TMI Blog1963 (5) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... f Manna Lal Khetan, Matadin Khetan, Bhagwati Prasad Khetan, sons of Seth Hari Ram Khetan, and Smt. Mahadbiri Devi widow of Seth Hari Ram Khetan against Lakshmi Devi Sugar Mills (Private) Ltd. Chhitauni, distt. Deoria, Durga Prasad Khetan, Gauri Prasad Khetan and Sri R. N. Chavan, special Mamlatdar. Special Appeal No. 110 of 1963 arises out of company case No. 18 of 1962, Kamla Prasad Khetan and Jwala Prasad Khetan, sons of Seth Onkarmal Khetan v. Lakhmi Devi Sugar Mills (Private) Ltd. Kedar Nath Khetan, Durga Prasad Khetan, Gauri Prasad Khetan, Smt. Saraswati Devi and Sri R.N. Chavan. Special Appeal No. 111 relates to another Sugar Factory Maheshwari Khetan Sugar Mills (Private) Limited, Ramkula, district Deoria and arises out of company case No. 15 of 1962 started on the application under Section 155 of the Companies Act of the Ishwari Khetan Sugar Mills (Private) Ltd. Lakshmiganj, District Deoria, against Maheshwari Khetan Sugar Mills (Private) Ltd. Ramkola, district Deoria, Kedar Nath Khetan and nine others belonging to the three branches of Debi Dutt, common ancestor of the contesting parties to the four proceedings and also against Nagarmal Khetan and the Receiver appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were suitable corrections made forthwith in the registers of members, as the shares had been attached by the Collector of Bombay in proceedings for the recovery of Income Tax dues from the Khetan family. The family owned most of the shares in Ishwari Khetan Sugar Mills, and Maheswari Khetan Sugar Mills and about 1/4th shares in Lakshmi Devi Sugar Mills. The agreement was that the shares of the family in Maheswhari Khetan Sugar Mills and Lakshmi Devi Sugar Mills shall go to the group of Kedar Nath Khetan while the shares of Ishwari Khetan Sugar Mills, to the other group. The shares of Ishwari Khetan Sugar Mills were sold in the recovery proceedings and have been purchased by the relations of the group of the sons of Seth Onkar mal Khetan. The case of this group naturally is that the sale of the shares and the purchase thereof was fair and Honest and it was never represented that the shares belonged exclusively to this group. The case of the group of Kedar Nath Khetan is that the other group had made a representation that by virtue of the agreement the shares of Ishwari Khetan Sugar Mills exclusively belonged to them and by underhand methods the group managed to purchase those sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or order rectification of the register; and in the latter case, may direct the company to pay the damages, if any, sustained by any party aggrieved. In either case, the Court in its discretion may make such order as to costs as it thinks fit. (3) On an application under this section, the Court, (a) may decide any question relating to the title of any person who is a party to the application to have his name entered in or omitted from the register, whether the question arises between members or alleged members on the one hand and the company on the other hand; and (b) generally may decide any question which it as necessary or expedient to decide in connection with the application for rectification. 6. The present applications for rectification were made in 1962 and they shall, therefore, be governed by the law as amended in 1960. In other words, rectification can be ordered if the name of any person is entered in the register of members or after having been entered in the register is omitted therefrom, in either case, without sufficient cause. The existence or non-existence of sufficient cause shall naturally depend upon the satisfaction of the Court; but the burd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Ltd. AIR1955Pat486 ; Laxminarayan Bhayya v. Praga Tools Corporation Ltd. AIR 1953 Hyd 126 and In re Ruby Consolidated Mining Co., (1874) 19 Ch. A. 664. 9. When the Court refuses to enter into complicated question of title in a proceeding under Section 155 of the Companies Act, 1956, the question of burden of proof becomes of importance considering that if the burden lay upon the applicant the application under Section 155 can be dismissed summarily, of course, leaving it open to him to seek remedy before a civil court. But if the applicant establishes that the company had acted fraudulently or had acted illegally by disregarding the mandatory provisions of the law, he discharges the burden which initially lay upon him and thereafter the burden shifts to the company to show that the alterations were made with sufficient cause i.e. if the company had applied under Section 155 the Court would have ordered rectification of the register or members in the same manner as the company had done, though illegally. This is based upon the general rule- that no one can be permitted to derive undue advantage of a fraudulent or illegal act of his and, parties must be relegated to the position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no reason why the same rule be not applied even to those cases where no finding is being recorded on a complicated question of title in dispute among the parties to the proceeding. 12. The Company Judge has, as already mentioned above, recorded the finding that both the companies had disregarded the mandatory provisions of Section 108 of the Companies Act, 1956, and their action in transferring shares in the names of other persons was void under Order 21 Rule 46 C. P. C. and was even otherwise against the law. The important question for Consideration, therefore, is whether the transfer of the shares in question and consequent alterations in the registers of members of the companies are illegal and void. 13. Non-compliance of the provisions of Section 108 of the Companies Act, 1956 can be held to be illegal only if they are mandatory and not merely directory, and also if Section 108 is exhaustive, meant to cover all cases of alterations in the register of members. For recording a finding whether the provisions of Section 108 are mandatory or directory we shall have to consider not only the language and scope of the section but also the policy underlying it See H. N. Rishbud v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been provided in Section 155, nor in any other section, what the consequences shall be for the disregard of this provision. It could be provided in Section 155 that in case of non-compliance of Section 108 the Court shall order rectification of the register of members unless for reasons to be recorded, rectification was not necessary or proper. Similarly, non-compliance of Section 108 could be declared an offence. When the law does not prescribe the consequences or does not lay down penalty for non-compliance of Section 108, the provision can be considered to be directory and not mandatory. 