04 September 1970
Supreme Court


Case number: Appeal (civil) 546 of 1970






DATE OF JUDGMENT: 04/09/1970


CITATION:  1971 AIR  321            1971 SCR  (2)  40  1970 SCC  (2) 550  CITATOR INFO :  RF         1986 SC1370  (54,83)

ACT: Companies  Act,  1956 s. 111(3), s.  111(5A)-Appeal  against refusal  to  transfer  shares-Scope  of-Directors  power  to refuse  transfers Circumstances when such refusal cannot  be upheld.

HEADNOTE: A group of shareholders led by applied to have transfers  of certain shares of the appellant company registered in  their names  but the Directors refused to register the  transfers. In the course of an appeal by the F group of respondents  to the  Company Law Board against the refusal, and  upon  being asked by that Board to disclose the reasons for the refusal, the  appellant company gave three reasons : First,  that  F, who  was  the company’s Chief Executive had written  to  the Company  Law Board against the extension of the term of  the company’s   managing  agents  and  had  thus  acted   in   a treacherous fashion against the interest of the company;  it was  therefore  evident  that  F’s  design  was  to   create mischief;  secondly, the transfer of shares applied for  was part  of a design of the F group to acquire interest in  the company which was likely to result in a threat to the smooth functioning  of the management of the company, and  to  vote down the passing of any special resolution required for  the management  of the company; thirdly, the purchase of  shares by the F group was not with a view to a bona fide investment but  was  with  a mala fide purpose and  evil  design.   The Company  Law  Board  allowed the  appeal  and  directed  the appellant company to register the transfer of the shares. On appeal to this Court, HELD,  dismissing the appeal : (i) in refusing  to  register the  transfers, the Directors did not act bona fide nor  did they  act  in the general interest of the company.   On  the contrary,  they  acted upon a wrong principle  and  for  the oblique  motive  of squeezing out F. On the facts,  the  in- escapable   conclusion   was  that   the   Directors   acted arbitrarily  and with the collateral and corrupt  motive  of keeping their own group in control of the company.



It  was  apparent  that F. wrote to the  Company  Law  Board against the appointment of the Managing Agents in the larger interest of the company.  He was justified in opposing their re-appointment   without  a  specific  resolution   of   the shareholders  of the company and without a public notice  to the shareholders to represent their views in the matter. There  are  well  recognised safeguards  as  to  notice  and consent   for   passing  a  special   resolution.    Special resolutions are for limited purpose, and are not matters  of daily  occurrence or of daily routine  administration.   The mere  apprehension  that  special resolutions  will  not  be passed was not a legitimate reason. There  was  no evidence that the transferees belonged  to  a rival  concern.  Equally, there was no evidence that  the  F group ever obstructed 41 in  the  management of the company.  On  the  contrary  they advanced  large sums of money and F was largely  responsible for  the gradual growth and prosperity of the  company.   It was  therefore  an  abuse  of the  fiduciary  power  of  the Directors to refuse to register the transfers of the shares. [53 D; 54 D] (ii) Although the company’s Articles of Association provided that the Directors might at their absolute and  uncontrolled discretion decline to register any transfer of shares,  such discretion does not mean a bare affirmation or negation of a proposal.  Discretion implies just and proper  consideration of the proposal in the facts and circumstances of the  case. In  the exercise of that discretion the Directors  will  act for  the  paramount  interest of the  company  and  for  the general  interest of the shareholders because the  Directors are  in  a fiduciary position both towards the  company  and towards  every  shareholder.  The  Directors  are  therefore requited  to act bona fide and not arbitrarily and  not  for any collateral motive. [46 C] (iii)     If the Articles permit the Directors to decline to register transfer of shares without stating the reasons, the Court  would not draw un-favourable inferences  against  the Directors because they did not give reasons.  Where  however the Directors give reasons the Court would consider  whether they were legitimate and whether the Directors proceeded  on a right or wrong principle.  As a result of the introduction of   section  111(5A)  in  the  Companies  Act,  1956,   two consequences  follow.   First, if the  Articles  permit  the Directors not to disclose reasons for declining to  register a  transfer,  the statute confers power to  interrogate  the Directors  and  disclose  the  reasons.   Secondly,  if  the Directors do not disclose reasons, presumption can be  drawn against the Directors for non-disclosure of reasons in spite of being called upon to do go. [46 D] M/s Harinagar Sugar Mills Ltd. v. Shyam Sunder  Jhunghunwala JUDGMENT: Ltd., [1950] 2.A.E.R. 1120; Ex-parte Penney, L.R. 8 Ch. 446, Re.  Bede Steam Shipping Company Ltd., (1917) 1 Ch. 123; Re. Bell  Brothers  Ltd.,  7 Times Law Reports  689;  Pender  v. Lushington,  L.R. 6 Ch.  D. 70; Balwant Transport Co.   Ltd. Amraoti v. Y. H. Deshpande, A.I.R. 1950 Nag. 20; Re.   Smith &  Fawcett Ltd., [1942] Ch. 304; Kaikhosro  Muncherji  Heera ’Maneck  & Ors. v. The Coorla Spinning & Weaving  Company  & Ors,  I.L.R. 16 Bom. 80 and The Muir Mills Company  Ltd.  of Cawnpore  v.  T.  H.  Condon & Anr.,  I.L.R.  22  All.  410; referred to.,



