Mathew Michael v. Teekoy Rubber India Ltd — 1981 DIGILAW 90 (KER)

JUDGMENT M.P. Menon, J. 1. These are petitions under S.155 of the Companies Act for rectifying the register of members of the Teekoy Rubbers (India) Ltd., Palai. The petitioners belong to a well known family engaged mainly in the abkari business. They purchased 15,100 equity shares and 31,750 preference shares and applied for registration of the transfers, but the company refused to register them. And the prayer is to direct the company to enter the names of the transferees in its register of members in the place of the transferors. 2. The facts are identical in all the petitions and they have all been tried together, so that it is enough to refer to the pleadings in one of them. The Teekoy Rubbers (India) Ltd. is a public company limited by shares, with its registered office at Palai. The authorised capital is Rs. 16 lakhs, made up of 60,000 cumulative preference shares and 1,00,000 equity shares of Rs 10 each. The company is listed in the Madras Stock Exchange and its shares are quoted. Regulation.24 of the Articles, of Association of the company reads: "The Board may, in their absolute discretion and without assigning any reason, decline to register - (a) the transfer of a share to a person of whom they do not approve; (b) any transfer of shares on which the company has a lien." It is alleged in C.P. 75/79 that notwithstanding the above provision, the company has not been refusing to register transfer of any shares during the last so many years. The petitioner purchased 550 equity shares at prevailing market rates and forwarded to the company, the share transfer deeds duly executed by the transferor and the transferee, together with the concerned share certificates, for registration of transfer. But by letter dated 14th August 1979 the company informed him that the Board of Directors had declined to register the transfer. The share certificates were returned along with the letter, but not the share transfer deeds. These were kept back with a view to prevent the petitioner from returning the transfer deed to the transferor and claim back the purchase price. The Directors of the company have been purchasing shares in their names and in the names of relatives and nominees at about the same time; their idea was to purchase the said shares themselves from the original transferors, at lower rates. The Directors of the company have been purchasing shares in their names and in the names of relatives and nominees at about the same time; their idea was to purchase the said shares themselves from the original transferors, at lower rates. The provision in Regulation.24 conferring an absolute discretion on the Directors is invalid as it contravenes the right of a shareholder to freely deal with his shares. It is an unreasonable restraint on trade. Having made a representation in its prospectus that arrangements will be made for dealing with the shares in the Stock Exchange, the company is also estopped from declining to register transfers obtained through the Stock Exchange. Even if Regulation.24 is valid, the Directors cannot use the power thereunder for personal ends; and in the instant case, the Directors have acted maliciously, capriciously and oppressively, without regard to the interests of the company. The petitioner is a businessman and he has at no time acted against the interests of the company; his admission to membership will in no way prejudice the company. The Directors have declined to register the transfer on the only ground that they do not approve of the petitioner; and there are no reasons at all to disapprove of him. The Directors have acted mala fide in the exercise of their power, without caring to enquire whether the petitioner is quarrelsome or in any other way personally disqualified. They have acted in their own interests and not in the interests of the company. 3. These allegations are denied in the counter affidavit sworn to by the Managing Director of the company. It is claimed that in declining to register the transfers in question, the Directors had only exercised their discretion under Regulation.24, and that too, in the interests of the company and the shareholders. They did not act on wrong principles or for collateral purposes or with oblique motives. They had no intention to corner the shares. Regulation.24 is valid and similar provisions are found in the Articles of Association of every company. They are also binding on the company and each of its share holders. The petitioners are persons well known to the Directors, and the latter bona fide thought the former were prisons who could not be approved of. There were reasons to hold that it would be undesirable, in the interests of the company, to admit them to membership. They are also binding on the company and each of its share holders. The petitioners are persons well known to the Directors, and the latter bona fide thought the former were prisons who could not be approved of. There were reasons to hold that it would be undesirable, in the interests of the company, to admit them to membership. Some of the transfer deeds were also incomplete and defective. They were not duly stamped within the meaning of S.108 of the Companies Act, read with S.12 and 17 of the Indian Stamp Act. 4. The question relating to the incomplete or defective nature of the transfer deeds can easily be disposed of. The averments in the counter affidavits in this regard are vague and not specific. All that is stated is