M.G. Amirthalingam vs Gudiyatham Textiles Pvt. Ltd. and Others

Palaniswamy, J.—This petition is filed u/s 155 of the Companies Act, 1956, for rectification of the register of the members of the

Gudiyatham Textiles Private Ltd., the first respondent herein. Respondents Nos. 2 and 3 are the surviving directors of the company. To start with,

there were four directors of whom one subsequently transferred his shares in favour of the other three directors, namely, Govindaraja Mudaliar

(father of the petitioner), and respondents Nos. 2 and 3. Govindaraja Mudaliar died on September 6, 1964, leaving a will, under which he

bequeathed his shares in the company in favour of the petitioner. The petitioner obtained succession certificate in O. P. No. 38 of 1968 on the file

of the District Court, Vellore, in respect of the amount due by the first respondent-company to his deceased father. He has obtained an extension

of the succession certificate to cover the shares of his deceased father in the first respondent-company. On October 5, 1964, the petitioner applied

to the company to transmit the shares of his father to his name. He made another application on February 23, 1968, for the same purpose. A third

and final application was made on November 4, 1968. He was called upon to produce the necessary succession certificate and other documents

to snow his right, and on his producing the same on January 10, 1969, the directors, respondents Nos. 2 and 3, informed the petitioner by a letter

dated March 31, 1969, declining to effect the transfer. The reason given was that in the opinion of the directors the activities of the petitioner were

against the interest of the company, and that it was, therefore, not desirable or feasible, in the interest of the company, to permit the transmission of

the shares to the name of the petitioner as requested by him. The petitioner was also informed that the company was agreeable to purchase the

shares in question according to the prevailing value. It is in these circumstances that the petitioner has come forward with this petition praying for

rectification of the register of the company, by the substitution of his name in the place of his father.

The respondents have filed a counter-affidavit reiterating the objections put forward in the communication sent to the petitioner declining to

accede to his request for substitution of his name. Their contention is that under the articles of association of the company, they have got discretion

to decide whether it would be proper, in the interest of the company, to recognise the transmission, that having regard to the conduct of the

petitioner which was detrimental to the interest of the company, it was decided that the transmission should not be accepted. It is their contention

that if the petitioner is admitted, it would be the beginning of the end of the company.

The first respondent-company was floated with certain objects, the chief of which were :

(i) to manage the affairs of Messrs. Rajeswari Mills Ltd., as managing agents, that company being a public limited company ;

(ii) to promote limited companies, mills, factories, cinema studios, etc ;

(iii) to buy or sell cotton, yarn, silk or cloth and to deal in the same ; and

(iv) to construct, build factories or godowns, etc.

In the first respondent-company, out of the total of 20 shares, the petitioner''s father has 6 2/3rd shares ; the remaining 13 1/3rd shares belong to

equal moieties to respondents Nos. 2 and 3.

The main contention urged on behalf of the petitioner is that under the articles of association, there is no power conferred upon the board of

directors to refuse recognition of the transmission of shares by operation of law in case of death of one of the directors. It is also contended on

behalf of the petitioner that even if there was such a power, it has not been exercised bona fide, and that the exercise of power by respondents

Nos. 2 and 3 is arbitrary and unjust and is maal fide. On the other hand, the contention urged on behalf of the respondents is that under the articles

of association wide discretion is given to the board of directors to decide whether recognition of the transmission of shares even in the case of

devolution by operation of law should be considered in the interest of the company. They contend that, in the instant case, they have taken into

consideration all the relevant circumstances with regard to the interest of the company and have decided that the recognition of the petitioner with

regard to his father''s share would be detrimental to the interest of the company.

The articles of association are in Tamil, There are two articles of association, which require to be noted in this proceeding, and they are Articles

15 and 19. To understand the real import of these articles, I set them out fully and they are :

Article 15, on a reading of it, would show that it is clear and unambiguous. According to that article, a transfer either by a shareholder or by the

heir of a deceased shareholder can be made in the name of a relative of the shareholder or heir, as the case may be. If request for such a transfer is

made, discretion is given to the board of directors to decide whether it is just and proper that the transfer should be made. If they so decide, then

the transfer could be effected subject to the liability of the transferee to discharge any debt or encumbrance subsisting on the share. So far as

Article 19 is concerned, it is not clearly worded. It refers to transfer by the shareholder and also transfer by the heir of the deceased shareholder.

