E.M. Muthappa Chettiar vs Salem Rajendra Mills Ltd., Salem

Somasundaram, J.—This is an appeal by the plaintiff against the dismissal of his suit by the Subordinate Judge of Salem.

The plaintiff purchased 2030 shares of the Salem Rajendra Mills Ltd., (defendant 1 in the suit and respondent herein) and applied to have the

same transferred in his name. As the transfer was refused, the plaintiff filed the suit for a declaration that he is entitled to have his name entered in

the books of the company as transferee of the above shares and also asked for a mandatory injunction directing defendant 1 to enter his name in

the books of the company. The plaintiff purchased the shares from defendants 2 and 3 and therefore they were also added as parties. The other

defendants were added as pro forma parties. This appeal is only against defendant 1 in the suit.

The circumstances which led to the refusal of the transfer and which resulted in the suit are these. The plaintiff and one Karimuthu Thyagaraja

Chettiar entered into a. partnership in 1939 for the purpose of carrying on business as the Managing Agents of textile mills at Coimbatore and later

took up the managing agency of the respondent-company, the Rajendra Mills at Salem, by entering into an agreement with the Salem

Balasubramaniam and Co., who were then the managing agents of the Rajendra Mills at Salem. In connection with the managing agency of

Rajendra Mills, with which alone we are concerned in this appeal, both the plaintiff and Thayagaraja Chettiar incurred certain financial

''responsibilities.

In 1941 in consequence of a letter written by the plaintiff to Thyagaraja Chettiar Stating that he has nothing to do with the Hajendra Mills and that

Thyagaraja Chettiar alone is responsible for the debts and liabilities of the business and that he can do what he likes without the plaintiff''s

connection, there was an agreement between the plaintiff and Thyagaraja Chettiar by which the plaintiff was relieved of all his-financial

responsibilities in respect of the managing agency of the Rajendra Mills. Thyagaraja Chettiar then called upon the plaintiff to transfer the 100 shares

of Balasubramaniam and Co., which the plaintiff had taken; and he also called upon the plaintiff to execute an agreement to evidence the severance

of his connection with the managing agency of Rajendra Mills.

After the plaintiff was relieved of his financial responsibilities in respect of the managing agency of Rajendra Mills in pursuance of the agreement,

the plaintiff changed his mind and refused to do what he was called upon to do by Thyagaraja Chettiar. Consequently misunderstandings arose

between them resulting in several suits being filed by the plaintiff against the respondent company. The suits relating to the Rajendra Mills alone will

be referred to here.

The plaintiff filed O.S. No. 128 of 1942 in the District Munsif''s Court,'' Salem, for a permanent injunction restraining Thyagaraja Chettiar from

holding a certain meeting by Balasubramaniam and Co. to consider a special resolution for allotting the unallotted shares of Balasubramaniam and

Co. to Manickavachakam Chettiar, a divided sort of Thyagaraja Chettiar. As the proposed meeting was not held and the proposed allotment of

the shares was dropped, the suit became infructuous and was dismissed on 31-7-1943 by the Sub-Court to which Court the suit was transferred

to be tried along with another suit. In that suit Thyagaraja Chettiar filed a written statement alleging that there was an arrangement between himself

and the plaintiff, according to which the plaintiff had severed his connection with the managing agency of the Rajendra Mills and therefore the

plaintiff had no longer any interest in the same.

The plaintiff thereupon filed O.S. No. 26 of 1942 in the Sub-Court, Salem, for a declaration of his status as a subsisting partner owning a half

share in the managing agency of the Rajendra Mills. On the same day, he filed O.S. No. 34 of 1942 in the same Court for a decree directing

rectification of the share register of Balasubramaniam and Co. by deleting therefrom the mime of one Sundaram Chettiar, another divided son of

Thyagaraja Chettiar. O.S. No. 26 of 1942, when it came up for hearing on 31-7-1943 along with O.S. No. 128 of 1942, was withdrawn by the

plaintiff as some difficulty was felt in getting the reliefs claimed by him, since the partnership had not been registered under the Partnership Act.

In O.S. No. 34 of 1942, the Court found that the plaintiff had severed his connection with Balasubramaniam and Co. on 17-5-1941 and that he

was therefore not entitled to question any acts done by Thyagaraja Chettiar after that date. The suit was therefore dismissed on 20-3-1944. This

was taken up in appeal to this Court and it was heard by a Bench of this Court. The learned Judges confirmed the finding of the lower Court and

held that the plaintiff''s ""repudiation of the agreement was certainly open to grave criticism.

