Philipose, Adv. vs Vanchinad Rubber and Produce Co., Ltd. and Others

Sankaran, J.—Plaintiff whose suit was dismissed by the lower Court has preferred this, appeal. The 5th Defendant was the holder of 121 shares in the first Defendant - company - and he had pledged these shares with the Plaintiff and had also entrusted to him the share certificate which has been marked as Ext. C. Since the 5th Defendant failed to redeem the piedge Plaintiff instituted a suit as O.S. 63/1108 in the Trivandrum District Court against the 5th Defendant for recovery of the amount due as per the pledge already mentioned. Since the amount was sought to be recovered by the sale of the shares held by the 5th Defendant the first Defendant company was also made a party to the suit. In execution of the decree obtained by the Plaintiff in that suit, he sold these shares in Court auction and himself purchased the same on 15-3-1112. Ext. A is the copy of the sale certificate granted to him.

Subsequent to such purchase he had some correspondence with the 1st Defendant company to have these shares transferred to his name on the strength of the Court sale. The company informed the Plaintiff that the 5th Defendant had already transferred 40 shares in favour of the 2nd Defendant, 25 shares each in favour of Defendants 3 and 4 and that these transfers had already been recognised by the company and the necessary, entries made in share register. Plaintiff was also informed that Defendants 2 to 4 as transferees of these shares were being paid the dividends due in respect of such shares and that for certain amounts due to the company from Defendants 3 and 5 the company had a lien over the 25 shares standing in the name of 3rd Defendant and over the 31 shares still standing in the name of the 5th Defendant According to the Plaintiff, the transfer of shares in favour of Defendants 2 to 4 has been fraudulently effected as a result of collusion between them and the 5th Defendant and that such transfer does not affect the rights acquired by the, Plaintiff as per Ext. A sale certificate. On these allegations Company Petition No. 16 of 1115 was filed by the Plaintiff in the Kottayam District Court u/s 41 of the Travancore Company''s Act corresponding to Section 38, Indian Companies Act, for getting a rectification of the share Register of the first Defendant company by substituting his name in the place of Defendants 2 to 5 as the owner of the 121 shares covered by Ext. C share certificate. In view of the conflicting claims put forward by the Plaintiff and Defendants 2 to 5 that Court directed the Plaintiff to institute a regular suit to get his rights declared. The order to that effect was passed on 6-11-1117.

The present suit was accordingly instituted by the Plaintiff on 24-11-1117 praying for a rectification of the Share Register of the first Defendant company by entering in it the name of the Plaintiff as the owner of the 121 shares covered by Ext. C share Certificate and also for a decree for recovery from the company the dividends due on these shares for the period from 15-3-1112 the date of Ext. A sale certificate together with 6 per cent, interest on such amount and also for costs of the suit. The suit was resisted by the Defendants. The first Defendant company contended that when the transfer of shares in favour of Defendants 2 to 4 was recognised by the Company and the names of such transferees entered in the share register the company was not aware that the 5th Defendant had pledged these snares with the Plaintiff that such transfer which had already come into effect could not be effected by the subsequent suit instituted by the Plaintiff on the basis of the pledge in his favour or by the decree and the Court sale which followed it. It was also contended that Defendants 2 to 4 had also paid the call at the rate of Rs. 5/- for each share and that they were regularly getting the dividend due in respect of those shares. The 4th Defendant also raised similar contentions and stated that Defendants 2 to 4 purchased the shares from the 5th Defendant in good faith and for valuable consideration and without any knowledge of the pledge with the Plaintiff. The 5th Defendant also supported the contentions of Defendants 2 to 4. He further contended that the Plaintiff''s suit is not maintainable and that it is barred by limitation. Still Anr. contention raised by the 5th Defendant was that since the Court sale evidenced by Ext. A was not followed by the delivery as contemplated in Rule 76 and 77 of Order 21 of the Travancore Code of Civil Procedure. Plaintiff had acquired no valid title to the shares in question. The lover Court overruled the plea of limitation raised by the Defendants but upheld the other contention raised by them and accordingly dismissed the suit. Hence this appeal by the Plaintiff. Defendants 1, 4 and 5 have filed objection memorandum challenging the correctness of the lower Court''s finding that the suit is not barred by limitation and also reiterating the contention that the non-compliance with the procedure prescribed in Order 21 Rule 76 and 77, Code of Civil Procedure. is fatal, to the rights claimed by the Plaintiff.