So far as the shareholder is concerned, the expression used is But so far as the heir of a shareholder is concerned, a different expression is used

and that is The expression means who desires to transfer his share. The expression would mean who desires to have the shares transferred. This

difference in language appears to have been deliberately adopted to cover the case of transfer if such a request is made by the heir of a deceased

shareholder. Such request can be made to recognise the transfer either in the name of the heir himself or in the name of a relative of the heir as

provided in Article 15. That appears to have been the reason why the difference in language is adopted in Article 19. According to Article 19, any

member desirous of transferring his share or the heir of a deceased member desirous of having the share transferred should, in writing, apply to the

company giving the particulars specified therein. That article further provides that within 60 days after the receipt of the application, the transfer

should be effected, if, on examination by the board, there was no objection. This article undoubtedly gives discretion to the board to decide

whether there is objection or not to recognise the transfer. This discretion is applicable not only to the case of an application for transfer by a

shareholder but also to an application for transfer by the heir either to his name or to the name of a relative. I, therefore, do not accept the

contention urged on behalf of the petitioner that under the articles of association no power is conferred upon the board to examine the request for

transmission of a share in case of devolution by operation of law.

The law relating to the right of the board of directors to refuse to register transfer of shares is well settled. Where the regulations confer a

discretion on directors with regard to the acceptance of transfers, this discretion, like all the directors'' powers, is a fiduciary one to be exercised

bona fide in what they consider to be in the interest of the company. If, on a true construction of the regulations, the directors are only given power

to reject on certain prescribed grounds and it is proved that on those grounds the request for transfer was rejected, the court would not substitute

its opinion for the opinion of the directors. If the articles of association give an unfettered discretion, the court would interfere with it only on proof

of bad faith. These principles have been enunciated in a number of decisions. In Moodie v. W. & J. Shepherd Book Binders Ltd., [1949] All E.R.

1044 (H.L.) (1) the articles of association provided that any person becoming entitled to a share in consequence of the death of a member shall

have the right subject to the directors not exercising their powers as provided therein, to acquire the said shares, either to be registered as a

member or to make such transfer of the share as the deceased person could have made. But the directors shall have the same right to decline or

suspend registration. Another article provided that it shall be in the absolute discretion of the directors to refuse to register any transfer of shares of

which they do not approve. The compay had three directors. On the death of one of them, his executors applied for transfer. Out of the two

remaining directors, one was in favour of recognising the transfer and the other was opposed to it. But the directors did not pass any resolution.

One of the articles of association required a resolution to be passed in case of rejection of request for transfer. As no such resolution had been

passed, it was held that the executors were entitled to be recognised.

In Smith and Fawcett Ltd, In re, [1942] Ch. D. 304 , one of the articles of association provided :

The directors may at any time in their absolute and uncontrolled discretion refuse to register any transfer of shares.

On the death of one of the two directors, his executor applied to have his name registered. The other director refused to consent for the

registration but offered to register some shares and to buy the remaining shares at a fixed price. The executor applied to the court by way of

motion that the register of members of the company might be rectified by inserting his name as the holder of all the shares held by the deceased.

The court held that the articles of association gave the directors the widest powers to refuse to register a transfer and that while such powers are of

a fiduciary nature and must be exercised in the interest of the company, there was nothing to show that they had been otherwise exercised. In

Babulal Choukhani Vs. Western India Theatres Ltd. and Another, , the relevant articles of association gave absolute and uncontrolled discretion to

the directors to decline to register transfer of shares. It was held that the directors were not bound to give reasons for their refusal.

In Coimbatore Kamala Mills Ltd. v. T. Sundaram, [1950] 20 Comp. Cas. 61 , the articles of association of the company provided :

The directors may decline to register any transfer of shares in respect of which any member solely or jointly with others is indebted to the

company in any manner whatsoever or if the directors shall not approve of the proposed transferee, and they shall not be obliged to give any

reason for not approving the transferee.