The O.S. No. 55 of 1942 was filed by Thyagaraja Chettiar, in the Sub-Court, Madurai, for declaring that the plaintiff had no manner of interest

in the managing agency of Rajendra Mills and for directing him to execute a transfer deed in respect of the 100 shares standing in his name in the

books of Salem Balasubramaniam and Co. Though the trial Court did not give a decree, in the appeal, the District Judge upheld the plea of

Thyagaraja Chettiar and directed the plaintiff execute the transfer deed in respect of the 100 shares standing in his name in favour of Thyagaraja

Chettiar. The second appeal preferred by the plaintiff resulted in its dismissal. Certain other suits were filed by the plaintiff against Saroja Mills at

Coimbatore, all of which were dismissed and ho was ultimately turned out of the managing agency of both the Rajendra Mills as well as the Saroja

Mills,

It was after these proceedings, in all of which he was worsted, the plaintiff started purchasing shares of Rajendra Mills. The shares in question--

the subject-matter of this case, were purchased on 31-1-1944. On 19-6-1944 he applied to the company for registration of the transfers in his

name. As the transfer deeds were not stamped they were returned on 3-7-1944. On 31-8-1944 the plaintiff re-presented the application with a

cheque for Us. 500 for the purpose of purchasing stamps. On 8-9-1944 the Secretary of the company informed the plaintiff of the insufficiency of

stamps and asked for a further sum to cover the transfer fees and stamp fees. That was sent on 12-9-1944.

On 15-9-1944 the plaintiff was informed that the application would be placed before the Board of directors for their consideration. The Board met

on 22-9-1944, considered the application and refused to register the shares in the plaintiff''s name, without giving any reasons. The resolution of

the Board was communicated to the plaintiff on 27-9-1944. The plaintiff protested against this by his Setter dated 31-5-1945. The suit itself was

filed only on 30-3-1946, nearly one and a half years after the communication to the plaintiff about the refusal to register. The plaintiff asked for

certain other reliefs against defendants 2 and 3, but we are not concerned with them in this appeal as the appeal is preferred only against defendant

1.

The plaintiff alleges that the Board of Directors acted mala fide in refusing to register the transfer of his shares in his name and that under the

Articles of Association they have no power to so refuse.

The respondent-company in their written statement denied that they ever acted mala fide in refusing to register the plaintiff''s name. They stated

that under the Articles the Board of Directors has absolute discretion in the matter of refusal of registration of the transfer of. shares and that the

discretion of the Board cannot be questioned either by the transferor or the transferee. They also stated that under the Articles of Association the

Board need not give any reasons for their refusal. The case of the defendants is that the Board was acting with the best of motives and in the

interests of the company and that the refusal was for good and sufficient reasons.

Defendant 1, company, though they stated that they need not give any reason for refusing to register the transfer, still in the written statement gave

the reasons and set out the circumstances relied on by them to show that the plaintiff is a cantankerous litigant and an undesirable person and that it

was in the best interests of the company that the application was rejected. The facts of the purchase of the shares by the plaintiff and the refusal by

defendant 1 to register were not disputed.

The lower Court after considering the evidence and the law on the subject, found that the plaintiff cannot be called a cantankerous litigant merely

from the circumstances of the number of suits filed by the plaintiff, almost all of which being decided against him. It held that it was not unusual for

partners to fall out and seek their remedies in a Court of law in respect of rights arising from the partnership. The lower Court, however, held that

the decision of the Board had been arrived at in the best interests of the company, as the plaintiff is an undesirable person and the refusal was

justifiable on that ground. The suit was, therefore, dismissed.

In appeal the only question is whether defendant 1 was justified in refusing to register the transfer. Article 56 of the Articles of Association on

which the respondent relies for the exercise of its, power is as follows :

If there be any mortgage on the share, or if there be any dues in respect of the instalments of share amounts, instalment amount, interest, or any

other dues in respect of the share, or if any amount whatever is due from that member either severally or jointly along with others or if the

transferee of the share is not approved, the Board of directors may without assigning any reason whatever for their refusal, refuse to register the

share in the exercise of their discretion and independence .....

Board of directors may refuse to register the transfer even without giving any reason therefor.

It is clear from the above article that it mentions certain grounds on which the transfer may be refused. One of the grounds is ''if the transferee of

the share is not approved.'' The articles also give a power to the Board of Directors to refuse to register the transfer even without giving any

reasons therefor. Respondent 1 though they take their stand under the Article that they need not give any reason for the refusal, still in the written

statement, have come out with the reasons for refusal. The question is whether the defendant can refuse to register without giving reasons and when

they give reasons in court, it is open to the court to find that they are legitimate or not,

Under the Articles of Association that a discretion is given to the Directors to refuse to register the transfer cannot be disputed. It is well settled

that

if a discretion as to registering transfers is given by the Articles to the Directors, the court will not control the exercise of such discretion unless it is

proved that the directors are not exercising it bona fide or are acting in other ways oppressively, capriciously or corruptly or in some way mala

fide."" (vide Palmer''s Company law, 19th Edn. p. 109).