that the adhesive stamps were not seen cancelled in accordance with law. The transfer deeds have all been produced in court; but no attempt was made during the cross examination of PW 1 and PW 2 and even during the examination of RW 1, to point out which the defective deeds were. Ext. B2 is the resolution passed by the Board on 14th August 1979 declining to register the twenty transfers in question, and it reads: "Resolved that the Board does hereby decline to register the transfers of the following 31,750 preference shares and 15,300 ordinary shares of the company, since the transfer deeds in respect thereof are incomplete and / or defective and / or not duly stamped as required by law and since the transferees are persons of whom the Board does not approve for the various reasons discussed". Here again, the decision is omnibus, and it is not possible to find out which the defective or incomplete transfers are, or why they have been so considered. It is common ground that many of the transfer deeds are complete and without defects. At the time of hearing counsel for the company produced a 'statement' setting out the details of the defects; and on a cursory examination, five out of the sixteen cases noted as defective were not found to be really defective. In my view, the petitioners have not been given a reasonable opportunity to meet the company's case about incomplete and defective transfer deeds, and the refusal to register for that reason alone cannot be sustained. In my view, the petitioners have not been given a reasonable opportunity to meet the company's case about incomplete and defective transfer deeds, and the refusal to register for that reason alone cannot be sustained. But that does not solve the problem because in respect of all the transfers, including those allegedly defective, there is the additional ground that the transferees are persons who could not be approved of. 5. Though a point was raised in the pleadings that Regulation.24 was invalid, the same was not pressed at the hearing. What remains to be considered therefore, is whether the discretion exercised by the Directors under the said Regulation, can be interfered with in proceedings under S.155. 6. There appears to have been some controversy regarding the nature of the Company Court's jurisdiction in proceedings for rectification. As pointed out by Desai. J. in Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel (1978 (48) Comp. Cas. 438) the English courts were always taking the view that the jurisdiction was summary in nature. That was because under the Rules framed, an application for rectification had to be made by originating summons. But in India the Company Court is approached under S.155 with a "petition", which is more or less analogous to a suit. Some of the earlier Bombay decisions were rendered under Rules framed by the High Court. These decisions cannot apply to petitions under S.155 where the court is empowered to decide "any question which it is necessary or expedient to decide in connection with the application for rectification". The jurisdiction conferred by S.155(3) is wide and comprehensive, and I am in respectful agreement with the view taken in Gulabrai's case (1978 (48) Comp. Cas. 438) that it is not summary. 7. The fact however remains that irrespective of the nature of the jurisdiction, courts have been reluctant to interfere with the decision of Directors in the matter of registering transfers, where the articles of association confer on them an absolute discretion. Decided cases show that the power to refuse to register a transfer is always presumed to have been exercised bona fide, and that unless the articles otherwise provide, the Directors are not bound to disclose their reasons. Decided cases show that the power to refuse to register a transfer is always presumed to have been exercised bona fide, and that unless the articles otherwise provide, the Directors are not bound to disclose their reasons. The presumption will be replaced when a petitioner positively proves that the power has been used without bona fides i.e., when he succeeds in showing that the Directors have acted "oppressively, capriciously or corruptly or in some way mala fide". The leading case on the subject, often quoted by courts in India also, is In re Grasham Life Assurance Society: Ex parte Penny (1872 (8) Ch. App. 446). The company in that case was formed by a deed of settlement which provided that any shareholder could transfer his share to any person approved by the Board. One De Paiva sold his shares to Penny, but the Directors refused to register the transfer. Paiva and Penny took out a joint summons under S.35 of the Companies Act, 1862 and the Master of the Rolls directed the transfer to be registered. It was observed that the Directors had failed to establish any ground personal to the purchaser and that it was for the court to decide whether the objection was reasonable. The Directors having failed to disclose their reasons, the court was free to hold that there was really no ground to be disclosed at all. But the Court of Appeal reversed the decision of the Master of the Rolls on the footing that the Directors were in a fiduciary position to the company and the shareholders, and that unless breach of trust or corrupt or arbitrary conduct was established, the court had no jurisdiction to sit in appeal over the decision of the Directors. The court could interfere only in exercise of its duty as between the cestui oue trust and the trustees. Mellish, L. J. said: "But it is further contended that in order to secure the existing shareholder against being deprived of the right to sell his shares, the directors are bound to give their reason why they reject the transferee, and if they reject him without giving a reason, that is ground for which the Court ought to infer that they are acting arbitrarily. I cannot agree with that. I cannot agree with that. It appears to me that it is very important that the Directors should be able to exercise the power in a perfectly uncontrollable manner for the benefit of the shareholders; 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." The principle seems to be this. The memorandum and articles of association of a company bind the company and shareholders, and where such a binding contract invests the Directors with discretion to refuse to register transfer of shares without assigning reasons, the Directors can rest on the contract and refuse to disclose their reasons; and in view of the contract again, the shareholder also cannot attack the exercise of discretion, unless it be on grounds of equity and breach of trust. The contract will be enforced and the Directors relieved of the duty to disclose, so long as it is not shown affirmatively that the power is exercised capriciously, wantonly, or oppressively. 8. In the present case, Regulation.24 confers, in a sense, only a limited discretion on the Directors, though the word "absolute" is there. The discretion has to be exercised on grounds personal to the transferee i. e. any refusal to register a transfer can only be on the ground that he is a person the director do not approve of. If other grounds are brought out, that will be outside the scope of the discretion conferred. But the Regulation clearly provides that the Directors are not bound to disclose any reason for disapproving of the transferee. Of course, if they disclose the reason, the court can go into the question whether they are good reason i. e. reasons in law. But where no such disclosure is made, the authorities seem to take the view that the court will not compel them to make a clean breast of it, in rectification proceedings. The presumption is that the directors have acted bona fide, and the burden of displacing it by cogent evidence will be on the complaining transferee. 9. The above approach has its reasons in history and the social philosophy which influenced the development of company law in England. A company is an association of people for carrying on business for gain. The presumption is that the directors have acted bona fide, and the burden of displacing it by cogent evidence will be on the complaining transferee. 9. The above approach has its reasons in history and the social philosophy which influenced the development of company law in England. A company is an association of people for carrying on business for gain. Where their number is small, each having confidence in the others, the relationship takes the form of a partnership, in which each partner is an agent of the other. But where the number is large, many of them not knowing much about the others, the venture has to adopt a different form of organisation. In the initial stages, these larger unincorporated bodies of England were also developing on the lines of partnership, something like a quasi partnership with fluctuating membership. While partnership law stood on contract and agency, the Chancery Courts applied the equitable doctrine of trust to the larger bodies. Incorporation, with the legal consequence of the body acquiring a personality different from those who were behind it, was then practically unknown in commercial circles. Ecclesiastical and public bodies like monasteries and boroughs had acquired such personality by charter from the Crown, and the merchant guilds first emulated their example by obtaining charters, mainly for getting monopoly in certain lines of trade. Even then each member of the guild was trading on his own account; trading on joint account became familiar only with the expansion of trade when companies like the East India Company obtained charters for monopolistic foreign trade. Monopoly in domestic trade had ceased to be popular even by the 17th century and when the South Sea Bubble burst in the beginning of the 18th century, Parliament had to intervene and declare that corporate bodies functioning without proper authority were illegal. The legislations that followed were also directed against preventing abuses and fraud in joint stock business. To some extent at least, their effect was to suppress the growth of joint stock business. But the laws of economic growth were beyond the reach of Parliament and the Government. Companies and promoters flocked to lawyers, and their ingenuity led to the formation and growth of business associations where the subscribers of capital agreed, under deeds of settlement, to vest the property in a separate body of trustees some of whom would be the Directors. But the laws of economic growth were beyond the reach of Parliament and the Government. Companies and promoters flocked to lawyers, and their ingenuity led to the formation and growth of business associations where the subscribers of capital agreed, under deeds of settlement, to vest the property in a separate body of trustees some of whom would be the Directors. Equity courts which were already applying the principles of trusts to unincorporated bodies encouraged this development by allowing the trustees to sue and be sued on behalf