TMI Blog1970 (9) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the order dated March 14, 1970, made by the Company Law Board, Department of Company Affairs, Ministry of Industrial Development, Internal Trade and Company Affairs, New Delhi, under section 111(3) of the Companies Act, 1956, directing the appellant-company to register transfer of 3,643 shares forming the subject-matter of these appeals. The respondents in these appeals are Jaya Hind Industries Ltd., N.K. Firodia and other persons who will be referred to as the Firodia group.. The appellant will be referred to as the Bajaj group. The Firodia group lodged in different lots 3,643 shares of the appellant for being transferred to different names. Jaya Hind Industries Private Ltd. applied for transfer of 1,500 shares in their names. Firodia applied for transfer of 30 shares in his name. The other transfers were in the names of associates, nominees and friends of the Firodia group. The board of the appellant refused to register transfer of the said shares at the board meetings held on May 23, 1968, in respect of 2,532 shares and on June 24, 1968, in respect of 1,111 shares. The appellant communicated the said refusal to transfer the shares in the month of June, 1968. Thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to refuse the said transfers. In order to appreciate whether the directors used the discretion in proper exercise of their fiduciary power and the reasons were bona fide and legitimate in the interest of the company as a whole, it is necessary to refer to certain features of the case. In the year 1947 a joint venture business was entered into between Jaya Hind Industries Ltd. and Bachhraj Trading Corporation Ltd. In the month of March, 1950, Bachhraj Trading Corporation suffered heavy losses and the joint venture was transferred to Bajaj Factories Ltd. with the consent of Jaya Hind Industries Ltd. In the year 1952, N.K. Firodia became a director of Bachhraj Trading Corporation Ltd. In the month of April, 1954, Jaya Hind Industries Ltd. acquired 1,800 shares of the face value of Rs. 1,80,000 of Bachhraj Trading Corporation Ltd. at Rs. 36-8-0 per share which together with 50 shares held by N.K. Firodia equalled 3/8ths of the share capital. In the month of May, 1954, Bachhraj Trading Corporation Ltd. again took over the business of the joint venture from Bajaj Factories Ltd. In the year 1955, N.K. Firodia as a director of Bachhraj Trading Corporation Ltd. applied to the Cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned the said re-appointment of managing agents for the period commencing August 16, 1965, and ending March 31, 1968, viz. , for an approximate period of three years. The appellant-company entered into an agreement with the managing agents on similar terms. In the month of August, 1967, Kamalnayan Bajaj of the Bajaj group proposed at the board meeting of the appellant that an application should be made to extend the term of the managing agency. Firodia of the respondent-company group opposed any such extension. In the month of December 1967, the appellant applied to the Company Law Board for extension of the term of managing agency of Jamnalal Sons Private Ltd. for a period of 7 years so that the managing agents would have a term of 10 years commencing August 16, 1965. The letter of the appellant-company was signed by the secretary. In the month of March, 1968, Firodia came to know about the said letter and wrote to the Chairman of the Company Law Board that there was neither any resolution of the general meeting of the company for such extension nor any publication of such appointment. Firodia said that the appellant-company contravened, in particular, the provisions containe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1954 and 1960. When the appellant-company became a public limited company in the year 1960 the Firodia group subscribed for 37 % of the shares and assisted in procuring subscription to the shares offered to the public. Jamnalal Sons Private Ltd., the managing agents of the appellant, agreed to pay 25% of their remuneration of the managing agency to the respondent-company of the Firodia group in consideration of the services rendered. Article 52 of the appellant-company provided that the directors might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation of a proposal. 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. If the articles permit the directors to decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decisions. Reference may be made to the decision in Greenhalgh v. Arderne Cinemas Ltd., [1951] Ch. 286; [1950] 2 ALL. ER 1120 (CA) where Evershed M.R. said that if a resolution had the effect "to discriminate between the majority shareholders and the minority shareholders so as to give the former advantage of which the latter were deprived", the resolution could be attacked on grounds of elements of dishonesty or impropriety. The acts of the directors would have to be scrutinised as to whether they were the honest opinion of the directors acting for the company as a whole. Mellish L.J., in Ex parte Penny: Gresham Life Assurance Society, In re [1872] LR 8 Ch. App. 446 , said that the directors would have no right to force a particular shareholder to continue as a shareholder and not to allow him to transfer shares at all because that would be an abuse of their power. Lord Cozens-Hardy M.R. in In re Bede Steam Shipping Co. Ltd. [1917] 1 Ch. 123 (CA) said that the personal objections to a transferee were where the transferee would be quarrelsome person or he would be an unreasonable person or he would be acting in the interest of a rival company. The directors there had p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and in the interest of the company and with due regard to the right of a shareholder to transfer his shares and they must fairly consider the question of the transferee's fitness at a board meeting. The directors in that case were not required to disclose