept this argument as a sufficient and valid excuse for the plaintiff in this case. After all this was a plaintiff's suit against the defendant company for the relief that the register of the defendant company be rectified by acknowledging the plaintiff of transferee and owner of the shares. The complaint is against refusal of the company to register such transfer. If the law prohibits registration without stamp., then the company is entitled to refuse such registration on that ground and whether it do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the conclusion: "It seems to me that this consideration affords an absolute justification to the directors in their refusal to register this transfer. It was he duty of the plaintiff to tender a transfer which was right in all respects in point of law, and that he never did; and unless lie did that he company were under no obligation to put him on the register" That principle of law is applicable here. Section 3 of the Stamp Act makes the transfer of shares the subject of stamps as much as section 34(3) of the Companies Act. But section 17 of the Stamp Act makes it clear that all instruments chargeable with duty and executed by any person in India shall be stamped before or at the time of execution. Therefore, the legal requirement is that the stamp must be put either before or at the time of execution. That requirement was not satisfied in this case. Mr. Gupta tried to get away from the rigours of law by saying that the correspondence showed that the plaintiff sent a cheque for stamp to the company and thereby he tried to spell out an agreement by which the company were agreed in some form or another to purchase the stamp and put it on the transfer deed. Whatever the prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout stamps is not a legal transfer we do not see why the directors should not refuse to register such transfer. In fact, in that case the transfer was subsequently stamped with the proper ad valorem duty and the penalty for neglect to do this also had been paid, neither of which facts is present here in this case before us. The position in that case was that when the summons came on to be heard the transfer by virtue of which Hopkinson's name was taken off and Green's entered had been validated by the payment of the additional duty, and, therefore, the court in that case came to the conclusion that it was impossible for Mr. Hopkinson to claim to have Green's name struck out and his own restored. We fail to see how this case or its principle can help the appellant before us. While we are satisfied that the law is clear on the point, reference may be made to the company's own article in this case, namely, article 53(3). which repeats the provisions of the Indian Companies Act by saying: "It shall not be lawful for the company to register a transfer of any shares unless the proper instrument of transfer duly stamped and executed by the transferor and the transferee has been de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as the defendant Hemmad has not appeared in this case and as the plaintiff has asked for an injunction restraining the defendant Hemmad from exercising any right 111 respect of these shares, this court should grant him that injunction. Now, the relief of permanent injunction in suits must be governed by section 54 of the Specific Relief Act. The requirements of that section are well known. It says that a perpetual injunction may be granted to prevent the breach of an obligation existing in favour of the applicant whether expressly or by implication. In this connection the material part of section 54 is that when the defendant invades or threatens to invade the plaintiff's right to or enjoyment of property, the court may grant a perpetual injunction. There is, however, no pleading in the plaint alleging that the defendant Hemmad has invaded or threatens to invade the plaintiff's right to or enjoyment of the shares. Mr. Hazra tried to induce us to hold that there is a pleading in paragraph 16( i ) of the plaint where it is suggested that the dividend in respect of these shares was wrongfully appropriated by Modi in collusion with the defendant Hemmad. The charge even there is dir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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