& CIVIL APPELLATE JURISDICTION Civil Appeals Nos. 546, 547 and 692 to 1031 of 1970. Appeals  by  special leave from the orders dated  March  14, 1970  of  the  Company  Law  Board,  Department  of  Company Affairs, Ministry of Industrial Development, Internal  Trade & Company Affairs, New Delhi in Appeals Nos. 4 to 7 of  1969 etc. C.   K.  Daphtary, A. K. Sen. L. M. Singhvi, S.  Swarup,  B. Datta, J. B. Dadachanji, O. C. Mathur ’and Ravinder  Narain, for the appellant (in all the appeals). F.   S.  Nariman,  A.  B. Diwan, K. J. Merchant  and  I.  N. Shroff, for respondent No. 1 (in all the appeals). Sup.CI/71-4 42 The Judgment of the Court. was delivered by Ray, J. These appeals are by special leave against the order dated 14 March, 1970 made by the Company Law Board,  Depart- ment   of   Company   Affairs,   Ministry,   of   Industrial Development, Internal Trade and Company Affairs, New  Delhi, under  section 111(3) of the Companies Act,  1956  directing the  appellant company to register transfer of  3643  shares forming the subject matter of these appeals. The  respondents in these appeals are Jaya  Hind  Industries Ltd. N.   K. Firodia and other persons who will be  referred to as the Firodia group.  The appellant will be referred  to as the Bajaj group. The  Firodia group lodged in different lots 3643  shares  of the  appellant  for being transferred  to  different  names. Jaya  Hind Industries Private Ltd. applied for  transfer  of 1500 shares in their names.  Firodia applied for transfer of 30  shares  in his name.  The other transfers  were  in  the names  of  associates, nominees and friends of  the  Firodia group.   The  Board  of the appellant  refused  to  register transfer of the said shares at the Board meetings held on 23 May, 1968 in respect of 2532 shares and on 24 June, 1968  in respect of 1111 shares.  The appellant communicated the said refusal to transfer the shares in the month of June, 1968. Thereafter,  in the month of August, 1968 338  appeals  were filed before the Company Law Board in respect of refusal  of the  appellant  to transfer 3643 shares.   The  Company  Law Board  by  its  letter  dated 16  January,  1969  asked  the appellant  to disclose the reasons for refusal  to  register transfer  of  shares.   The  appellant  company  gave  three reasons  for refusal to register transfer of the  said  3643 shares.  First, that Jaya Hind Industries Private Ltd. was a beneficiary  to  the  extent of 1/4 share  in  the  Managing Agency remuneration receivable by Jamnalal Sons Private Ltd. from Bajaj Auto Ltd. and yet N. K. Firodia chose to write to the  Company  Law  Board  against.,  the  extension  of  the Managing  Agency of Jamnalal Sons Private Ltd.  The  company further said that N. K. Firodia, according to the  appellant company,  was  their representative and when N.  K.  Firodia acted in such a treacherous fashion and against the interest of the company and behind the back of the Board of Directors it  became  evident  that Firodia’s  design  was  to  create mischief.   Secondly, the transfer of shares  received  from Jaya Hind Industries Private Ltd. was part of the design  to acquire  interest in the company which was likely to  result in  a threat to the smooth functioning of the management  of the  company,  and  to vote down the passing  of  a  special resolution required for the management of the company,  and, therefore, 43 transfer should not be permitted.  Thirdly, the purchase  of



