TMI Blog1962 (2) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... so far as is relevant to this case, a company can only be deemed to be a company in which the public are substantially interested if its shares were at any time during the previous year the subject of dealing in any recognised stock exchange in India or were freely transferable by the shareholders to other members of the public. The Income-tax Officer held that article 39 of the articles of association of the company stood in the way of the assessee being considered a company in which the public were substantially interested . The said article provides as follows: The directors may decline to register any transfer of share upon which the company has a lien and in case of shares not fully paid up may refuse to register transfer to a transferee of whom they do not approve. The directors may also in their absolute discretion refuse to register transfer of any share to any person whom it shall in their opinion be undesirable in the interest of the company to admit to membership. The directors shall not be bound to give any reason for refusal of transfer as aforesaid. No transfer shall be made to an infant or person of unsound mind. According to the Income-tax Officer this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny goes a little further than that. Under this article it is open to the directors of the company to refuse to register transfer of shares to any person if they consider that it would be undesirable in the interest of the company to admit the transferee to membership and it was argued that this showed that the right of free transfer was being cut down by the article. Regulation 20 itself shows that the legislature thought that the company should have the power to refuse registration when the shares were not fully paid or when the company had a lien on the shares. This is because it was thought right that a person whose solvency was not beyond controversy should not be thrust upon a company. The question is does the power of refusal of the directors to recognise a transfer in favour of a solvent person on other grounds restrict the right of free transfer. Where articles contain such a power the directors must before rejecting a proposed transferee fairly consider the question at a board meeting. If they do so they are not bound to disclose their reasons and in the absence of evidence to the contrary the court will assume that they have acted reasonably and bona fide. The court ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion when such power was coupled with the right of refusal to give the reasons therefor. In my opinion, the contention of the revenue is sound. The point of time as to when a transfer is complete was discussed at length by Eve J. in In re Copal Varnish Co. Ltd. [1917] 2 Ch. 349. In this case the company was at first a public company. Article 17 of its articles of association provided that the directors may decline to register any transfer of shares made by any person who is indebted to the company for any money then due and payable or who may be solely or jointly liable to it for any call whether payable or not or any interest thereon or in respect of any debt notwithstanding that the same may not then be due, or where the proposed transferee is a person engaged in business of a similar character to the business of the company or who may otherwise be a competitor in trade with the company, or in any case where the directors shall consider the proposed transfer will not be conducive to the interest of the company. When the company was turned into a private company the following words were added to article 17 by a special resolution: No share shall be transferred to any p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. It was, however, contended that transferability and registrability of shares are entirely different and even though registration might be refused the transfer was complete. Further it was argued that if the articles do not lay down that a person proposing to transfer his shares has to do something before executing the transfer deed the same was freely transferable. I find myself unable to accept this contention. Transferability and registrability go hand in hand. The articles of association of some private companies do indeed provide that a member proposing to transfer his shares must give notice to the directors who in their turn must first find out whether any other member is willing to take up the shares is (sic) the transferee in a position to part with them in favour of a third person. Such clauses in the articles of association do seriously curtail the right of free transfer but it is not necessary to go that length. As already pointed out a member of a public company is only authorised to transfer his shares in the manner laid down by the articles and if the articles do give the directors a power to control the entry of strangers to the company by holding up regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so, The purchaser takes that risk on himself, and the seller's liability is satisfied by handing to the purchaser the transfer and certificates of the shares in proper form, and doing nothing either before or subsequently to prevent the registration of the purchaser. In my view, these observations do not mean that the transfer is complete on execution of the transfer deed and the handing over of the share scrip. As already pointed out so long as the purchaser's name is not entered on the register the transferor continues to be the only person whom the company can recognise as the owner of the shares. It is to him that all dividends must be sent and it is he who can appear at the meetings of the company and cast his vote. No doubt he will have to make over the dividend to the purchaser and vote as directed by the latter but still it is he alone whom the company will recognise. All that was said in Moffat v. Farquhar [1877] 7 Ch. D. 591 to which our attention was drawn is that the right to transfer shares in joint stock companies is a right of property and directors must not arbitrarily or capriciously refuse to register the name of the purchaser so as to prevent tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t should not be allowed to take advantage of his own omission to avoid the contract. The learned judges observed: We hold that the contract was complete on the day that the deed of transfer was signed by both parties and that by virtue of that the defendant stepped into the shoes of the transferor and became an owner of the twenty shares in the company in his place, with all the advantages and disadvantages attached to that status. Reliance was placed on this observation in support of the contention that as soon as the transfer is executed in proper form the transferee becomes the owner of the shares. This statement of the law taken apart from the context is not quite accurate. So far as the transferor is concerned it may be that he has carried out his part of the obligation under the contract to sell the shares but the legal ownership continues in him so long as the transfer is not registered and, although in one sense the shares may be said to belong to the transferee, in that he holds the beneficial interest therein, the legal title still continues in the transferor. If and when the transferee seeks to sell the shares he will have to ask the transferor to execute a deed of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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