Of the several grounds raised by the Defendants against the maintainability of the Plaintiff''s suit one ground alone is seen to have been considered by the lower Court. That ground is to the effect that Plaintiff should have pursued his remedies by way of proceedings in execution of the decree in O. S. 63 of 1108 and that a fresh suit like the present one is barred by Section. 47, Code of Civil Procedure. The lower Court upheld this contention and ruled that the present suit or the enforcement of the Plaintiff''s right under the sale certificate Ext. A granted in O. S. 63/1108 is not maintainable. This view is obviously erroneous. Plaintiff''s claim in O. S. 63/08 was for recovery of a debt due to him from the present 5th Defendant. That suit was decreed in favour of the Plaintiff and in execution of the decree the right, title and interest which the present 5th Defendant who was the judgment-debtor in that case had over the 121 shares covered by the Share Certificate Ext. C were sold in Court auction and was purchased by the Plaintiff himself. The sale was duly confirmed in his name and the sale certifi ate Ext. A was issued in his favour. It was a sale of movable property and the mode in which the delivery of that property covered by that sale is to be effected is the one prescribed by Clause (3) of Rule 76 of Order 21 of the Travancore Code of Civil Procedure. (corresponding to Clause 3 of Rule 79 of Order 21 of the Indian Code). The provision is to the effect that "delivery of the shares sold shall be made by a written order of the Court prohibiting the creditors from receiving the debt or any interest thereon and the debtor from any payment thereof to any person except the purchaser or prohibiting the person in whose name the share may be standing from making any transfer of the share to any person except the purchaser or receiving payment of any dividend or interest thereon and the manager, secretary, or other proper officer of the Corporation from permitting any such transfer or making any payment to any person, except the purchaser". Beyond this nothing, further could be done by way of proceedings in execution on the strength of the sale certificate Ext. A. It follows therefore that none of the reliefs claimed in the present suit could be obtained by the Plaintiff by way of execution proceedings in O.S. 63/1108. The main relief claimed in the present suit is to get a rectification of the share register of the 1st Defendant company by registering the name of the Plaintiff as the holder of the 121 shares of which he has become the purchaser under Ext. A. The other reliefs claimed are only consequential ones following the main relief. Since the reliefs claimed in the present suit were entirely beyond the scope of the prior suit O. S. 63/ 08 there is no force or substance in the contention that the Plaintiff should have applied for these reliefs in the Court executing the decree in O.S. 63/08. Such reliefs could be obtained by the Plaintiff only by way of other independent proceedings and hence it cannot be said that Section. 47, Code of Civil Procedure. operates as a bar to the present suit.