shares  by Jaya Hind Industries Private Ltd. was not with  a view  to  bona  fide investment but was  with  a  mala  fide purpose and evil design.  It was said that the issued  share capital of the company was 1,04,250 shares of Rs. 100  each. Firodia  group  was  holding  21,500  shares.   Transferring further shares to the names of Firodia group would  obstruct the  business  of the appellant company in  the  passing  of special  resolution  which was required in the  day  to  day business  of  the company.  It was also said that  from  the investment point of view with a dividend of Rs. 10 per share on  a  paid up share of Rs. 100 the purchase price  paid  by Firodia  group was artificial and could only be with a  view to  try  to take control and/or obstruct  the  business  and smooth  working  of the company and to injure  the  existing management.  The appellant company concluded by saying  that the Board of Directors came to the conclusion that it was in the interest of the company to refuse the said transfers. In  order  to  appreciate whether  the  Directors  used  the discretion  in proper exercise of their fiduciary power  and the reasons were bona fide and legitimate in the interest of the company as a whole, it is necessary to refer to  certain features of the case. In  the year 1947 a joint venture business was entered  into between Jaya Hind Industries Ltd. and Bachhraj Trading  Cor- poration Ltd.  In the month of March, 1950, Bachhraj Trading Corporation suffered heavy losses and the joint venture  was transferred to Bajaj Factories Ltd. with the consent of Jaya Hind Industries Ltd.  In  the  year  1952  N. K. Firodia  became  a  Director  of Bachhraj  Trading Corporation Ltd.  In the month  of  April, 1954  Jaya Hind Industries Ltd. acquired 1800 shares of  the face  value of Rs. 1,80,000 of Bachhraj Trading  Corporation Ltd.  at  Rs. 36/8/per share which together with  50  shares held by N. K. Firodia equalled 3/8ths of the share  capital. In the month of May, 1954, Bachhraj Trading Corporation Ltd. again took over the business of the joint venture from Bajaj Factories Ltd.  In the year 1955 N. K. Firodia as a Director of Bachhraj Trading Corporation Ltd. applied to the  Central Government  for the manufacturing licence of scooters,  auto rickshaws  and  tempo three wheeler vehicles.  In  the  year 1957  Bachhraj  Trading  Corporation Ltd.  was  granted  the manufacturing  licence  of tempo three  wheelers.   In  1958 Bajaj  Tempo  Private Ltd. was formed to  manufacture  tempo three  wheeler vehicles and N. K. Firodia was appointed  the Managing  Director of the same.  In the year  1959  Bachhraj Trading Corporation Ltd. was granted licence to  manufacture scooters and auto rickshaws.  In the year 1960 the name of 44 Bachhraj Trading Corporation Ltd. was changed to Bajaj  Auto Private Ltd.  Shares of Bajaj Auto Private Ltd. were offered to   shareholders   of  Bachhraj  Trading   Corporation   in proportion to, their shareholding. Between the years 1954 and 1960 Jaya Hind Industries Private Ltd.  of  the Firodia group had provided  substantial  funds amounting  to Rs. 4,36,000 to the appellant company  in  its former  name.  In the year 1960 there was a Managing  Agency agreement  between the appellant company and  Jamnalal  Sons Private  Ltd. for a period of five years.  In 1960 when  the appellant  was converted into a public limited  company  and Firodia was appointed as its Chief Executive, the respondent company   of   the  Firodia  group  by   themselves,   their shareholders and friends subscribed for 37-1/2% of the shares offered  to the then existing shareholders of the  appellant company.   An  agreement was entered into  between  Jamnalal Sons Private Ltd.  Managing Agents of the appellant  company



