1. Dispute over rectification of share register under Section 38, Indian Companies Act, 1913, following devolution of shares by operation of law due to constitutional changes. (Para 1 )
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1966 Supreme(SC) 149
SUPREME COURT OF INDIA
J.R.Mudholkar : R.S.Bachawat : Raghubar Dayal
Indian Chemical Products
Versus
State Of Orissa
Case No. : 303 of 1963
Date of Decision : 5/5/66
Advocates Appeared: Chatterjee G.S. : Chatterjee N.C. : Chaudhuri Ranadeb : Daphtary C.K. : Dapthary C.K. : Karkhanis N.D. : Majumdar S.C. : Sachthey R.N.
Advocates:
C.K.DAFTARY, G.S.CHATTERJEE, N.C.CHATTERJI, N.D.Karkhanis, R.N.SACH, RANADEB CHOUDHURY, S.C.MAJUMDER
C.K.DAFTARY, G.S.CHATTERJEE, N.C.CHATTERJI, N.D.Karkhanis, R.N.SACH, RANADEB CHOUDHURY, S.C.MAJUMDER
The court distinguished between 'transfer' (act of parties) and 'transmission' (operation of law), ruling that restrictive articles governing transfers do not apply to transmissions. Additionally, the directors' discretionary power to refuse share transfers must be exercised reasonably and in good faith, not for mala fide purposes.
Headnote:(A) Indian Companies Act, 1913 - Section 38 and Table A - Distinction between transfer and transmission of shares - Transmission by operation of law is not a transfer by the act of parties - Restrictive provisions in articles of association must be strictly construed - Power to refuse registration of transfer is discretionary and must be exercised reasonably and in good faith - Court can control discretion if exercised capriciously or in bad faith. (Paras 6, 9)
(B) Rectification of Register - Jurisdiction under Section 38 of the Indian Companies Act, 1913 - Beneficial jurisdiction to be liberally exercised where a person's name is omitted from the register without sufficient reason. (Para 11)
Facts of the case:
Shares held by a former ruler of a state vested in a state government by operation of law following constitutional changes and merger agreements. The state government requested the company to register the shares in its name. The company refused, relying on an article of association allowing the board to refuse registration of transfers. The state also provided a formal transfer deed, which the company also refused to register on various pretexts, including the demand that the state honor a proposed agreement. The state sought rectification of the share register under the Companies Act.
Findings of Court:
The title to the shares vested in the state by operation of law. The board of directors had no power to refuse registration of a transmission by operation of law under the articles of association. The refusal to register the transfer deed was mala fide and capricious, as it was used to pressure the state into entering into a proposed agreement.
Issues: Whether the power to refuse registration of a "transfer" under the articles of association extends to "transmission" by operation of law, and whether the board's refusal to register the transfer deed was an exercise of discretion in bad faith.
Ratio Decidendi: Transmission by devolution of law is distinct from a transfer by the act of parties; therefore, a restrictive clause applying to "transfers" does not apply to "transmissions." Furthermore, the discretionary power of directors to refuse a transfer must be exercised in good faith and cannot be used to coerce a party into an agreement.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether directors can refuse registration of shares vested by operation of law under articles allowing refusal of transfers, and whether such refusal was mala fide. (Para 5 , 8 )
3. Distinction between transfer by act of parties and transmission by operation of law; discretionary power to refuse registration must be exercised reasonably and in good faith. (Para 6 , 7 , 8 , 9 , 10 )
4. Articles authorizing refusal of share transfers do not apply to transmissions by operation of law; discretionary refusal powers must be exercised in good faith and reasonably. (Para 6 , 9 )
5. Appeal dismissed with costs; order for rectification of the share register upheld. (Para 11 , 12 )
6. What is the legal distinction between the transfer and transmission of shares?
Transfer refers to the act of parties through an instrument of transfer, whereas transmission refers to the devolution of title by operation of law. (Para 6 )
7. Can a company's board of directors refuse to register the transmission of shares by operation of law under a clause allowing refusal of transfers?