The next point urged on behalf of the Respondent is that the non-compliance with the procedure prescribed by Rules 79 and 80 of Order 21, Code of Civil Procedure. (corresponding to Rule 76 and 77 of the Travancore Code) makes the present suit based on Ext A unsustainable. It is contended that the delivery as contemplated in Clause 3 of Rule 71 is essential to complete the title of the auction purchaser under the sale certificate Ext. A, to the shares covered by that certificate. The rule only prescribes the different modes in which delivery is to be effected in the case of sales of movable properties. When such property consists of shares in a corporation it is stated that the delivery may be effected by prohibiting the parties concerned from transferring the shares or any interest thereon to any person other than the purchaser. But there is nothing in the rule to indicate that the title of the auction-purchaser to the shares purchased by him will be perfected only after delivery is made by the issue of the prohibitory order as prescribed by Clause 3 of Rule 79. On the other hand, the conditions necessary for perfecting the auction-purchaser''s title are prescribed by Clause 2 of Rule 77 of Order 21 (Rule 74 of the Travancore Code). Clause 2 of this rule lays down that "On payment of purchase money the officer or other person holding the sale shall grant a receipt for the same and the sale shall become absolute". So far as the sale evidenced by Ext. A is concerned, these conditions were duly complied with and satisfied. It is also clear from a reading of Clause 2 and 3 of Rule 79 that the modes of delivery prescribed therein are intended to govern cases where the movable property sold happens to be in the possession of some person other than the judgment-debtor. In such cases, the interests of the auction purchaser are sought to be safeguarded by the issue of notices to the third parties in possession of the property sold intimating them about the fact of the sale and of the consequences following such sale. The compliance with such a procedure was not necessary in the case of the sale evidenced by Ext. A. The share Certificate relating to the 121 shares sold under Ext. A has already been delivered over to the Plaintiff decree-holder auction purchaser even a(sic) the time when the 5th Defendant had pledge these shares with him. At the time of the (sic)ion sale and even subsequently possession o(sic) the share certificate has been with the auction purchaser himself and it was he who produced it in this case and got it marked as Ext. C. There is the further fact that the 1st Defendant company had been made a party Defendant in O. S. 63/1108. Thus the auction sale of the share in question was conducted after notice to the company as well. Since the auction sale of the shares was conducted in such a .situation it cannot be said that it was essential that the issue of a delivery order as contemplated by Clause 3 of Rule 79 was essential for the completion of the proceedings in execution in that case. There was in substance and in effect such a delivery order and the company as a party Defendant in that case had the necessary notice that subsequent to the Court, sale the auction purchaser alone could be treated as the owner of the shares in question. The absence of a formal delivery order as contemplated by Clause 3 of Rule 79 cannot therefore in any way prejudice the Plaintiff''s rights under Ext. A,

Coming to the procedure prescribed by Rule 80 it is clear from a reading of the rule itself that procedure is not obligatory. Clause 1 of the rule runs as follows:

Where the execution of a document or the endorsement of the party in whose name a registered instrument or a share in a corporation is standing is required to transfer such negotiable instrument or share the Judge or such officer as he may appoint in this behalf may execute such a document or make such an endorsement as may be necessary and such -execution or endorsement shall have the same effect as an execution or endorsement by the party.

This provision is to govern cases where the execution of a document or the endorsement by the party in whose name the negotiable instrument or the share in a corporation is standing, is necessary for effecting a transfer of such negotiable instrument or share. It is a rule which prescribes the procedure when what is required or when what is decreed or ordered is the transfer of the share. In such cases the Court by complying with the procedure prescribed by this rule will be doing what the party in whose name the share stands was bound to do in order to effect a transfer of the share. But where it is not a transfer of the share in the real and strict sense of the term the execution of a document or the endorsement by the party may not be required. The question of the Court executing such a document or making such an endorsement as contemplated by Rule 80 will not, also arise. The rights of a shareholder may pass to Anr. either by way of transfer or by way of transmission. There is a clear distinction between transfer and transmission of shares. Transfer is by voluntary act of parties whereas transmission is by operation of law. Sale of shares in Court auction comes under the category of transmission by operation of law.

This distinction between transfer and transmission of shares has been clearly explained in - T.A.K. Mohideen Pichai Taraganar Vs. Tinnevelly Mills Co. Ltd. and Others, and also in - ''In Re Wahid Bus and Mailsi Transport Co. Ltd., Muitan'' AIR 1949 Lah 6 (B). In the Madras case it was pointed out that in the case of Court-sale of shares the purchaser will acquire a complete title to the share when delivery thereof is effected by passing a written order of prohibition by the Court as contemplated by Clause 3 of Rule 79 and that the compliance with the procedure prescribed by Rule 80 is not obligatory. The same view was taken in - Tadepalli Nagahhushanam (dead) and Others Vs. Siram Ramachandra Rao and Others, It was held in that case that where a Court sale in respect of the shares is confirmed and an order contemplated by Clause 3 of Rule 79 is issued no further steps need be taken for completing the transmission of the shares in favour of the purchaser. It is seen from the articles of association of the first Defendant company that separate provisions have been made to govern transfer of shares as distinct from the transmission of shares. These articles are contained in Ext. 22. Articles 14 to 17 deal with transfer of shares while Articles 18 to 21 deal with transmission of shares. In the case of transfer of shares the same has to be effected by the execution of document in the manner prescribed by Article 15. The execution of such a (sic)ent is (sic) case of transmission of shares. On the other hand, such transmission will be recognised and implemented by the company on production of the evidence in proof of such transmission. The Plaintiff in whose favour the shares cohered by Ext. C share certificate had been transmitted by the sale in O. S. 63/1108 has produced the sale certificate Ext. A in support of his claim to the shares and it is sufficient to substantiate his claim to have his name entered in the share Register of the company, as the holder of these shares. For the reasons stated above, we hold that the objection that the Plaintiff''s suit based on Ext. A is unsustainable for the reason of non-compliance of the procedure prescribed by rules 79 and 80 of Order 21, Code of Civil Procedure. cannot prevail.

