TMI Blog1957 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... d owners, cancelled, and omitted in respect of 1,608 partly paid up shares of Rs. 90 each (only Rs. 40 out of each share having been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing director of the appellant bank on 4th May, 1945, itself. The fourth defendant later on bought 500 shares out of the 3,118 shares 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 sol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... get such purchasers to sign in them as transferees. So the 1,6o8 shares and 60 shares continued in the books of the company registered 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 deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to see that the transfers are effected in the registers. It is our business and interest. We will do it." As the second defendant was the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plaintiff's existing deposit of Rs. 1,20,000. The first plaintiff wrote Exhibit P. 18 on 2nd September, 1947, immediately, after receiving the call 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng for copies of the indemnity bonds executed by defendants Nos. 2 and 3 for receiving the dividends, and asking for a reply acknowledging the receipt of his letter. 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 regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section 34 of the Companies Act and article 35 of the articles of association regarding applications for transfer were not complied with, and that the company 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d defendant had settled with the liquidators his liability for the calls concerning the 950 shares bought by him. The fourth defendant stated that he had only acted as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the third defendant towards the mortgage amount. He also held that the bank was estopped from contending that the plaintiffs' names were properly continued in the register, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the normal way for moving the court for rectification of the register, a suit also can be filed under that section, either alternatively or in addition, as in this case. A ruling of a Bench 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 mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such jurisdiction ought to be confined to cases where the register is incorrect through the default of the company when it was rushing towards bankruptcy, and as in the present case there had been no delay, or default on the part of the company, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in Kent v. Freehold Land and Brick Making Co [1868] 3 Ch. App 493 . (and some other similar rulings). In Kent's case ( supra ), Lord Cairns L.C. held that a petitioner cannot be relieved from his liability for shares in a company upon the ground of misrepresentation in the prospectus on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not responsible for the delay, provided the petition for rectification is filed before the winding up order and the company has no objection to the transfer. Such instances may be multiplied. Indeed, even the company will have a right to apply under section 38( a ), to rectify the register of shareholders regarding the name of any person 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f these 1,668 shares, and the admitted fact that the transfer forms in respect of these shares are still blank, without any transferees signing therein, the bank had no authority to transfer the shares to the name of the second or third or fourth defendant as prayed for by the plaintiffs, and that the bank was certainly not bound to do so, in view of section 34 of the Companies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the transferee required by section 34(1) of the Companies Act before the transfer can be made in the transferee's name. A blank transfer deed may pass property in the shares as between the purchaser and the seller, and transfer the shares in that sense, but before that transfer can be registered with the company under section 34, the transferee's name must be clearly known to the company either by his signing 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manilal Brijlal's Cases ( supra ) , referred to above. In our opinion, a ruling of a Bench of this court, consisting of Srinivasa Ayyangar and Ananthakrishna Ayyar JJ. in Mohideen Pichai v. Tinnevelly Mills Co. Ltd. AIR 1928 Mad 571 holding that a company has no discretion to refuse to register the shares whose transfer is ordered by the court, relied on by Mr. K. Rajah Aiyar, is with great respect, wrong law, and is due to the failure to observe 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company, and registration of the transfer applied for, the company had no authority or power to consider the registration of the transfer except of course in the extraordinary case of rioters, fraudulent persons and the occupying army of the enemy destroying such transfer deeds signed by both the transferor and the transferee, which is not the case here. In Madhava Ramachandra Kamath v. Canara Banking Corporation Ltd [1941] 11 Comp Cas 78 . Gentle J. held that in the absence of an instrument of transfer signed by 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 Kan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfers are valid or not ; nor does it affect the plaintiffs' right to sue defendant No. 2, or defendant No. 3, or defendant No. 4, for specific performance, if so advised. Of course, even after getting a decree for specific performance against them or any one of them, directing them to get the transfer deeds executed in their favour (the court executing the transfers in the place of the unwilling parties in suitable cases of decrees for specific performance), the transfer deeds will have to be presented by the transferors or transferees to the company, under 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot sue within the period of limitation. Honesty, by itself, will not prevent the operation of law. Again, Mr. Rajah Aiyar forgets that the honest creditors of the bank deserve more consideration than the honest plaintiffs who were at least guilty of laches. The last contention of Mr. Rajah Aiyar was that the bank was estopped from contending that the names of the plaintiffs should remain in the register of shareholders against these 1,668 shares, because they knew about the transfers by the first plaintiff's phone call intimating it, and impliedly accepting the transfer of 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 phon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... again became the managing director and chairman for a short spell, there were no duly completed stamped transfer deeds and an application for registering the transfer before the bank. The plaintiffs never wrote to the bank directly for months after the call for Rs. 9 per share was received by them, and corresponded only personally with the fraudulent second defendant. The first letter of the plaintiffs to the bank was only Exhibit P. 20, on 2nd December, 1947, three months after the call was received. The fact that the dividend on the 1,668 shares was given by the bank to the third defendant, 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 Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X
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