of such bodies. The first seeds of incorporation were thus sown, not with the aid of legislation, but in the face of it. The need for development of railways however compelled Parliament to have a second look into the matter. The Trading Companies Act of 1834 empowered the Crown by letters patent to confer the privileges of incorporation on companies, thereby obviating the need for the more expensive and dilatory method of charters and special enactments. The Joint Stock Companies Act of 1844 was the first to draw a clear distinction between partnerships and joint stock companies. All new associations with more than 25 members could be registered provisionally, to be followed by complete registration on filing a deed of settlement containing the prescribed particulars. The Registrar of Companies, now a familiar figure, was created by this Act, and the method of incorporation by mere registration was also introduced. The principle of limited liability was still far away. By the middle of the 19th century the "railway mania" had reached its peak and public opinion had swerved in favour of recognising that principle. Still, in the Royal Commission of 1854, only a minority was bold enough to assert in favour of laissez, faire by observing that: "...... the interest of a community is best consulted by leaving to its members, as far as possible, the unrestricted and unfettered exercise of their own talents and industry". The limited Liability Act of 1855 stopped short of granting such unfettered freedom, though it provided for the limited liability of the members on complete registration of the company. Full freedom however arrived a few months later with the Joint Stock Companies Act, 1856. Provisional registration was done away with, and so too was the deed of settlement. The limited Liability Act of 1855 stopped short of granting such unfettered freedom, though it provided for the limited liability of the members on complete registration of the company. Full freedom however arrived a few months later with the Joint Stock Companies Act, 1856. Provisional registration was done away with, and so too was the deed of settlement. The memorandum and articles of association superseded the deed of settlement; and all that was necessary was for seven or more persons to sign and register the memorandum of association. The safeguards in the 1855 Act were also swept away, with the result that incorporation became a matter of course, and the principle became firmly entrenched that those who dealt with companies knowing them to be limited had only themselves to blame if they burnt their fingers. The Companies Act, 1862 which consolidated various enactments marked the heyday of unlettered freedom and uncontrolled discretion. The uneasy balance in the realm of ideas, politics and law has thereafter shifted with the compulsions of economic development, and the subsequent history of company law in England reflects only a movement away from the theory of absolute freedom, with the imposition of greater controls. 10. The policy behind In Re Grasham (1872 (8) CH, App. 466) it can thus be seen, was but a reflection of the social philosophy which then reigned supreme, of Laissez faire and of the sanctity of contract, to be relaxed only on equitable considerations. Breach of trust fraud and the like were the minimum requirements for courts to intervene, and where they were not affirmatively established by evidence, the contracts were sacrosanct. Solamon v. Salomon (1897 AC 22) was a classic example of the House of Lords refusing to tear the veil of incorporation to discover bare nominees and dummies among the shareholders of a company. In Foss v. Harbottle (1843 (2) Hare 461) the court declared that the internal affairs of a company could best be left to it. In Deny v. Peek (1889 (14) App. Cas. 337) it was held that an action in deceit would lie only when a misrepresentation is made fraudulently i.e. with knowledge of its falsity; Promoters and directors were under no duty of care, unless there was a preexisting contractual or fiduciary relationship. Those were days, as we have seen, when contract was the essence of the matter. Cas. 337) it was held that an action in deceit would lie only when a misrepresentation is made fraudulently i.e. with knowledge of its falsity; Promoters and directors were under no duty of care, unless there was a preexisting contractual or fiduciary relationship. Those were days, as we have seen, when contract was the essence of the matter. "Hands off contracts", was the gospel of the era. If you have contracted to suffer something, you cannot complain against its consequences - volenti non fit injuria: And the question raised by Mr. Minattur in these petitions is whether the above principles evolved in the above historical and social background, more than a century ago and in a different country, should still be adhered to in India in the closing decades of this century, when we have already declared ourselves in favour of a socialistic order of society and have even abrogated the right to property as a fundamental right, 11. The answer furnished on behalf of the company is that the concept of an in corporate body with limited liability is itself a product of western thought, and that so long as such business associations are allowed to exist and flourish on our soil, there is no reason to jettison the legal principles we have inherited. Until such time as you decide to abolish private property and overhaul the law of contracts, business organisations have to function under some legal set up, and the fiduciary nature of the duties and responsibilities of Company Directors cannot be ignored. Company law, it is asserted, has to be administered, as matters now stand, within the four walls of the Companies Act and the body of recognised legal principles which still remain to be codified. 