TMI Blog1984 (7) TMI 405X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 (B-3)), the second respondent wrote to the first respondent expressing a desire to dispose of the shares at the price of ₹ 100 fixed by the company to a member of the company and desired to take urgent steps in the matter. The company did not find any person as enjoined by Article 39 of the articles of association. By Ext. A-13 dated July 29, 1982, the second respondent wrote to the first respondent intimating that in the absence of a reply for Ext. A-4 (B-3) dated February 14, 1982, she has sold the shares to the petitioner, acting in conformity with Article 39 of the articles for association. There was no reply from the company. The company could not find any purchaser for 705 shares and so intimated the second respondent accordingly by Ext. A-5 dated November 11, 1982. By Ext. A-6 dated November 15, 1982, the second respondent intimated the first respondent that she has transferred the shares to the petitioner and handed over the share transfer forms duly filled in to the petitioner and requesting the company to register the transfer in the petitioner's name, on his furnishing the share transfer forms with similar request. The petitioner made a request on November 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok to produce the share certificates on being informed. It was finally by a letter dated December 24, 1982, by Ext. A-9(B-8), the first respondent informed the petitioner as also the second respondent about the resolution of the company dated December 18, 1982, rejecting the transfer application. It is the first respondent's case that on a fair and proper reading of the articles of association, the petitioner's case, based substantially on Article 39 of the articles of association, is unsustainable. The petitioner had not sent along with the letter, Ext. A-7, (enclosing Ext. A-6), dated November 19, 1982, the share certificates which were alleged to have been transferred in his name nor did he remit ₹ 2 for registration as required by Article 41. Under Section 108 of the Companies Act read with Article 41 of the articles of association/ compliance thereof is mandatory. Failure to do so is fatal. The interpretation placed on Article 39 of the articles of association, in isolation, and without reference to Articles 40 and 41, is untenable. The communication of the second respondent, purporting to be a notice under Article 39 dated February 14, 1982 (Ext. A-4/B-3), was r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but where two or more persons hold one or more shares in the company jointly, they shall for the purpose of this paragraph be treated as a single member. (b) No invitations shall be issued to the public to subscribe for any shares or .debentures of the company. (c) The right to transfer share shall be restricted in manner hereinafter set forth. 33. No shareholder shall transfer, mortgage or create any interest with reference to his shares in this company without the consent of a majority of the directors and even if one member sells or transfers or creates any interest, it shall be only in favour of one or more members of this company. 34. A share may be transferred to a member selected by the transferor but save as aforesaid and as provided for by the articles hereof no share shall be transferred to any person who is not a member so long as any member is willing to purchase the same at a fair value which shall be determined by a general meeting of the shareholders. 35. Except where the transfer is made in pursuance of Articles 33 and 42 hereof, the person proposing to transfer any share shall give notice, in writing, to the company that he desires to transfer the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a shareholder and retain the instrument of transfer, but the transferor or the transferors, as the case may be, shall be deemed to retain the holder or holders of such share until the name or names of the transferees is or are entered in the register of members in respect thereof. 6. As stated, the first respondent is a private limited company. It is what is sometimes called a close corporation , The transfer of shares therein is subject to the restrictions contained in the articles of association of the company which is a contract governing the relationship between the members. The discretion of the directors in the matter of registration of transfers in a private limited company has been lucidly stated in Palmer's Company Law, 23rd edn. (1982), at page 481, as follows : Where a discretion as to registering transfers is given by the articles to the directors/the court will not control the exercise of this discretion, unless it is proved that the directors are not exercising it bona fide ; in other words, that they are acting oppressively, capriciously or corruptly or in some way mala fide. In re Smith Fawcett Ltd. [1942] Ch 304, the court would not find mala fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors with discretion to refuse to register a transfer of shares without assigning reasons, the directors can rest on the contract and refuse to disclose their reasons; and in view of the contract again, the shareholder also cannot attack the exercise of discretion, unless it be on grounds of equity and breach of trust. The contract will be enforced and the directors relieved of the duty to disclose, so long as it is not shown affirmatively that the power is exercised capriciously, wantonly or oppressively. 9. Proceeding further, in p. 94, the learned judge observed : 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. 10. In Balwant Transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 84 on June 18, 1984 (dated June 16, 1984), praying for an order that this court may be pleased to receive the share certificates produced and described in the schedule and also a demand draft for ₹ 2 for compliance with Article 41 of the memorandum of the articles of association of the first respondent-company, condoning the delay, if any, in producing the same. It cannot admit of any doubt (it is practically conceded) that the mandatory requirement of Article 41 has not been complied with by' the petitioner when he applied for the transfer of shares in his name. The share certificates and the registration fee of ₹ 2 were not filed along with the application requesting for the transfer to be made. Article 41 of the articles of association read with Section 108 of the Companies Act enjoins that along with the transfer application, the certificate for the shares to be transferred and fee of ₹ 2 should be left at the office of the company. Admittedly this has not been complied with. If so, the first respondent is well justified in rejecting the transfer application. Ext. A-9 (B-8) communication is valid, legal and proper. In view of the decision of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this short ground, the jurisdiction of this court under Section 155(2) of the Companies Act itself is not properly or validly invoked by the petitioner, nor attracted. I hold that the company petition filed is misconceived and should fail. 14. On merits, it should be stated that the directors of a private limited company have got a very wide discretion in the matter of registration of transfers. It has not been proved in this case by the petitioner that the directors failed to exercise the discretion vested with them bona fide or they acted oppressively, capriciously or corruptly or mala fide. In the absence of a plea and proof in that behalf as stated in Palmer's Company Law, 23rd Edn., at p. 481, quoted in para 6 supra, this petition is not maintainable. The decision reported in Balwant Transport Co. Ltd's case, AIR 1956 Nag 20, is also to the same effect. In this case, there is no allegation or proof on that score. On this ground also, this petition is not sustainable. The main plank of attack was based on the basis of rights of the petitioner on an interpretation of Article 39 of the articles of association. That is separately considered in the following paragraphs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -13 also, the petitioner has not obtained any acknowledgment. It is difficult to believe that for delivery of such important communications, Ext. A-4 (B-3) and Ext. A-13, any reasonable person would ordinarily fail to obtain acknowledgments. On these premises, it follows that three months have not elapsed when the petitioner filed Ext, A-7 dated November 19, 1982, along with Ext. A-6(B-6), for the transfer of shares in his name. The first respondent-company had time till December 24, 1982. Article 39 of the articles of association will not enable the petitioner to get his name registered as the purchaser. It should be noted that within three months of the receipt of Ext. A-4 (B-3) by the first respondent-company, the transferor (second respondent) has sold and transferred the shares to the petitioner. The first respondent-company should find a person only within three months after the receipt/service of Ext. A-4 (B-3) on September 24, 1982. It is only, at any time thereafter, the proposed transferor shall sell and transfer the shares to any person, at any price. It is only then, the company shall enter the name of such purchaser in the register. None of these requirements are satis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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