Still Anr. objection urged on behalf of the Defendants is that the Plaintiff''s remedy is by way of an application u/s 38 of the Companies Act and not by way of a fresh suit like the present case. No doubt that Section provides for an application for rectification of the share register of the company and for consequential reliefs being granted to the applicant. Even though such a summary procedure is prescribed by the Companies Act it cannot be said that the provision takes away the right of the party to seek the necessary reliefs by way of a regular suit. The provisions of the Companies Act do not by express words or by necessary implication take away the party''s right of suit in respect of matters coming within the scope of Section 33. Hence it has to be taken that the right of suit available to the party under Common Law subsists in spite of the provision made in Section 38 of the Companies'' Act. It will be open to the party to resort to the summary procedure prescribed by that section or to seek reliefs by instituting a regular suit. In - ''Rameshchandra v. Jogini Mohan'' AIR 1920 Cal 789 (D). it was held that "in a simple case where an immediate rectification is essential, it may be desirable to apply u/s 38, but if the case is at all complicated, an action should be brought". This decision was followed in - T.A.K. Mohideen Pichai Taraganar Vs. Tinnevelly Mills Co. Ltd. and Others, where also it was held that a regular suit for rectification of the share Register and for consequential reliefs is maintainable and that the remedy in that direction is not confined to an application u/s 38, Companies Act.

In the present case the Plaintiff had as a matter of fact filed an application to the. District Court u/s 38, Companies Act. That Court found that the questions raised by the parties were of a complicated nature and which could only be properly dealt with in a regular suit and accordingly directed the applicant to institute a fresh suit to get the reliefs claimed by him. Ex. D is the copy of the order striking off his application with a direction to institute a regular suit. The present suit was accordingly instituted by the Plaintiff. Considered in the light of all these aspects, we hold that the present suit is maintainable.

The position taken up by the Defendant is that the Plaintiff''s suit is governed by the three years'' period of limitation, prescribed by Article 48 or Article 49, Limitation Act. Article 48 governs suits for specific movable property lost, or acquired by theft, or dishonest misappropriation or conversion, or for compensation for wrongfully taking: or detaining the same. Article 48-A applies to suits to recover movable property conveyed or bequeathed in trust, deposited or pawned, and afterwards bought from the trustee, depository or pawnee for a valuable consideration. Article 48-B relates to suits to set aside sale of movable property comprised in a Hindu, Muhammadan or Buddhist religious or charitable endowment, made by a manager thereof for a valuable consideration. Article 49 applies to suits for other specific movable property, or for compensation for wrongfully taking or injuring or wrongfully detaining the same. The reliefs claimed in the present suit do not come under the category of any of the reliefs specified in Articles. 48 and 49. There is no other particular article applicable to suits of this nature. In the absence of any other specific article governing the present suit, it has necessarily to be taken that the present suit is governed by the residuary article i.e., Article 120, Limitation Act. That this is the article applicable to suits for rectification of the Share Register of a company and for other incidental reliefs is also the view taken in - The Jawahar Mills Ltd. Vs. Sha Mulchand and Co. Ltd.,