12. It is well known that the most important feature of an incorporated company is the free transferability of its shares; and it is equally well settled that some restrictions on the right to transfer are also necessary in the interests of the company. S.111 of the Companies Act saves the power of a company, under its articles of association, to refuse to register a transfer. This is an indication that Parliament does not want to undermine the right or power of Directors to refuse registration of transfers, when the articles of association confer such a power on them. S.111 of the Companies Act saves the power of a company, under its articles of association, to refuse to register a transfer. This is an indication that Parliament does not want to undermine the right or power of Directors to refuse registration of transfers, when the articles of association confer such a power on them. But sub-s.(3) of S.111 provides for an appeal to the Central Government against the decision of the Directors. An appellate authority can normally exercise all the powers of the original authority and in this view, the provisions of sub-s.(3) constitute a fetter on the uncontrolled discretion of the Directors. With the introduction of sub-s.(5A) by Act 65/60, empowering the Central Government to require the company to disclose its reasons for the refusal to transfer, the so called absolute discretion of the Directors and the sanctity of the contract based on the articles of association have lost much of their validity. If it was the intention of Parliament that the Directors' discretion should remain uncontrolled and that they could not fairly and properly exercise it if they are compelled to give reasons, as Mellish, J. had thought in Gresham's case (1872 (8) Ch. App. 446) such an amendment would not certainly have been made. And the argument on behalf of the petitioners is that the company court should take the cue from this deviation in policy and free itself from self imposed fetters in matters of rectification. What is the content of the freedom, the power, the fiduciary duty or responsibility of Directors, it is asked, when they are available only in proceedings under S.155 and vanish into thin air when the matter is taken up under S.111? The very introduction of sub-s.(5A), it is suggested, is a recognition by Parliament that the so called immunity of the Directors, founded on the articles of association, can no longer be recognised. Learned counsel for the company would contend that so long as S.155 is not likewise amended, the court's jurisdiction thereunder should remain supervisory, and distinct from the Central Governments appellate power under S.111. And to this, the petitioners would reply by pointing out that specific conferment of a power to call for reasons had to be conferred by statute in the case of a body like the Central Government, whereas a court had always such power under O.11 CPC and S.165 of the Evidence Act. 13. And to this, the petitioners would reply by pointing out that specific conferment of a power to call for reasons had to be conferred by statute in the case of a body like the Central Government, whereas a court had always such power under O.11 CPC and S.165 of the Evidence Act. 13. Again, counsel for the petitioners would refer to the various amendments made to the Companies Act from time to time, showing an unmistakable trend towards clipping the freedom of the Directors and of companies in general, in the public interest. S.58A, 58B, 153A, 153B, 187C, 187D, 197A, 198, 205A, 205B, 224(1A), 233A, 233B etc., are cited as instances where controls are enforced in areas where there was formerly more freedom. S.396 empowers the Central Government to bring about amalgamation of companies in the public interest. Prejudice to the public interest is also a ground for interference in oppression and mismanagement proceedings under S.397 and 398, as also in proceedings under S.408. This emphasis on public interest, it is argued, marks a clear departure from the principles of laissez faire and the theory of non intervention on which the courts in England were accustomed to recline. 14. When the Directors of a company refuse admission to membership to a transferee of shares on grounds personal to him, and when they are held to be free not to disclose their reasons, does it not amount to condemning a person without even telling him why he is branded as undesirable? The principles of natural justice may or may not apply to exclusive clubs or voluntary bodies, but it is pointed out that a company whose affairs trench on matters of public interest, at least under our dispensation, cannot be equated to a self governing exclusive club. 15. The rival contentions do certainly raise interesting points, and some rethinking may probably be possible. But that has to be done, if at all, at higher levels. So far as I am concerned, the decisions of the Supreme Court in Bajaj Auto v. N. K. Firodia (1971 (41) Comp. Cas. I) and of a Division Bench of this Court in South Indian Bank v. Joseph Michael (1978 (48) Comp. Cas. 368) conclude the question. These decisions were rendered after most of the amendments referred to were effected. So far as I am concerned, the decisions of the Supreme Court in Bajaj Auto v. N. K. Firodia (1971 (41) Comp. Cas. I) and of a Division Bench of this Court in South Indian Bank v. Joseph Michael (1978 (48) Comp. Cas. 368) conclude the question. These decisions were rendered after most of the amendments referred to were effected. Sub-s.