TMI Blog1981 (3) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by shares, with its registered office at Palai. The authorised capital is Rs 16 lakhs, made up of 60,000 cumulative preference shares and 1,00,000 equity shares of Rs. 10 each. The company is listed in the Madras Stock Exchange and its shares are quoted. Regulation 24 of the articles of association of the company reads : "The Board may, in their absolute discretion and without assigning any reason, decline to register ( a )the transfer of a share to a person of whom they do not approve ; ( b )any transfer of shares on which the company has a lien." It is alleged in C.P. No. 75/79 that notwithstanding the above provision, the company has not been refusing to register transfer of any shares during the last so many years. The petitioner purchased 550 equity shares at the prevailing market rates and forwarded to the company, the share transfer deeds duly executed by the transferor and the transferee, together with the concerned share certificates, for the registration of the transfer. But by letter dated August 14, 1979, the company informed him that the board of directors had declined to register the transfer. The share certificates were returned along with the letter, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught that the former were persons who could not be approved of. There were reasons to hold that it would be undesirable, in the interests of the company, to admit them to membership. Some of the transfer deeds were also incomplete and defective. They were not duly stamped within the meaning of section 108 of the Companies Act, read with sections 12 and 17 of the Indian Stamp Act. The question relating to the incomplete or defective nature of the transfer deeds can easily be disposed of. The averments in the counter-affidavits in this regard are vague and not specific. All that is stated is that the adhesive stamps were not seen cancelled in accordance with law. The transfer deeds have all been produced in court; but no attempt was made during the cross-examination of P.W. 1 and P.W. 2 and even during the examination of R.W. 1, to point out which the defective deeds were. Ext. B-2 is the resolution passed by the board on August 14, 1979, declining to register the twenty transfers in question, and it reads : "Resolved that the board does hereby decline to register the transfers of the following Rs. 31,750 Preference Shares and Rs. 15,300 Ordinary Shares of the Company, since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement with the view taken in Gulabrai's case [1978] 48 Comp. Cas. 438 (Guj.) that it is not summary. The fact, however, remains that irrespective of the nature of the jurisdiction, courts have been reluctant to interfere with the decision of the directors in the matter of registering transfers, where the articles of association confer on them an absolute discretion. Decided cases show that the power to refuse to register a transfer is always presumed to have been exercised bona fide, and that unless the articles otherwise provide, the directors are not bound to disclose their reasons. The presumption will be replaced when a petitioner positively proves that the power has been used without bona fides i.e ., when he succeeds in showing that the directors have acted "oppressively, capriciously or corruptly or in some way mala fide ". The leading case on the subject, often quoted by courts in India also, is Gresham Life Assurance Society, In re : Ex parte Penney [1872] 8 Ch App 446. The company in that case was formed by a deed of settlement which provided that any shareholder could transfer his share to any person approved by the board. One De Paiva sold his shares to Penn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 24 confers, in a sense, only a limited discretion of the directors, though the word "absolute" is there. The discretion has to be exercised on grounds personal to the transferee, i.e ., any refusal to register a transfer can be only on the ground that he is a person the directors do not approve of. If other grounds are brought out, that will be outside the scope of the discretion conferred. But the regulation clearly provides that the directors are not bound to disclose any reason for disapproving of the transferee of course, if they disclose the reason, the court can go into the question whether they are good reasons, i.e ., reasons in law. But where no such disclosure is made, the authorities seem to take the view that, the court will not compel them to make a clean breast of it in rectification proceedings. The presumption is that the directors have acted bona fide, and the burden of displacing it by cogent evidence will be on the complaining transferee. The above approach has its reasons in history and the social philosophy which influenced the development of the company law in England. A company is an association of people for carrying on business for gain. Wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment of railways, however, compelled Parliament to have a second look into the matter. The Trading Companies Act of 1834 empowered the Crown by letters patent to confer the privileges of incorporation on companies, thereby obviating the need for the more expensive and dilatory method of charters and special enactments. The Joint Stock Companies Act of 1844 was the first to draw a clear distinction between partnerships and joint stock companies. All new associations with more than 25 members could be registered provisionally, to be followed by complete registration on filing a deed of settlement containing the prescribed particulars. The Registrar of Companies, now a familiar figure, was created by this Act, and the method of incorporation by mere registration was also introduced. The principle of limited liability was still far away. By the middle of the 19th century the "railway mania" had reached its peak and public opinion had swerved in favour of recognising that principle. Still, in the Royal Commission of 1854, only a minority was bold enough to assert in favour of laissez faire by observing that "...the interest of a community is best consulted by leaving to its mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al or fiduciary relationship. Those were days, as we have seen, when contract was the essence of the matter. "Hands off contracts", was the gospel of the era. If you have contracted to suffer something, you cannot complain against its consequences volenti non fit injuria. And the question raised by Mr. Minattur in these petitions is whether the above principles evolved in the above historical and social background, more than a century ago and in a different country, should still be adhered to in India in the closing decades of this century, when we have already declared ourselves in favour of a socialistic order of society and have even abrogated the right to property as a fundamental right. The answer furnished on behalf of the company is that the concept of an incorporated body with limited liability is itself a product of western thought, and that so long as such business associations are allowed to exist and flourish on our soil, there is no reason to jettison the legal principles we have inherited. Until such time as you decide to abolish private property and overhaul the law of contracts, business organisations have to function under some legal set up, and the fiduciary n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the articles of association, can no longer be recognised. Learned counsel for the company would contend that so long as section 155 is not likewise amended, the court's jurisdiction thereunder should remain supervisory, and distinct from the Central Govt's appellate power under section 111. And to this, the petitioners would reply by pointing out that specific conferment of a power to call for reasons had to be conferred by statute in the case of a body like the Central Govt. whereas a court had always such power under O. 11, CPC and section 165 of the Evidence Act. Again, counsel for the petitioners would refer to the various amendments made to the Companies Act from time to time, showing an unmistakable trend towards clipping the freedom of the directors and of companies in general, in the public interest. Sections 58A, 58B, 153A, 153B, 187C, 187D, 197A, 198, 205A, 205B, 224(1A), 233A, 233B, etc ., are cited as instances where controls are enforced in areas where there was formerly more freedom. Section 396 empowers the Central Govt. to bring about amalgamation of companies in public interest. Prejudice to the public interest is also a ground for interference in oppression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectors in this case had a right to reject the transfer applications without giving reasons. There is a presumption that they have acted bona fide, in the interests of the company and the shareholders. This court cannot compel them to place their cards on the table, unless there is a positive evidence to show that they have acted arbitrarily, capriciously or corruptly. And on this aspect, the material available appears to be far from satifactory. P.W. 1 is the petitioner in Company Petitions Nos. 79, 80, 82 and 84. The other petitioners are all members of his family. Members of the Kottukappilly family and their relatives control the company. Some of the directors of the company and the petitioners live in the same municipal town, and they know each other. On the question of bona fides, all that P. W. 1 stated was that the company had assigned no reasons for the refusal to transfer and that it should, therefore, be inferred that the directors had no valid reasons to state, and that they had acted capriciously. In answer to a straight question in cross-examination, witness however stated : "I can think of no particular reason for the company's refusal". P.W. 2 is the petitione ..... 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