In ''In re, Gresham Life Assurance Society; Ex parte, Penny'', (1873) 8 Ch. A. 446 (A), James L. J. states the position as follows at p. 450 :

I cannot conceive that any director would choose to accept office, or exercise the power entrusted to him if he were liable to be called upon to

say what the particular reasons were or the particular motive was which influenced him in coming to the conclusion that any person was not eligible

as a share-holder.

Earlier at p. 449, the learned Judge says :

No doubt the directors are in a fiduciary position both towards the company and towards every shareholder in it. It is very easy to conceive

cases such as those cases to which we have been referred, in which this court would interfere with any violation of the fiduciary duty so reposed in

the directors. But in order to interfere upon the ground it must be made out that the directors have been acting from some improper motive, or

arbitrarily or capriciously.

Mellish L. J. who concurred with James L. J. observed as follows at p. 451 ;

It appears to me that it is very important that directors should be able to exercise the power in a perfectly uncontrollable manner for the benefit of

the share-holders; but it is impossible that they could fairly and properly exercise it if they were compelled to give the reason why they rejected a

particular individual.

And then he points out how in certain circumstances the directors will be perfectly entitled and Justified to refuse to register and adds finally :

I am, therefore, of opinion that in order to preserve to the company the right which is given by the articles a shareholder is not to be put upon the

register if the board of directors do not assent to him, and it is absolutely necessary that they should not be bound to give their reasons, although I

perfectly agree that if it can be shown affirmatively that they are exercising their power capriciously and wantonly that may be ground for the Court

interfering.

The above decision is also an authority for the position that :

Where the articles authorise the directors to reject transfers to transferees of whom they do not approve, the directors must before rejecting a

proposed transferee, fairly consider the question at board meeting. Provided that they do so, however, they are not bound to disclose their reasons

for rejecting any particular individual, as to compel them to do so would be to deprive the power of half its efficacy.

(Vide Buckley on the Companies Act, 12th Edn. p. 175).

It is also well-settled that the Court will not draw an unfavourable inference against the directors because they did not give their reasons for refusing

to pass a particular transfer; for they are under no obligation to disclose their reasons either in Court or out of Court. It is enough that they in fact

considered the transfer but that in exercise of the discretion given to them by the articles they have not passed it.

In -- ''In re Coalport China Co.'', (1895) 2 Ch 404 (B) Lindley L. J. observed as follows ;

Under the articles the directors have a power to refuse a transfer. I will not say at present for what reasons ; I will allude to them presently. They

do refuse a transfer they do not say why. The argument is, and the view taken by the learned Judge is, that it is for them to justify their conduct.

Now, that appears to me to be wrong. It is for those who say that the directors have exercised their power improperly to give some evidence to

that effect.

The other to Judges concurred with Lindley L. J. and Rigby L.J. added :

The fact that they have resolved must be taken, in the absence of positive evidence sufficient to satisfy the Court to the contrary, to mean that they

have resolved within their jurisdiction and for right reasons.

It is thus clear from the above decisions that if the Articles of Association give power--and in this case Article 56 undoubtedly gives such a

power -- the respondent is not bound to give any reasons for not registering the transfer. That the Board considered the application at its meeting

on 22-9-1944 is not disputed. As already stated, though the respondent did not give any reasons at the time of the refusal and took the stand that

they are not bound to give any reasons, they have however, in the written statement, come forward with the reasons for refusing. Now the question

is whether the reasons given by the respondent are legitimate or not.

(15) It has been held that :

If the directors do give their reasons, the Court will then consider whether they are legitimate or not, i.e., whether the directors have proceeded on

a right or wrong principle, and will overrule their decision if their reasons are not legitimate, but not, if they are legitimate, merely because the Court

would not have come to the same conclusion.

(See Buckley on Companies Act, p. 175).

In--''In re, Bell Bros. Ltd., Ex parte Hodg son.''''(1891) 7 I L R 689 (C), Chitty J. states the law as follows :

The discretionary power is of a fiduciary nature, and must be exercised in good faith; that is, legitimately for the purpose for which it is conferred.

It must not be exercised corruptly, or fraudulently, or arbitrarily or capriciously or wantonly. It may not be exercised for a collateral purpose. In

exercising it, the directors must act in good faith in the interest of the company and with due regard to the shareholder''s right to transfer his shares,

and they must fairly consider the question of the transferee''s fitness at a board meeting. When the Court once arrives at the conclusion that the

directors have in good faith rejected a transfer on the ground that the transferee is not a fit person to become a member of the company, it will not

review the directors'' decision.

