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TMI Blog1957 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... en paid up) standing registered in the name of the first plaintiff, and of 60 other similar shares standing registered in the name of the second plaintiff in the books of the company, and directing the name of the second defendant, Saraf, to be registered as the holder and owner of the above 1,668 shares in the books of the bank, and restraining the appellant bank and its liquidators by an injunction from making any call or taking any other proceedings against the plaintiffs in respect of the said 1,668 shares. The facts are briefly as follows: The Bank of Hindustan Ltd., the appellant bank, was a banking company incorporated under the Indian Companies Act with its registered office at No. 119 Armenian Street, Madras. The first plaintiff is a landlord and merchant, carrying on business at No. 95 Broadway, Madras. Till the beginning of May, 1945, he, admittedly, held 2,508 partly paid up shares of Rs. 100 each (reduced to Rs. 90) in this bank; and the second plaintiff, of which the first plaintiff is the governing director, held another 610 shares of Rs. 90 each. These shares admittedly, stood registered in the books of the appellant bank in the names of the first and second plaint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed to be purchased by the second defendant. He paid the plaintiff Rs. 1,28,617-8-0 on behalf of the second defendant, as agreed to under Exhibit P. 1; and wrote a letter, Exhibit P. 3, on 8th May, 1945, to the second defendant at Bombay, informing him about the payment to the plaintiffs on behalf of the second defendant, and requesting him to send a cheque to him payable at Madras for Rs. 1,07,992-8-0, the money paid by him to the plaintiffs, less Rs. 20,625, the value of 500 shares bought by him out of the 3,118 shares. Exhibit P. 3 also conveyed to defendant No. 2 information of a tea party given to the Deputy Governor, Reserve Bank of India, at the appellant bank premises, and added that the bank matter was going in order. On 9th May, 1945, the first plaintiff passed a stamped receipt for Rs. 1,03,455, the value of 2,508 shares of his own sold by him to the second defendant, on whose behalf the fourth defendant had paid the money. A similar receipt was granted with regard to Rs. 25,162-8-0 due to the second plaintiff for the 600 shares sold by it to defendant No. 2. But troubles began very soon. On 16th May, 1945, the fourth defendant wrote a letter. Exhibit P. 5, to the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in the names of the plaintiffs. The scrips in respect of the 1,668 shares, and the blank transfer forms relating to them, were handed over by the second defendant to the third defendant as security for large sums advanced by him to the second defendant, probably to pay off the fourth defendant. The third defendant wrote a letter, Exhibit P. 6, to the secretary of the appellant bank on 19th May, 1945, claiming dividend in respect of those shares as mortgagee, producing those shares before the secretary and executing an indemnity bond (Exhibit P. 11), in favour of the bank against any claims in respect of the dividend for those shares, and giving in detail the numbers of the shares. The bank paid him the dividend on those shares on the authority of the letter, statements therein, production of the scrips, and the indemnity bond, for the year ending 31st December, 1944, and for two more years. After this, the amount due to the third defendant from the second defendant was said to have been entirely paid and discharged. The third defendant then delivered back the blank transfer forms and the scrips to the second defendant's nominee, the National Studios Ltd., Bombay, and he cease ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing director of the bank, and the fourth defendant was the chairman, and the third defendant was also a director, the first plaintiff did not worry about the transfers, and took it for granted that they would be made in due course after the second defendant had distributed the 3,118 shares he had bought to the purchasers from him, or that the second defendant would get himself registered in respect of the unsold shares. According to him, though technically the purchaser of the 3,118 shares under Exhibit P. 1 was the second defendant, Saraf, he treated him as the mouth-piece and nominee of the other directors and as acting on behalf of the other directors, and considered all the three directors, defendants Nos. 2 to 4, to be acting in concert and to be jointly purchasing the shares under Exhibit P. 1 though the third defendant was absent at the transaction, and only defendants Nos. 2 and 4 were present, and defendant No. 4 purported to pay the price only on behalf of the second defendant, and there was no privity of contract between him and the plaintiffs regarding the purchase of any of the shares under Exhibit P. 1. The first plaintiff added, as P.W. 1, that, after he had so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll for Rs. 9 per share, to the second defendant, pointing out that he had purchased from the plaintiff all the 3,118 shares belonging to them on 4th May, 1945, and that the second defendant had also*drawn the dividends on those shares, when he himself was the managing director, but had omitted to register the shares in his name, and added that the plaintiffs had no liability in respect of the shares, and that the second defendant should, in honesty and fairness, see that the shares were actually registered in the bank's books in his name at once, if he had not already done so, and requested reply. The second defendant was too cunning to be taken in by such tactics. He did not reply to that letter. The first plaintiff wrote frantically another letter to him on 31st October, 1947, possibly by registered post. The second defendant, then by registered post, sent a reply, Exhibit P. 19, dated 10th November, 1947, stating that he did not appear to have received the letter dated 2nd September, 1947, and requesting for a copy thereof to be sent to him. He added that he was not in any way liable to pay any call in respect of the 1,668 shares standing registered