The company did not specify in their letter the ground upon which they refused to accept the plaintiff''s application for transfer. It was held :

that the company was bound to specify which of the two grounds mentioned in the article was the ground on which the directors declined to

register the transfer ;

that if the ground was that they did not approve of him they were not obliged to give the reasons for not approving him ;

that because the directors did not specify the ground on which they had declined to register the transfer, the court should not draw unfavourable

inferences against them ; and

that the presumption would be that the directors had acted bona fide and the onus would be on the person challenging their action to establish

the lack of bona fides and the impropriety on their part.

In E.M. Muthappa Chettiar Vs. Salem Rajendra Mills Ltd., Salem, , it is pointed out that if a discretion as to registering transfers of shares of a

company is given by the articles of association of the company to the directors, the court would not control the exercise of such discretion unless it

is proved that the directors are not exercising the discretion bona fide or are acting in other ways oppressively, capriciously or corruptly or in some

way mala fide. It is also pointed out that if the directors give their reasons, the court should consider whether they are legitimate or not, that is, with

a view to find out whether the directors acted on right or wrong principles. The Supreme Court has pointed out in Harinagar Sugar Mills Ltd. Vs.

Shyam Sundar Jhunjhunwala and Others, that rectification of the register of members of a company u/s 155 of the Companies Act, 1956, can be

granted only if it is established that the directors had, in refusing to register the shares in the names of the transferee, acted oppressively,

capriciously or corruptly, or in some way mala fide and not in the interest of the company. It is also pointed out that such a plea has, in a petition

for rectification, to be expressly raised and affirmatively proved by evidence and that, normally, the court would presume, where the directors have

refused to register the transfer of shares when they have been invested with absolute discretion to refuse registration, that the exercise of the power

was bona fide. In Indian Chemical Products Ltd. v. Stale of Orissa, [1966] 36 Comp. Cas. 592 ; [1966] Supp. S.C.R. 380 , the articles of

association gave power to the directors to refuse registration of transfer without showing any cause. But on facts it was found that the refusal to

register was mala fide. It was held that though there was power to refuse registration without showing any cause, the power had been exercised

capriciously and in bad faith and that, therefore, the refusal would not be sustained. In Thenappa Chettiar v. Indian Overseas Bank, [1943] 13

Comp. Cas. 202 ; AIR 1943 Mad. 743, the question arose for consideration in a regularly framed suit ; the court found that the objections to

recognise the transfer were capricious and untenable. It is pointed out that though the articles of association may confer absolute power on the

directors, the refusal must not be arbitrary.

Keeping the foregoing principles in view, the facts of this case may be examined. The petitioner''s father died on September 6, 1964. At that

time, the first respondent-company was functioning as the managing agents of Rajeswari Mills Ltd. The agreement under which the said managing

agency was created was to expire on 15th August, 1965. The petitioner was appointed as the director-in-charge of the day to day management of

the Rajeswari Mills after the death of his father. In that capacity, he called for a meeting of that company on November 11, 1964, and a resolution

was passed in that meeting removing the first respondent-company from the office of managing agents. The petitioner got himself appointed as the

managing director. This gave rise to institution of a suit, O.S. No. 132 of 1964, on the file of the Sub-Court, Vellore, by the first respondent-

company challenging the action of the petitioner in passing the resolution. Certain shareholders of Rajeswari Mills themselves questioned the

validity of the resolution and instituted O.S. No. 140 of 1964 on the file of the same court for certain reliefs. Alleging that the action of the

petitioner in causing the removal of the first respondent from being the managing agents had caused substantial loss to the first respondent-

company, the first respondent-company instituted 0. S. No. 132 of 1964 claiming damages against the petitioner and Rajeswari Mills Ltd. It

appears that the said suit has been dismissed so far as the petitioner is concerned, but has been decreed for a smaller amount than the amount

claimed as against Rajeswari Mills Ltd. It is represented on behalf of the respondent that the first respondent-company is intending to file an appeal

not only with regard to the disallowed portion against the Rajeswari Mills but also against the petitioner.