15. It is true that the register of members is a valuable document not only from the view point of the company and of the share-holders but also of creditors. An entry in the register determines the right of the person to participate in the affairs of the company. At the same time he incurs the liability of a share holder. Creditors can also act upon an entry in the register of members by treating that person to be the bolder of that share. Entry in the register of members is thus of great importance, but no one incurs any penal liability as a consequence of an incorrect entry being m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sub-section (3). It gave power to the company to register as shareholder or debenture-holder any person to whom the right to any share in or debentures of the company had been transmitted by operation of law. 19. When a new law was passed in 1956 a different provision was made in Section 108 of the Companies Act, 1956 Instead of laying down that it shall not be lawful for the company to register the Legislature provided that a company shall not register When the Parliament did not follow the wording of the English Companies Act, 1948, and departed from the corresponding provision of the Indian Companies Act, 1913, as amended under the Companies (Amendment) Act, 1936, they can be deemed to have had in mind not to declare the non-compliance of Section 108 as unlawful and illegal. Reasons for making the change are not far to seek. The term transmission by operation of law has not been defined in any of the laws, neither in the English Companies Acts, nor in the Indian Companies Act; but the old laws give out the meaning of this term. In Table 'A' of the First Schedule of the English Companies Act, 1862, and of the Indian Companies Act, 1882, separate sub-heads were g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above light, namely, that neither of the provisions are exhaustive, we can safely assume that the Parliament had an underlying object when the wording of Section 34(3) was not adopted while enacting Section 108 of the Companies Act, 1956. When the Parliament did not intentionally declare non-compliance of Section 108 to be illegal. Section 108 cannot be held to be mandatory. It is true that there has to be substantial compliance of a provision which is merely directory but in cases not strictly covered by the provision the authority can deviate from that rule and take a decision which is equitable and fair to both the parties. 21. The agreements in question were not followed by a formal instrument of transfer but both the companies could, in good faith, be of the opinion that by virtue of the agreement the group of Kedar Nath Khetan became the sole owner of the shares of Lakshmi Devi Sugar Mills (Private) Ltd. and Maheshwari Khetan Sugar Mills (Private) Ltd., originally belonging to the Khetan family, and they could make necessary alterations in the registers of members. No final opinion is being expressed on this point. The above observation has been made merely to lay down tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibited and restrained from permitting any transfer of share in the Corporation for making payment of dividend thereon. The prohibitory order contained in Form 18 being inconsistent with the provisions of Section 64 and Order XXI, Rule 46 C. P. C. can have no legal effect. 24. At this place it may also be observed that the Corporation and the Secretary thereof are invariably not parties to the proceeding in which attachment is made and no prohibitory order can strictly speaking, be served upon them. They are only parties to the proceeding who can be restrained from doing an act or who can be ordered to do a particular act A copy of the order can, however, be sent to persons not parties to the proceeding so that they may know the true state of affairs and Court's order may not be disregarded by the parties to the proceeding. In other words, Form 18 in Appendix 'E' cannot be utilised to declare the alterations made by the two companies in the registers of members to be illegal. 25. There does exist a conflict in Section 64 and Order XXI, Rule 46 C. P. C. but when we try to harmonise the two provisions, it shall have to be held that a private transfer of shares in a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. Even though they have the right to partition their property, they shall not be able to do so if the transfer of property under attachment is completely barred. Litigation may continue for years together. Law is not meant to cause inconvenience to people and we can adopt a liberal interpretation if it be said that the law is capable of two interpretations. On this ground also Section 64 C. P. C. can be given its ordinary meaning and Order XXI, Rule 46 C. P. C. construed liberally to bring it in line with Section 64 C. P. C, 28. In the instant case, according, to the appellants, the two companies had given effect to the agreement arrived at between the members of the Khetan family. After the registration of shares in the names of the appellants, the duplicate shares were placed at the disposal of the Receiver, with the result that the authority making the attachment could recover the dues from these shares also. As the transfer of the shares and the alterations made in the registers of members did not adversely affect the rights of the claimants, the action taken by the two companies cannot be declared to be ab initio void and illegal. 29. A Receiver is appointed under Orde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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