JOSEPH MICHAEL Vs. SOUTH INDIAN BANK LTD.

JUDGEMENT

(1.) THESE petitions were heard together and are considered and disposed of by this common order as the question involved in all these cases is the same, namely, the legality of the decision of the respondent -bank in refusing registration of the transfers of shares of the banking company ,to the respective petitioners. The reason given for refusal is the same in all the cases. The facts in B.C.P. No. 2/75 are stated hereunder and the facts in the other cases are not mentioned since it will be practically a duplication of the facts in B.C.P. No. 2/75 with only minor changes in the number of shares transferred to the respective petitioners therein. The authorised share capital of the respondent -banking company is Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each. The issued and subscribed share capital of the company is Rs. 36,47,700 consisting of 36,477 equity shares of Rs. 100 each on which Rs. 50 per share has been called up. The 2nd respondent held 210 equity shares in the company. The petitioner purchased the said shares on January 22, 1975, for a consideration of Rs. 10,000 and forwarded the share transfer deed duly executed by the transferor and the transferee together with the share certificates relating to the said shares to the company for registering the transfer and entering the name of the petitioner in the register of members of the company as the holder of the said 210 shares. The company informed the petitioner by letter dated 18th March, 1975, that the board of directors of the company in exercise of their powers under regulation 42 of the articles of association of the company read with Section 111(1) of the Companies Act have refused the application of the petitioner for the transfer of the shares. The petitioner alleges that the board of directors with the ulterior object of preventing the petitioner from partaking at the next annual general meeting of the company to be held on or before 30th of June, 1975, and in the election of the directors of the meeting have capriciously and in bad faith refused to register the transfer of the said shares to the petitioner. The petitioner is a businessman owning movable and immovable properties worth a few lakhs of rupees and he can easily raise the necessary funds to pay the balance amount due on the shares as and when calls are made. The petitioner has not in any way acted against the interest of the company and the company's interest will not in any manner be prejudicially affected by admitting the petitioner to the membership of the company. The company ought to have registered the transfer. But the board of directors have mala fide refused to register the transfer and thereby committed default and unnecessary delay in entering in the register of members of the company the fact that the petitioner has become a member of the company and that the 2nd respondent has ceased to be a member of the company in respect of the said 210 shares. It is further alleged that the petitioner reasonably apprehends that the directors have refused registration with the ulterior object of compelling the shareholders to transfer their shares in favour of the relations of the directors at a low price. Though regulation 42 of the articles of association provides thus: 'The directors may decline to register any transfer of shares on which the company has a lien and, in case of shares not fully paid up, may refuse to register the transfer to a person of whom they do not approve. The directors may in their absolute discretion and without assigning any reason refuse to register the transfer of any shares to any person whom, it will, in their opinion, be not desirable in the interests of the company to admit to membership. The directors shall not be bound to give any reason for such refusal. ' the company has been regularly registering all transfers of its shares from its incorporation. The refusal of the registration of transfer in this case is not bona fide or in the interests of the company and, therefore, this petition is filed under Section 155 of the Companies Act for an order directing the company to rectify the register by entering on the register the fact that the 2nd respondent has ceased to be a member and the petitioner has become a member of the company.