The directors are not bound out of Court to assign their reasons for disapproving. If they decline to do so, or if their decision is challenged in Court

and they retrain from giving evidence, upon which a cross-examination may take place as to their reasons, or if, giving such evidence, they refrain

from stating their reasons, the Court will not, merely on that account, draw unfavourable inferences against them. In these articles there is an

express provision protecting the directors against any liability to disclose their reasons. They are, however, at liberty, if they think fit, to disclose

them, and if they do, the Court must consider the reasons assigned with a view to tain whether they are legitimate or not; or, in other words, to

ascertain whether the directors have proceeded on a right or wrong principle. If the reasons assigned are legitimate, the Court will not overrule the

directors'' decision merely because the Court itself would not have come to the same conclusion.

But, if they are not legitimate, as, for instance, if the directors state that they rejected the transfer because the transferor''s object was to increase

the voting power in respect of his shares by splitting them among his nominees, the Court would hold that the power had not been duly exercised.

So, also if the reason assigned is that the transferee''s name is Smith, or is not Bell. Where the directors do not assign any reason, it is still

competent for those who seek to have the transfer registered to show affirmatively, if they can, by proper evidence that the directors have not duly

exercised their power. These principles are deducible from the authorities, among which the more important are (1873) 8 Ch A 466 (A); ''Moffat

v. Farquhar'', (1878) 1 Ch D 591 (D).

It is clear from the above decision that if the reasons are not given, the Court will not merely on that account draw an unfavourable inference

against the Board. They are however at liberty to disclose the reasons, and if they do, the Court must consider the reasons assigned with a view to

and out whether the defendants acted on a right or wrong principle. The learned advocate relies on this decision in support of his contention that

the defendants acted on a wrong principle and the only object of refusing was"" that the plaintiff would oppose the domination of Thyagaraja

Chettiar in the mills. The learned advocate also relied on the decision in -- ''Muir Mills Co. Ltd,, Cawnpore v. T. H. Condon and A. Butterworth'',

22 All. 410 (E) and ''Khaikhorso Muncherji Heeramaneck v. Coorla Spinning and Weaving Co.,'' 16 Bom. 80 (F). There is no doubt that in

(1891)7 TLR 689 (C)'', the reason for opposing the registration had nothing to do with the person, but it was for some other reason, namely to

increase the voting power in his own hands.

In 22 All. 410 (E) also the real objections were not against the transferees as such but their connection as employees of some other mills and the

desire of the Directors was that the person concerned should not add to his voting power at the meetings of the company. The learned Judges held

that as the objections were not personal to the transferees they did not constitute legitimate reasons for refusing to transfer. In 16 Bom. 80 (F) also

there was no objection to the person and as it was for other reasons, the transfer was Ordered.

In this case the facts set out earlier and the evidence show that the plaintiff after expressing his desire to have no share whatsoever in the

company filed several suits in all of which he was worsted and the finding, as already stated, is that his conduct is ""open to grave criticism."" It is in

evidence that he went about purchasing shares at thrice the value of the shares and when it would fetch only 6 per sent, at face value, he had paid

for his share three times the face value, which would give him only two per cent. This is certainly not for investment. There must be some other

ulterior object. According to the evidence of D.W. 1, the secretary, the various cases filed by the plaintiff affected the Rajendra Mills, and the

managing agency could not raise funds for financing the mills. D.W. 1 says that the share-holders of the mills lost confidence in the mills and wanted

to sell their shares.

Many of the prominent director sold their shares, and the number of directors was reduced; and it was because, the directors said that the plaintiff

was litigious and quarrelsome person, that he would discredit and obstruct the management and create factions among the shareholders and act

against the interests of the company, the directors decided not to have him and invite trouble. The lower Court has dismissed the suit, holding that

the decision of the Board had been arrived at in the best interests of the company and that the refusal to recognise the assignment on the ground

that the plaintiff is an undesirable person is valid.

In (1878) 7 Ch, D. 591 (D), Malins V. C. observed as follows at p. 605 :

In my opinion, therefore, it is perfectly clear there can be no justification for refusing the transfer unless they have an objection to the person of the

transferee. That they should have such a power seems reasonable; because, this being a limited company, and it being very desirable that they

should have respectable men and solvent men as members, and persons who would be able to pay the calls which should be made, it is reasonable

that they would have the power of objecting to the person, and not have introduced among them insolvent persons, or it might be, if you like,

disagreeable persons who would throw them into confusion, and therefore the directors have the power of objecting to the person"",

(underlining here into '' '' is ours). This shows that if a person is of such a character as to throw their company into confusion and if he was not a

desirable one, then the Board of Directors would certainly be acting in the best interests of the company in refusing to register the shares in his

name and such a reason is quite a valid reason. The evidence justifies the finding of the lower Court, and it cannot be said that the directors did not

act bona fide or that they acted arbitrarily or capriciously.

In our opinion no case has been made out for interference in appeal. The appeal, therefore, fails and is dismissed with costs.