(5A) of S.111, in particular, was noticed in the Bajaj Auto case, and still, the observations of Mellish, J. in Gresham's case (1872 (8) Ch. App. 446) were referred to with approval. Apparently, the Directors' obligation to disclose reasons were limited to proceedings under S.111. In the South Indian Bank case (1978 (48) Comp. Cas. 368) also, those principles were reaffirmed. It is true that both were cases where reasons had been disclosed, and the question whether the directors could be compelled to disclose reasons in proceedings under S.155, in the light of S.111(5A), had not directly arisen. But it will be presumptuous to think that while their Lordships reiterated the principles of trust and fiduciary relationships as expounded by the English Courts, the attempt was only to recount ancient history, and to ignore the significance of subsequent developments. I would therefore have to proceed on the basis that in view of Regulation.24, the Directors in this case had a right to reject the transfer applications without giving reasons. There is a presumption that they have acted bona fide, in the interests of the company and the shareholders. This Court cannot compel them to place their cards on the table, unless there is positive evidence to show that they have acted arbitrarily, capriciously or corruptly. 16. And on this aspect, the material available appears to be far from, satisfactory. PW 1 is the petitioner in Company Petitions 79, 80, 82 and 84. The other petitioners are all members of his family. Members of the Kottukappilly family and their relatives control the company. Some of the Directors of the company and the petitioners live in the same Municipal town, and they know each other. On the question of bona fides, all that PW 1 stated was that the company had assigned no reasons for the refusal to transfer and that it should therefore be inferred that the Directors had no valid reasons to state, and that they had acted capriciously. On the question of bona fides, all that PW 1 stated was that the company had assigned no reasons for the refusal to transfer and that it should therefore be inferred that the Directors had no valid reasons to state, and that they had acted capriciously. In answer to a straight question in cross examination, witness however stated: "I can think of no particular reason for the company's refusal". PW 2 is the petitioner in C. P. No. 81/79. He purchased the shares direct from the L.I.C. at Rs. 20 a share. In chief examination, he stated that the Directors were attempting to reduce share values which a view to purchasing them in their own names, that the refusal to register was part of this design, and that they had been purchasing shares during the same period. But in cross examination, witness admitted that he could not say when such purchases were actually made and at what price; all that he could say was that the transfers were registered in September, 1979. He could not also deny the suggestion that the price paid was Rs. 30 a share. 17. Ext. A11 is the annual return of the company furnishing the details of transfers registered between 30th September 1978 and 29th September 1979. This shows that the Periyar and Pareekanni Rubbers Ltd., a company in which the Directors are interested, had acquired a large number of shares during the above period. One Thomas George Menamparambil, a relative of the Managing Director of the company, had also likewise acquired a large number of shares during the period. But such acquisition is not per se illegal. Nor is it shown that the acquisitions were at a low price. The petitioners' allegation was that the Directors had refused to register the transfers with the intention of bringing down share values so that they themselves could purchase them at low rates. That is not established. There is nothing on record to show that share values had gone down as a consequence of the rejection of the petitioners' transfer applications. Nor is there anything to show that the Directors and their relatives had taken advantage of the situation to purchase shares for themselves at comparatively lower rates. That is not established. There is nothing on record to show that share values had gone down as a consequence of the rejection of the petitioners' transfer applications. Nor is there anything to show that the Directors and their relatives had taken advantage of the situation to purchase shares for themselves at comparatively lower rates. So far as I could see, this was the only attempt made by the petitioners to positively show that the directors had acted corruptly, capriciously and arbitrarily; and in that, they have failed. The presumption thus stands unrebutted. It is not established that the Directors have acted on wrong principles or that they have acted otherwise than in the interests of the company and their shareholders. It is not made out that they have misused their fiduciary position. The contract embodied in Regulation.24 should therefore operate with all its vigour. The result is that there is no scope for interference under S.155. The Company Petitions accordingly fail and are dismissed, but without costs.