in the plaintiff's name in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter. All these letters and protestations proved to be of no avail. The first plaintiff happened to become again the managing director and chairman of the appellant bank after the second defendant had cleared out. At a meeting of the directors of the bank, presided over by him, the 1,668 shares, concerned in this suit and the petition, were transferred to the name of the third defendant, who had received the dividends in respect thereof for two years, and the plaintiff's name was deleted from the company's books. But the third defendant at once took out Application No. 1238 of 1948 in this court for rectification of the company's register of shareholders, making only the appellant bank a party, and not the plaintiffs also. Bell J. by his order dated 20th April, 1948, ordered rectification of the company's register of shareholders, removed the name of the third defendant on the ground that the directors' meeting, approving the transfer in his name, was an invalid one, and put back the plaintiffs' names once more in the register of shareholders. In August, 1948, a petition for winding up the appellant-bank was filed in this court, as its affairs were said to be in bankrupt conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had an absolute right without giving any reasons, to refuse the transfer under article 36 of the articles of association and section 34(7) of the Companies Act, and that this right was specially relevant when these were partly paid up shares and the plaintiffs were solvent persons and defendant No. 2, the purchaser, was not at all in a sound financial position and able to discharge the further calls of Rs. 60 per share. Several other defences were also raised by the bank, namely, that the power of the court to rectify the register under section 38 would not extend to a case like this, where the default lay only with the plaintiffs and defendant No. 2, and the alleged fraud only with defendant No. 2, and there was no default or unnecessary delay or fraud on the part of the bank, and the names of the plaintiffs were continued in the register of shareholders for excellent reasons, and not "without sufficient cause" as contemplated under section 38. The defence was also raised that the moment the winding up petition was filed and resulted in a winding up order, the winding up order thus passed would, under the insolvency law, take effect from the date of the filing of the winding up p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a financier for the second defendant who had purchased the 3,118 shares from the plaintiffs under Exhibit P. 1, and had no ready cash. Defendants Nos. 3 and 4 denied that they had conspired with defendant No. 2 regarding these shares purchased under Exhibit P. 1, or that those shares were purchased by defendant No. 1 on their behalf also. It was represented by the learned counsel for defendant No. 4 that the fourth defendant had settled with the liquidators his liability regarding the calls concerning the 500 shares bought by him from the second defendant, out of the 3,118 shares purchased by the second defendant under Exhibit P. 1. The second defendant has filed a written statement, contending that he had never agreed to purchase from the plaintiffs the 3,118 shares, under Exhibit P. 1, as urged by the plaintiffs, but was only acting as an intermediary in respect of these shares, in other words, that he had only promised to find purchasers for those shares, if possible, and that he was not liable for getting the names of the plaintiffs deleted and those of the purchasers substituted in respect of these 1,668 shares, as no purchasers had bought them, and it was the duty of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ister, as it had not sent the plaintiffs any notices of meetings' or dividend warrants after Exhibit P. 1, leading them by such conduct of theirs, to believe that the shares had been transferred from the plaintiffs ' names. He observed that mere knowledge of the sale of the shares by the plaintiffs, on the part of the officers of the bank, because of the telephone conversation referred to by P.W. 1, would not be enough to satisfy the requirements of section 34 of the Companies Act or article 35 of the articles of association, though it might be taken into account regarding the plea of estoppel raised by the plaintiffs. He rejected the contention of the plaintiffs regarding concert and conspiracy by defendants Nos. 3 and 4 with defendant No. 2 regarding the purchase of the shares under Exhibit P. 1 by defendant No. 2. He also rejected the plaintiffs' contention that the purchase of the shares under Exhibit P. 1 was for the benefit of all the directors, namely, of defendants Nos. 2 to 4 and not merely for the benefit of defendant No. 2. He held that the purchase of all the 3,118 shares under Exhibit P. 1 was only by defendant No. 2 and would bind him only defendant No. 4 having acted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of this court in Mohideen Pichai v. Tinnevelly Mills Co AIR 1928 Mad 571 shows this clearly. Mr. Ranganatha Sastri's first contention was that no petition under section 38 of the Companies Act will lie after a petition for winding up, resulting eventually in a winding up order, has been filed, as in this case, since, under the insolvency law, an order of winding up like an adjudication, will take effect from the filing of the petition itself, and the company must be deemed to have ceased to exist from the date of the petition as the rights of the innocent third parties would have intervened, on the winding up order. He was not able to convince us on this point, or cite any clinching ruling. Obviously, the theory adumbrated by him will have startling results, and will lead to much avoidable hardship and injustice. In Tennent v. City of Glasgow Bank AIR 1928 Mad 571, a resolution for winding up the company had already been passed before the application for rectification was made. So the House of Lords rejected the petition for rectification as the rights of innocent parties had intervened. The following observations in the judgment of the House of Lords, at page 621, are