The next point for decision is whether by virtue of the Court sale evidenced by Ex A the Plaintiff has acquired the ownership'' in respect of all the 121 shares covered by the Share Certificate Ext. C. The Court sale of these shares was only on 15-3-1102. Lond prior to that date the 5th Defendant had transferred 60 of these shares in favour of Defendants 2 to 4. Exs. 24, 25 and 26 are the assignment deeds under which such a transfer was effected by the 5th Defendant. All these assignment deeds were executed on 3-11-1101. Ext. XXXV shows that 40 shares were transferred in favour of the 2nd Defendant, Ext. XXV shows that 25 shares were transferred in favour of the 3rd Defendant and Ext. 26 shows that 25 shares were transferred in favour of 4th Defendant. The Board of Directors of the company at the meeting held on 30-12-1101 recognised these transfers as proper and valid and accordingly resolved to register the names of the transferees as the holders of their respective shares in the books of the company. This is evident from Ext. 5 the minutes of the Directors'' meeting held on 3-12-1101 that Exs. 2 to 4 and 6 to 30 which are the account and other registers maintained by the first Defendant company show that from 3-12-1101 onwards Defendants 2 to 5 were treated as the holders of the 40 shares, 25 shares, 25 shares and 31 shares respectively.

It is contended on behalf of the Plaintiff that the transfer of shares as per the assignment deeds, Exts. 24 and 25 in favour of Defendants 2 and 4 were effected fraudulently and as a result of collusion between these Defendants and the 5th Defendant with notice that all the 121 shares covered by Ex. C had already been pledged with the Plaintiff. According to the Plaintiff, the 5th Defendant had pledged these shares with him on 5-8-1101. The document evidencing the pledge has not been produced in the case and therefore it is not possible to know the nature, the terms and the conditions of the pledge.

From the pledge itself no notice can be attributed to the company or to Defendants 2 to 4. Admittedly, the Plaintiff did not issue any notice to the Defendants and the company intimating them of the pledge of these shares in his favour by the 5th Defendant. Plaintiff''s suit (O. S. 63) for the enforcement of the pledge was instituted only in the year 1108. Present Defendants 2 to 4 were not made parties to O. S. 63 of 1108 and hence it cannot be said that they had any notice of the proceedings in that case which terminated with the issue of the Sale Certificate Ext. A to the Plaintiff. The 1st Defendant company was a party to that suit and thus it can be taken that in the .year H08 the Company had notice of the pledge in favour of the Plaintiff of the shares in question. But nearly seven years prior to that date, Defendants 2 to 4 had become the transferees in respect of 90 of these shares and they had been duly recognised as the holders of those shares. From the position occupied by Defendants 2 to 5 in relation to the first Defendant company the Plaintiff wants the Court to draw the inference that all these Defendants had notice of the pledge in his favour of the shares in question. The 5th Defendant has all along been the president of the first Defendant company. It is stated that the 4th Defendant was the Managing Director of the company and Defendants 2 and 3 are his brOrs. . The 4th Defendant as D. W. 2 has stated that he became the Managing Director of the company only in the year 1105." The transfer of the shares in favour of Defendants 2 to 4 by the. 6th Defendant was in the year 1101. There is the evidence of the 4th Defendant as D. W. 2 that Defendants 2 to 4 obtained the assignment of these shares as per Exts. 24, 25 and 26, in all good faith and for valuable consideration and without any knowledge of the pledge of these shares in favour of the Plaintiff. The 6th Defendant has been examined as D. W. 3 and he has also supported the evidence given by D.W. 2. The 5th Defendant has not stated that either before or subsequent to the execution of the assignment deeds Exs. 24 to 26 he has mentioned to the transferees anything of the pledge in favour of the Plaintiff. He has further stated that at the time of the assignment the security in favour of the Plaintiff was more than sufficient and that he bona fide believing that there was nothing wrong in executing assignment deeds Exs. 24 to 26. The trial Court has believed the version given by D. Ws. 2 and 3.

As against such evidence adduced on behalf of the Defendants there is practically no counter evidence on the Plaintiff''s side to make out his allegation that the aforesaid assignments were unsupported by consideration and brought into existence fraudulently and in collusion. Plaintiff alone has been examined on his side and he has not deposed to any such fraud and collusion. The mere fact that the 5th Defendant who effected the transfers of these shares in favour of Defendants 2 to 4 after the same had been pledged with the Plaintiff happened to be the President of the first Defendant company, cannot by itself be taken to mean that the company had knowledge of the pledge even before such transfers were recognised as proper and valid as per the proceedings evidenced by Ext. V. Under the constitution of the company the President has no duties cast upon him to disclose all his personal dealings to the company. As a matter of fact, there is no evidence to show that there was such a disclosure in respect of the pledge of the 121 shares covered by Ex. C to the Directors when they had passed the proceedings under Ex. V. Under such circumstances the knowledge of the 5th Defendant regarding the pledge cannot be deemed to be the knowledge of the Directors of the company. There is also nothing to show that the pledge in favour of the Plaintiff was under a registered document. At best it could only be taken to have been effected under an equitable mortgage by deposit of the Share Certificate Ex. C. At the same time it was not accompanied by any transfer either in full or in blank executed by the mortgagor. As already stated the deposit of the Share Certificate by the 5th Defendant with the Plaintiff by way of security for the loan was not intimated to the company. In the absence of any such intimation there was nothing wrong in the company having recognised the transfer of the shares in favour of Defendants 2 to 4 under Exts. 24 to 26 as proper and valid and in giving effect to such a transfer.