No. A restrictive provision allowing the refusal of transfers must be strictly construed and does not confer power to refuse the recognition of a devolution of title by operation of law. (Para 6 , 7 )
8. Under what conditions can a court interfere with a board of directors' discretionary power to refuse the registration of a share transfer?
The power to refuse registration is discretionary and must be exercised reasonably and in good faith. The court can control this discretion if the directors act capriciously or in bad faith. (Para 8 , 9 )
9. When is the jurisdiction for rectification of a share register under Section 38 of the Indian Companies Act, 1913, attracted?
Jurisdiction is attracted when a person's name has been omitted from the register without sufficient reason or there is a default in entering the fact that a member has ceased to be one. (Para 11 )
R.S.BACHAWAT, J.
(1) ON 29/11/1947, the Indian Chemical Products, Ltd., a limited company, was incorporated having its registered offices in Baripada, Mayurbhanj and in the town of Calcutta. Its authorised capital is Rs. 25 lakhs divided into 25,000.00 shares of Rs. 100.00 each. The company has seven share-holders. The Maharaja of Mayurbhanj subscribed and paid for 7,500 shares. The remaining six shareholders hold 150 shares only. All the shareholders are signatories to the memorandum of association of the company. The State of orissa claims that by reason of the constitutional changes since the declaration of independence, all the shares held by the Maharaja of Mayurbhanj have now vested in it by operation of law. The State also based its claim to the shares on a formal instrument of transfer executed by the Maharaja. On 16/03/1950, the government of orissa lodged the share scrip and the transfer deed with the company, and requested it to make the necessary changes in the share register. The government as also the Maharaja, through his agent, the Imperial Bank of India, repeatedly requested the company to register the secretary to the government of orissa,, Finance Department as the holder of the shares in place of the Maharaja. There was protracted correspondence in the matter for over three years and eventually on 16/05/1953, the board of directors of the company refused to register the transfer. On 1/12/1953, Sri S. K. Mandal, attorney for the State of orissa, requested the company to record the name of the State as the owner of the shares in the share register, but the company declined to do so. On 9/02/1955, the State of orissa filed an application under s. 38 of the Indian Companies Act, 1913 in the High court of orissa asking for rectification of the share register by inserting its name as the holder of the shares in place of the Maharaja. The company and the Maharaja were impleaded as respondents. The application was contested by the company only. On 22/11/1956, Ray, J. allowed the application. On 13/09/1957, he passed a supplemental order directing the filing of the notice of rectification with the Registrar within a fortnight. On 5/09/1960, a division bench of the High court dismissed the appeal preferred by the company. The company now appeals to this court on a certificate granted by the High court.
(2) BOTH courts concurrently held that (1) the title to the shares vested in the State of orissa by operation of law; (2) the, refusal of the board of directors to register the transfer was mala fide; (3) the State of orissa was entitled to rectification of the share register and a proper case for the exercise of the courts jurisdiction under s. 38 of the Indian Companies Act, 1913 had been made out; (4) the petition was not liable to be dismissed on the ground that the State had asked the company to register the name of the secretary to the government of orissa, as the shareholder in place of the Maharaja. The appellate court also held that under the articles of association of the company the board of directors had no power to refuse registration of a transfer where the transfer was by operation of law. The appellant challenges the correctness of these findings.
(3) THE courts below concurrently found that the 7,500 shares were held by the Maharaja in his capacity as ruler of the State of Mayurbhanj. This finding is amply supported by the documentary evidence on the record and is no longer challenged. The State of Mayurbhanj was one of the feudatory States of orissa under the suzerainty of the British Crown. As from 15/08/1947, with the declaration of independence the paramountly of the British Crown lapsed. Thereafter, steps were taken for the integration of the State with the Dominion of India. On 17/10/1948, the Maharaja of Mayurbhanj signed an agreement for the merger of the State with the Dominion. By art. 1 of this agreement, the Maharaja completely ceded to the Dominion his sovereignty over the Sta