relevant: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, the court should not use its discretion and rectify the register. In Oakes V. Turquand and Harding [1867] 2 H.L Cas 325, it was held that a petition for rectification of the company's register of shareholders for removing the petitioner's name from the list of contributories on the ground that he had purchased shares on misrepresentations made to him by the directors should be dismissed if it was filed after the winding up order. As his voluntary ignorance upon the subject until the winding up order came precludes him from raising the objection, and as his name was on the register of shareholders on the date of the winding up order, he was rightly placed on the list of contributories, and the petition was dismissed. Several learned Law Lords delivered that judgment. They did not say that a petition would not have lain after the winding up petition but before the winding up order was passed, thus going against Mr. Ranganatha Sastri's contention. In Indian Specie Bank Ltd. v. Patvardhan AIR 1915 Bom 1, a Bench of the Bombay High Court held that after a company had gone into liquidation, the transfer of shares or rectification of the registers, could only be made on proof of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a bill filed after the presentation of a petition for winding up the company, on which an order for winding up was subsequently passed, though the petitioner might have his remedy against any of the defendants except the company. The company in question had already become bankrupt and unable to pay its debts by the time the petition was filed, though the winding up order was passed subsequently. This was a decision rendered in 1868. In view of the numerous decisions to the contrary referred to above, and especially of several Law Lords in Oakes v. Turquand and Harding [1867] 2 H.L Cas 325 and Hansraj Gupta v. Asthana [1932] 2 Comp Cas 548, and the special facts in Kent v. Freehold Land and Brick Making Co [1868] 3 Ch App 493, and similar rulings, which will not apply to the facts of this case, we are unable to follow the view of Desai J. or accept the correctness of the ruling in Shiromani Sugar Mills Ltd. v. Debi Prasad [1950] 20 Comp Cas 296 , and hold that a petition for rectification will lie normally after the filing of a winding up petition and before the winding up order is passed, provided the court will normally reject that petition if the company is already in a notoriou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n entered in it fraudulently or without sufficient cause or omitted from the register of members, and of course, no default or fraud of the company can, or need be, proved in such cases. In Ward and Henry's case [1867] 2 Ch. App 431. Lord Justice Turner has held at page 436: "The question is, whether the jurisdiction given by it is general, applicable to all cases, or limited to cases in which there has been error, mistake, or default on the part of the company. Upon the best consideration I have been able to give to the subject, I am inclined to think that the jurisdiction is general, and not limited as suggested. The intention of the section, as I understand it, is to provide a summary means of dealing with cases which the court, in its discretion, should think might be so dealt with. A large and wide discretion, ought, I think, to be exercised by the court in determining whether it will exercise the power given to it by the section, and it is, I think, too narrow a construction to hold that the section applies only where there is error, mistake, or default, on the part of the company." In other words, there is jurisdiction in the court to rectify the register even in the abse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and article 35 of the articles of association, and that Ramaswamy Gounder J. went grievously wrong in directing the second defendant's name to be substituted for the name of the plaintiffs, overriding the absolute discretion of the bank, given under section 34(7) of the Companies Act and article 36 of the articles of association, to refuse to register any transfer without giving any reason whatever. We agree. Mr. Rajah Iyer could not cite a single ruling, English, Indian, or American, or of any other country where it has been held, that a company is bound to register a transfer without the transferee signing in the transfer deed. Section 34(1) of the Companies Act says that an application for the registration of the transfer of shares in a company may be made either by the transferor or the transferee, provided that where such application is made by the transferor no registration shall in the case of partly paid up shares (like these 1,668 shares) be effected unless the company gives notice of the application to the transferee, and that the company can, unless objection is taken by the transferee within two weeks from the date of receipt of the notice, enter in its register th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the transfer deed, in token of the transfer to him, or by a court passing a decree for specific performance recognising the transfer of the shares to the transferee. Such a procedure will show clearly who the transferee is. Even then, the transfer deed signed by the transferor and the transferee (wherever possible) or by court for one of the parties and duly stamped must be presented to the company with an application for the registration of the transfer, and it will be within the discretion of the company to allow or refuse the registration of the transfer under section 34 (7) of the Companies Act and article 36 of the articles of association, in this case. Of course, the prescribed stamp is required for the transfer deed under the Stamp Act, whose provisions the company must observe on pain of its being subjected to pecuniary penalties, or even prosecution if it is justified. No doubt, in the case of a decree for specific performance enforcing the transfer of the shares, if the transferor or transferee does not sign the transfer deed, the court might sign it on his behalf, as in any other decree for specific performance, and the other side can then sign in it, stamp it and pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve the vital distinction between a valid transfer of shares, in the sense of the passing of ownership, and the registration of the transfer by the company in its register of shareholders. The learned Judges drew a distinction between the transfer of shares by the voluntary act of the parties and what they termed transmission of shares by order of court, and considered the observations in Nagabhushanam v. Ramachandra Rao's Case (supra) that the directors of a company have a discretion in the matter of registering a transfer ordered by court, to be mere obiter. Both the views, are in our opinion, unsustainable. The observations in Nagabhushanam v. Ramachandra Rao [1922] ILR 45 Mad 537 were not obiter, and amounted to direct decision on a point which arose in the case, and could not be overruled by a Bench of co-equal authority, like that in Mohideen Pichai v. Tinnevelly Mills Co AIR 1928 Mad 571. Again, the distinction between the transfer and transmission drawn by the Bench in Mohideen Pichai's Case (supra) is in our opinion, irrelevant for the purpose of registering the shares. Section 34(7) of the Companies Act and article 36 of the articles of association are concerned with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transferor and transferee and duly stamped, and presented to the company for registration of the transfer, when so required by articles of association, there was no power in the company to register the transfer, and the registration was set aside as ultra vires of section 34 of the Companies Act, just as Bell J. in Application No. 1238 of 1948, set aside the registration of these very '1,668 shares in the third defendant's name by this bank, after the first plaintiff became again its managing director and chairman, by his order dated 20th April, 1948, for the same reason among others. A Bench of the Bombay High Court, consisting of Stone C.J. and Kania J. has held in New Citizen Bank v. Asian Assurance Co [1945] 15 Comp Cas 53 . that before a shareholder claims his name should be entered on the register of the company as a shareholder, he has to submit the share scrip and a properly executed and duly stamped transfer deed signed by the transferor and transferee, and that where an instrument of transfer properly stamped has not been given, it cannot be said that the transferee's name was omitted without any sufficient cause. In Mohamed Akbar v. Official Liquidator [1950] 20 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 34(1), praying for the registration of the transfers, and the company will have an absolute discretion (possibly subject to good faith) to refuse to register the transfer under section 34(7). The only possible exception is that when the company refuses to register a transfer out of spite, or from corrupt and improper motives, a writ may possibly lie by the aggrieved person to enforce the registration, though we give no ruling on the point, as it is not necessary in the facts of this case. The discretion given to the company under the articles of association is, in our opinion, perfectly justifiable, as that is necessary for the well being of companies and was the basis of the contract between the company and the shareholders. It is intended to prevent the company from being ruined by infiltrating fifth columnists, parading as transferees, or by transfers in the names of impecunious persons by solvent people in order to get rid of their liability regarding unpaid calls, and also to prevent the cornering of all shares by wealthy people to the prejudice of the ordinary shareholders. Thus, people interested in a rival company, carrying on the same trade, might want to beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shares by not sending any notices of meetings or dividend notices or dividend warrants to the plaintiffs in respect of these shares after Exhibit P. 1. We cannot agree. There was no estoppel, in law, by such conduct. The first plaintiff's phone call does not deserve any weight to be attached to it, as he could not say whether the secretary, or the assistant secretary, or other officer of the bank received the call, and could not even say to whom the shares were transferred, whether to the second defendant, or third defendant, or fourth defendant, or to all the three combined. To give such a phone call any value would be unthinkable. The first plaintiff did not follow up the phone call by any letter to the bank giving details. Even that would not have been of any avail, in the absence of presenting a duly completed and stamped transfer deed to the company with an application for registration of the transfer. The fact that the plaintiffs were not sent any notices of the meetings or dividend notices or warrants by the company after Exhibit P. 1 would only be sufficient to deprive the first defendant bank of its costs in the lower court and here for such laches, when dismissing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mortgagee, on behalf of the second defendant, who had purchased the shares under Exhibit P.1 and mortgaged them to defendant No. 3, will not amount to any conduct on the part of the bank operating as estoppel, as it is clear that banks in such circumstances, usually give dividends to such mortgagees after taking indemnity bonds from them. The rights of the plaintiffs, if any, against defendants Nos. 2, 3 and 4 may remain intact, subject to limitation, but that will not be relevant to this petition for rectification. In the end, therefore, we set aside the judgment and decree of Ramaswami Gounder J. in C,S. No. 525 of 1948 and Application No. 1229 of 1951, and direct the name of the second defendant to be removed from the list of shareholders, in the register of shareholders kept by the bank, in respect of these 1,668 shares, and direct the names of the plaintiffs to be put back in the register as shareholders (now contributories). In the peculiar circumstances, we direct all the parties to bear their own costs in both the suit and petition before the lower court and in this appeal, the official liquidators of the company being allowed to draw out their costs, including an advo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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