On behalf of the Plaintiff it is urged that without the production of the Share Certificate Ex. C the company should not have recognised the transfer of these shares under Exts. 24 to 26. The note at the foot of Ext. C is relied on in support of this contention. That foot-note is as follows:

No transfer of any portion of the shares comprised in this certificate can be registered unless accompanied by this certificate. Payment of calls will be endorsed on the back hereof.

At the outset it has to be stated that this footnote cannot have the force of a provision in the Articles of Association of the company contained in Ex. 22. Ex. 22 contains no provision insisting on the production of the share certificate along with the deed of transfer. The requirements of a valid transfer are provided for in Article 15, and if such requirements are satisfied by the execution of a deed of transfer as contemplated by that article, it will be perfectly open to the company to recognise such transfer if the company is satisfied that the transfer was effected (sic)ona fide and for valuable consideration. The note at the foot of the Share Certificate is obviously intended as a caution to the holder of the Share Certificate and it gives an option to the company to call for the production of the Share Certificate also in respect of the transfer of any particular share. All the same the non-exercise of that option cannot by itself invalidate the act of the company in recognising a transfer otherwise valid and proper. A similar question arose for consideration in - ''Rain Ford v. James Kaith and Blackman Co. Ltd.'' (1905) 1 Ch D 296 (F). There also the share certificate contained a footnote stating that "without the production of this certificate no transfer of shares mentioned therein can be registered". C, the holder of such a share certificate had pledged the same with R as a security for a loan. Subsequently C sold the same to Y. The directors of the company acting in good faith accepted the transfer in favour of Y and registered the shares in his name and issued a fresh certificate in his favour, even though the Share Certificate held by C was not produced along with the deed of transfer. It was held that R was not entitled to enforce the pledge in his favour against the company and that the foot-note in the Share Certificate did not amount to a representation to or contract with the holder of the certificate that the shares would not be transferred without the production of the certificate, but was only a warning to the owners of the shares to take care of the certificate because he could not compel the company Ho register a transfer without its production."

Applying these principles to the facts of the present case it is clear that there was nothing, wrong or illegal in the first Defendant company having recognised the transfer of the shares in favour of Defendants 2 to 4 as proper and valid and entering their names as holders of the respective shares in the1 Share Register of the company. The result is that when the Plaintiff, became the auction purchaser under Ex. A there were only 31 shares standing in the name of the judgment-debtor who is the present 5th Defendant. The title to these 31 shares alone passed to the Plaintiff under that Court sale. It follows therefore that on the strength of the sale certificate Ex. A Plaintiff is not entitled to enforce any claims in respect of the remaining 90 shares which had already been registered in the names of Defendants 2 to 4. So far as these Defendants and the Shares registered in their names are concerned the suit has to fail and Plaintiff can get a decree in this case only in respect of the 31 shares standing in the name of the 5th Defendant.

In the result this appeal is allowed only in respect of the 31 shares covered by Ex. C still, standing in the name of the 5th Defendant.- Plaintiff is given a decree for the several reliefs claimed in the plaint only in respect of these 31shares subject to the lien in favour of the 1st. Defendant company for whatever amount that may be due to the company from the 5th Defendant up to 15-3-1112 the date of Court sale under Exhibit A. Plaintiff will get proportionate cost throughout from the 5th Defendant. In other, respects the appeal is dismissed with proportionate costs to Respondents 1 to 4. The objection memoranda filed on behalf of Respondents 1, 4 and 5 are dismissed.