It appears that the first respondent-company was indebted to the late father of the petitioner. The petitioner instituted C.P, No. 49 of 1966 on

the file of this court to wind up the company alleging that the company was unable to pay its debts and that the substratum of the company had

disappeared. That matter was ultimately compromised. Under the compromise, the petitioner was allowed to draw a particular amount without

prejudice to his rights to institute fresh proceedings to recover the balance due to him. It was also agreed that the petitioner''s rights as a

shareholder were left open. Ultimately, the petition was dismissed as not pressed and withdrawn. The contention urged on behalf of the

respondents is that the institution of this petition reveals the attitude of the petitioner. Their submission is that the petitioner is bent upon seeing that

the first respondent-company is wound up. It is represented that there are some more suits pending between the petitioner on the one hand and the

respondents on the other.

From the foregoing facts, it is clear that the conduct of the petitioner has been such that it is inconsistent with his profession of being interested

in the affairs of the first respondent-company. The fact that money was due to him from the company does not necessarily mean that he should rush

to court with a petition to wind up the company on the serious allegation that the substratum of the company had disappeared. The contention

urged on his behalf that as a creditor he was entitled to take all such steps as were open to him according to law, has no substance in the

consideration of the question whether his conduct was for the benefit of the company. The board of directors have taken into consideration the

relevant circumstances and come to the conclusion that the activities of the petitioner were against the interest of the company, and that it was,

therefore, not desirable in the interest of the company to permit transmission of the shares of his father to his name. It cannot be said that this

reason is capricious or arbitrary or mala fide. The decision taken by the board of directors is in the best interest of the company and, therefore,

even if it is conceded for the sake of argument that the court is entitled to go into the question of validity or otherwise of the reasons given by the

directors, the evidence on record amply justified the view taken by the board of directors. All that the articles of association says is that the board

of directors may admit the transmission if they see no objection. The board had sufficient and valid reasons for rejecting the request of the

petitioner.

Mr. Gopalarathnam, appearing for the petitioner, faintly suggested that on account of the inordinate delay in considering the application of the

petitioner by the board, it should be deemed that the petition was allowed. No such claim is put forward in the petition, and there is also no merit in

this submission. It is true that the petitioner had applied twice on previous occasions, once on October 5, 1964, and again on February 23, 1968.

On these occasions, he had not obtained the necessary proof by way of extension of succession certificate to cover his claim to the rights in the

shares of his deceased father. It was only in August, 1968, that the petitioner obtained extension of succession certificate and he made a third

application on November 4, 1968, for recognition of transmission of his right. The board of directors called upon the petitioner to produce proof

and he furnished proof on January 10, 1969. On March 31, 1969, the board decided to reject the request. Thus there was no delay in disposing

of the petitioner''s application.

Mr. Gopalarathnam next contended that under the compromise arrived at between the petitioner on the one hand and the first respondent on

the other in C.P. No. 49 of 1966 it was expressly stipulated that the petitioner''s right as a shareholder was left open. On the basis of that

stipulation it is contended that it should be deemed that the petitioner''s right as a shareholder was accepted. There is no merit in this argument. The

fact that his right was left open does not mean that his right was recognised. It is obvious that the question of the petitioner''s right as a shareholder

was not decided, but it was merely left open. The compromise does not in any way advance the petitioner''s claim.

Lastly, Mr. Gopalarathnam contended that, after all, the petitioner is only a minority shareholder having 6 2/3rd shares, and that recognition of

his share as a shareholder would not in any way affect the working of the company inasmuch as the two majority shareholders are going together.

On this aspect also I find no substance. From the mere fact that the petitioner is only a minority shareholder it does not mean that the decision of

the board rejecting his request for transmission is in any way vitiated. It is rightly contended on behalf of the respondents that the petitioner, even

though a minority shareholder, can give trouble to the working of the company, if he wants to do, as there are adequate provisions in the

Companies Act under which the petitioner can come up to this court. It is undoubtedly so. The petitioner, as a minority shareholder, can approach

this court under Sections 397 and 398 alleging that the affairs of the company are being conducted in a manner prejudicial to the public interest or

in a manner oppressive to him. By this way, he can drag the company to court. Therefore, the fact that the petitioner is a minority shareholder does

not mean that he cannot take any action against the company.

In the result, the petition fails and is dismissed. There will be no order as to costs.