(2.) THIS petition is opposed by the 1st respondent -banking company. It is contended that this petition under Section 155 of the Companies Act is not maintainable in view of the fact that there is no ' default' or 'unnecessary delay ' within the meaning of Section 155(1)(b) of the Companies Act in entering in the register the fact of the petitioner becoming a member of the company. The board of directors in exercise of their discretion under Article 42 of the articles of association consciously refused the registration of the transfer as the proposed transfer was found to be not in the nature of genuine investment but an attempt at cornering the shares of the bank and to circumvent the provisions contained in Section 12(2) of the Banking Regulation Act, 1949, and in contravention of the policy of the Reserve Bank of India and as such it is not desirable in the interests of the company to admit the proposed transferee to membership. The board of directors of the company have exercised their discretion bona fide and in the best interests of the company and it is not competent for the petitioner to challenge this refusal in a petition under Section 155 of the Companies Act. Including the application of the present petitioner there were 20 applications in all, the applicants forming a group for cornering of shares in the company and for controlling the affairs of the company in their own way and against the interests of the company. This was thought to be an unhealthy trend as regards the development of a joint venture undertaking, and the Reserve Bank in their circular dated 13th January, 1970, had directed to obtain the acknowledgment or sanction of the Reserve Bank before effecting the transfers which are intended to have a controlling interest in the company or which are not in the nature of genuine investments. The 20 applications of the group including that of the petitioner were to transfer 1,603 shares with a paid -up amount of Rs. 80,150 forming 4.5% of the total paid -up capital of the company. Section 12 of the Banking Regulation Act prescribes that no person holding shares in a banking company shall exercise voting rights in excess of 1% of the total voting rights of all the shareholders of the company. Four members of the same family have purchased 1,067 shares for a total value of Rs. 53,350. On enquiries, it was found that the transfers of the shares in favour of the petitioner and those in his group are not for the purpose of genuine investments, but only an attempt to corner the shares of the company and to have a controlling interest in the company in violation of the provisions contained in Section 12(2) of the Banking Regulation Act. So, the board of directors forming an honest opinion that in the interests of the company it was not desirable to admit the proposed transferees to membership refused the registration. A case of conscious refusal of the registration cannot be a ground for invoking the remedy of rectification under Section 155 of the Companies Act and the remedy of an appeal to the Central Government under Section 111 of the Companies Act has not been availed of. The petitioner has no locus standi to come to this court under Section 155 of the Act. It was further alleged that one of the transferees in the group filed a suit before the Trichur Munsiffs Court against the refusal and made an attempt to stay the annual general meeting of the company which was due to be held on 16th June, 1975, but the same was dismissed by the munsiff's court stating that the remedy of the aggrieved person is to file an appeal under Section 111 to the Central Government and not a suit. The counter -affidavit concludes with 'the contention that the petition is unsustainable on the merits as well.

(3.) BEFORE I proceed to discuss the merits of the respective contentions it is necessary to keep in mind the provisions of the Companies Act relating to the transfer of shares and the procedure to be followed for the registration of that transfer. When a share is transferred an application for registration of the transfer has to be made under Section 110 of the Act to the company. Section 111 provides that the company may refuse to register the transfer if the articles of association of the company empowers it. If it is refused that fact has to be intimated within two months to the transferee and the transferor. Default in this matter is punishable with fine. On such refusal an appeal is provided for to the Central Government under Section 111(3) within two months of the intimation of refusal. The Central Government after causing a reasonable notice to be given to the company and also to the transferor and the transferee and giving them a reasonable opportunity to make their representation, if any, direct either that the transfer shall be registered or need not be registered. Sub -section (5A) enables the Central Government to call upon the company to disclose the reasons for the refusal and to draw adverse presumption if reasons are not disclosed. If on appeal registration of transfer is allowed, the company is required within a specified time to give effect to the decision. Section 155 provides that a person aggrieved by the ' default' or ' unnecessary delay ' on the part of the company in entering on the register the fact of any person having become a member may apply to the court for directing the rectification. On such an application the court may also decide any question relating to the title of any person who is a party to the application to have his name entered in the register and general power is given to decide any question which it is necessary or expedient to decide in connection with the application for registration. The argument of the respondent's counsel is that when a specific remedy is given to appeal, Section 155 of the Act does not apply and he further pointed out that the expression ' default' used in Section 155 does not take within it a conscious refusal under Section 111. According to him default is culpable neglect of some duty. In support of this he referred to the decision of the Calcutta High Court in Nazamunnessa Begum v. Vidya Sugar Cotton Mills Ltd. [1963] 33 Comp Cas 36 (Cal). At page 42, it is observed thus: ' But an application is also sustainable when ' default' is made by the company. ''Default' to my mind is not ' refusal'. I may quote with respect the meaning given to this word by Bowen L. J. in In re Young and Harston's Contract [1886] 31 Ch D 168 at page 174 (CA), which is as follows: ' Default is a purely relative term, just like negligence. It means nothing more, nothing less, than not doing what is reasonable under the circumstances - -not doing something which you ought to do, having regard to the relations which you occupy towards the other persons interested in the transaction.' ' Reference was also made to the meaning of the word ' default' in Siroud's Judicial Dictionary, volume I, page 757 and also Oxford Universal Dictionary, volume I, page 505. The complaint of the petitioner here is that the company has failed to do what is reasonable under the circumstances and the refusal is a default as well. If the petitioners establish that the action of the company is unreasonable it will amount to a default and the court can exercise the power under Section 155 of the Act. So there is no substance in this contention of the respondent.