reasons. Three propositions can be extracted from that case. First, where the directors do not assign any reason because of the articles it is competent for those who seek to have the transfer registered to show affirmatively by proper evidence that the directors had not duly exercised their power. Secondly, if reasons are given by the directors and the reasons are legitimate the court will not overrule the directors' decision merely because the court itself would not have come to the same conclusion. Thirdly, if the reasons are not legitimate, the court would hold that the power had not been duly exercised. An example would be where the directors said that they rejected the transfer because the transferor's object was to increase the voting power in respect of his shares by splitting them among his nominees. In the case of Bell Brother's case ( supra ) two Bell brothers, John and Lowthian, and the members of their familie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te discretion in regard to declining registration of transfer of shares, the court will consider if the reasons are legitimate if the directors have acted on a wrong principle or from corrupt motive. If the court found that the directors gave reasons which were legitimate, the court would not overrule that decision merely on the ground that the court would not have come to the same conclusion. Reference may be made to the decision in Balwant Transport Co. Ltd. v. Y.H. Deshpande AIR 1956 Nag. 20, which is a Bench decision of the Nagpur High Court. Sapate was a shareholder in the company and owned 31 shares. One of his shares was sold by public auction and was purchased by Deshpande. Deshpande applied for registration. The article in the Nagpur case conferred absolute and uncontrolled discretion on the directors to refuse to register transfer where in the opinion of the directors it was not in the interest of the company to admit the proposed transferee to membership. The evidence in that case was that Deshpande was the lawyer of Sapate. Sapate was quarrelling with the company. Sapate also joined a rival concern. The directors' decision in those surrounding circumstances was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obert. The directors of the Muir Mills came to a conclusion that McRobert should not add to his voting power and "harass the management". It was found to be abuse of fiduciary discretionary power of the directors when they wanted to safeguard the directors' personal interest against McRobert. The first reason of the appellant-company for the refusal of registration of transfer of the shares was that Firodia acted in a treacherous fashion against the interest of the company and behind the back of the board of directors. The evidence is that the managing agents of the Bajaj group in the year 1965 failed to obtain from the Government approval of an extension of term for 10 years. The Government sanctioned the term for about three years which was to expire on March 31, 1968. In the month of August, 1967, when Kamalnayan Bajaj of the Bajaj group proposed an extension of the term of the managing agents, Firodia represented to the Board that Firodia was opposed to the same. No application for extension of the term of managing agents was made at that time. The appellant, however, behind the back of Firodia, wrote to the Company Law Board in the month of December, 1967, and, though Firodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t circulated to the shareholders. Firodia came to know about the letter and that is why he informed the Company Law Board of the state of affairs. On this evidence it is apparent that Firodia wrote to the Company Law Board in the larger interest of the company. Firodia's allegations were against the managing agents. Firodia was justified in opposing re-appointment of the managing agents without a specific resolution of the shareholders of the company and without a public notice to the shareholders to represent their views in the matter. The Bajaj group acted behind the back of Firodia and wanted to steal a march. The real motive of the Bajaj group was revealed first by imposing restrictions in the month of March, 1968, on the powers of Firodia as chief executive of the appellant-company and, secondly, by the resolution in the month of May, 1968, to terminate the services of Firodia as chief executive. The refusal to register the transfers was at the meetings of the board held in the months of May and June, 1968. The directors had a hostile feeling against Firodia and they had the dominant desire to keep Firodia out of the company. The directors did not act in the interest of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the Bajaj group, 31,500 shares. The Firodia group on the other hand prior to the proposed transfer had 23,400 shares or 21,735 shares according to the Bajaj group. The general public held 52,250 shares. This was the position in the month of February, 1968. The Bajaj group by the acquisition of 16,230 shares would have a numerical strength of 44,830 shares whereas the Firodia group would be having 26,863 shares if the proposed transfers were allowed by the directors. The Bajaj group paid Rs. 411 per share. The Firodia group paid roughly about Rs. 200 per share. Firodia was not on the board of directors of the appellant-company. The Bajaj group and their friends were the directors. In the year 1967 the Firodia group lodged 4,243 shares for transfer in their names and the transfers were registered. Again, in the month of February, 1968, when the Firodia group lodged 68 shares with the appellant-company for transfer, the appellant-company accepted the said transfer. It is, therefore, revealed that after the appellant came to know that Firodia wrote to the Company Law Board in the month of March, 1968; the directors of the appellant-company developed antipathy against Firodia. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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