TMI Blog1977 (8) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... ares from the 2nd respondent and we shall respectively refer to them as the "transferee" and "transferor". The case of the transferee is that he purchased 210 equity shares from the transferor on 22nd January, 1975, for a consideration of Rs. 10,000 and forwarded to the company the share transfer deed duly executed by the transferor and transferee together with the share certificates relating to the said shares for registering the transfer and entering the name of the transferee on the register of the company as the holder of the said 210 shares. But the company informed the transferee by a letter dated 18th March, 1975, that the board of directors of the company, in exercise of their power under regulation 42 of the articles of association of the company, read with section 111(1) of the Companies Act, 1956 ("the Act") , refused the application to register the transfer. According to the transferee the board of directors have acted capriciously, male fide and in excess of their power in refusing to register the transfer of the shares. The company contended before the learned judge that the directors were justified in refusing to register the transfer by virtue of their power un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he power of the court under section 155 is untrammelled by section 111. It is open to the transferee to seek relief either under section 111 by an appeal to the Central Government or under section 155 by petitioning the court. In the present case, the transferee chose the latter procedure and he was well within his rights to do so: Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 38 7 (SC) and Vidyasagar Cotton Mills v. Mt. Naztnunnessa Begum [1964] 34 Comp. Cas. 704 (Cal.). A shareholder has, subject to the articles of association, the right to transfer his shares. Restrictions can be legitimately imposed on such right, but such restrictions must be explicitly stated in the articles of association! Moodie v. W. J. Shepherd Ltd. [1949] 2 All ER 1044, 1050 (HL). As stated by Lord Greene M R. in In re Smith and Fawcett Ltd. [1942] 1 Ch 304, 306 ; [1942] 1 All ER 542 (CA). "The right, if it is to be cut down, must be cut down with satisfactory clarity. It certainly does not mean that articles, if appropriately framed, cannot be allowed to cut down the right of transfer to any extent which the articles on their true construction permit." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise. As stated by the Supreme Court in Baja Auto Ltd. v. N.K. Fifodia [1971] 41 Comp. Cas. 1, 7 (SC): "....the reasons of the directors have to be tested from three points of view : First, whether the directors acted in the interest of the company; secondly, whether they acted on a wrong principle ; and, thirdly, whether they acted with an oblique motive or for a collateral purpose." If, upon an examination of the reasons disclosed by the directors, it is seen that they acted on a wrong principle, the refusal to register the transfer can be rescinded under section 155 of the Act. Even where the articles have conferred on the directors absolute and unlimited power, and the directors have ostensibly acted within the limits of the articles, yet their discretion is liable to be nullified if it is established that they "acted oppressively, capriciously or corruptly or in some other way mala fide ". Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC). In Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 (SC) the articles conferred absolute and unlimited power upon the directors. Nevertheless the refusal of the directors to regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords have they acted on a ground permitted under the articles. If they have not, the refusal is invalid and is of no effect. In In re Bede Steam Shipping Company Ltd. [1917] 1 Ch 123 (CA) an identical question arose for consideration. Articles 22 and 24 of the articles of association of the Bede Steam Shipping Company provided: "22. Subject to the restrictions of these articles any registered holder of shares may transfer all or any of his shares. 24. The directors and managers may in their discretion and without assigning any reason therefor refuse to register the transfer of any share (not being a fully paid up share) to any person of whom they shall not approve as transferee and may decline to register the transfer of any fully paid up share or shares on certifying that in their opinion it is contrary to the interests of the company that the proposed transferee should be a member thereof." Article 24 is in substance identical to regulation 42. Considering articles 22 and 24 of the Bede Steam Shipping Company, Lord Cozens-Hardy M.R. ([1917] 1 Ch 123, 133 (CA)) referred to the decision of Mellish L.J. in In re Gresham Life Assurance Society: Exparte Penney [1872] 8 Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Ltd. [1917] 1 Ch 123 (CA) was referred to and distinguished on two grounds: (1) Unlike the Bede Steam Shipping Company Ltd., Smith and Fawcett Ltd. was a private company; and (2) Unlike the limited scope of article 24 of the former, article 10 of the latter conferred absolute and unlimited powers on the directors. Article 10 was as follows: "The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares, and clause 19 of Table A shall be modified accordingly." Lord Greene M.R. pointed out that absolute powers, as under article 10, are normally vested in the directors of a private company. He then observed: "Private companies are in law separate entities just as much as are public companies, but from the business and personal point of view they are much more analogous to partnerships than to public corporations. Accordingly, it is to be expected that in the articles of such a company the control of the directors over the membership may be very strict indeed. There are, or may be, very good business reasons why those who bring such companies into existence should give them a constitution which confers on the director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir power under the articles, they acted "oppressively, capriciously or corruptly, or in some way mala fide ", the court would intervene to nullify the illegal action of the directors: Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp. Cas. 387 (SC). If, on the other hand, the reasons disclosed are legitimate, the court would not overrule the directors' decision merely because the court itself would not have come to the same conclusion. The question is, did the directors act on a ground permitted under the articles, and if they did, was their power exercised bona fide in the interests of the company ? In In re Bedc Steam Shipping Company Ltd, [1917] 1 Ch 123 (CA), the articles, as in the present case, conferred a limited discretionary power of refusal on the directors, and their refusal to register the transfer of shares, for reasons not personal to the transferee, was held to be ultra vires , In In re Smith and Fawcett Ltd. [1942] Ch 304 (CA) the position was held to be different as the articles had conferred an absolute and unlimited power on the directors and it was not established that they had acted mala fide . In Bajaj Auto Ltd. v. N.K. F ..... X X X X Extracts X X X X X X X X Extracts X X X X
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