and  the respondent Jaya Hind Industries Private Ltd. on  15 August, 1960 by which the Managing Agents agreed to pay  25% of the remuneration of the Managing Agency to the respondent company in consideration of services rendered to the  appel- lant company.  Gradually, the appellant company grew into  a prosperous  and very well developed automobile  unit.   Land was  acquired, buildings were constructed and machinery  and equipment  worth more than a crore of rupees  was  purchased and installed.  The manufacturing activity of the  appellant company  made  good progress and 90% of  the  components  of scooters   and   auto  rickshaws  were  capable   of   being manufactured indigenously. In the month of June, 1965 the appellant company applied  to the  Central Government for re-appointment of Jamnalal  Sons Private Ltd. as Managing Agents of the appellant company for a period of IO years.  The Central Government on 1 1 August, 1965  sanctioned the said re-appointment of Managing  Agents for  the  period commencing 16 August, 1965  and  ending  31 March, 1968, viz., for an approximate period of three years. The  appellant  company entered into an agreement  with  the Managing Agents on similar terms. In  the month of August, 1967 Kamalnayan Bajaj of the  Bajaj group proposed at the Board meeting of the appellant that an application  should  be  made  to extend  the  term  of  the Managing  Agency.  Firodia of the respondent  company  group opposed any such extension.  In the month of December,  1967 the appellant applied to the Company Law Board for extension of the term of Managing Agency of Jamnalal Sons Private Ltd. for  a period of 7 years so that the Managing  Agents  would have  a  term of 10 years commencing 16 August,  1965.   The letter of the appellant 45 company  was  signed  by the Secretary.   In  the  month  of March,, 1968 Firodia came to know about the said letter  and wrote  to the Chairman of the Company Law Board  that  there was  neither  any resolution of the general meeting  of  the company  for  such  extension nor any  publication  of  such appointment.   Firodia  said  that  the  appellant   company contravened,  in  particular, the  provisions  contained  in sections  326  and  640B of the Companies  Act,  1956.   The Company Law Board, however, approved of the extension of the Managing  Agency  for a period of two years from  31  March, 1970. The  appellant company was converted into a  public  limited company in 1960 and the share capital wag increased from Rs. 9,90,000  to  Rs. 70,00,000.  In the month of  February  and March,  1967  the  capital  of  the  appellant  company  was increased by issue of right shares.  By the end of February, 1968 out of the issued share capital of 1,04,250 shares  the Bajaj  group  held  about 28,600 shares  the  Firodia  group 23,400  shares and the general public about  52,250  shares. The Bajaj group however alleged that in February, 1968  they held  31500 shares and the Firodia group had  21735  shares. In  the  month of March, 1968 the Bajaj group  bought  about 16,230 shares up to the maximum value of Rs. 411 per  share. It may be mentioned here that out of the said 16,230  shares the  Bajaj_  group bought about 4000 shares  from  the  Life Insurance Corporation Ltd. and the Unit Trust of India.  The Bajaj  group obtained transfer of the said 16,230 shares  in their names.  The Firodia group, on the other hand, from the month  of April, 1968 onwards lodged in different lots  3643 shares  of  the appellant company for being  transferred  to their names.  The Board declined to register any transfer in respect of the said 3643 shares. It  is  also  necessary to know about  the  antecedents  and



activities  of  Firodia in relation to the  affairs  of  the appellant  company.  When the joint venture was  started  in the, year 1946 between Bachbraj Trading Corporation Ltd. and the  respondent company Firodia was in actual charge of  the joint venture.  In the year 1950 Firodia went to Germany and obtained  representation  from Vidal and  Sohn  Tempo  Works Hamburg, Germany in connection with the manufacture of tempo three  wheeler vehicles.  In 1952 Firodia became a  Director of  Bachhraj  Trading Corporation Ltd.   Firodia  thereafter submitted a scheme for the manufacture of scooters and  auto rickshaws  and obtained a licence for Bachhraj Trading  Cor- poration  Ltd. in that behalf.  The Firodia  group  acquired shares of the face value of Rs. 1,80,000 in Bachhraj Trading Corporation  in the year 1954 and helped its  rehabilitation after it suffered heavy losses.  The Firodia group  provided funds  to  the  extent of Rs. 4,36,000 to  the  Bajaj  group during the years 1954 and 1960.. 46 When  the appellant company became a public limited  company in  the year 1960 the Firodia group subscribed for  371%  of the  shares  and assisted in procuring subscription  to  the shares  offered to the public.  Jamnalal Sons  Private  Ltd. the  Managing Agents of the appellant agreed to pay  25%  of their remuneration of the Managing Agency to the  respondent company  of  the  Firodia  group  in  consideration  of  the services rendered. Article 52 of the appellant company provided that the Direc- tors  might  at their absolute and  uncontrolled  discretion decline to register any transfer of shares.  Discretion does not  mean  a  bare affirmation or negation  of  a  proposal. Discretion  implies  just and proper  consideration  of  the proposal in the facts and circumstances of the case.  In the exercise  of that discretion the Directors will act for  the paramount  interest of the company and for the  general  in- terest  of the shareholders because the Directors are  in  a fiduciary  position  both towards the  company  and  towards every shareholder.  The Directors are therefore required  to act bona fide and not arbitrarily and not for any collateral motive. If the, Articles permit the Directors to decline to register transfer  of  shares without stating the reasons  the  Court would not draw unfavourable inferences against the Directors because  they  did not give reasons.  In  other  words,  the court will assume that the Directorsted  reasonably and bona fide  and  those who allege to the contrary  would  have  to prove and establish the same by evidence.  Where however the Directors gave reasons the Court would consider whether they were  legitimate  and whether the Directors proceeded  on  a right  or wrong principle.  As a result of the  introduction of   section  111(5A)  in  the  Companies  Act,   1956   two consequences  follow.   First, if the  Articles  permit  the Directors not to disclose reasons for declining to  register a  transfer  the statute confers power  to  interrogate  the Directors  and  disclose  the  reasons.   Secondly,  if  the Directors  do not disclose reasons presumption can be  drawn against the Directors for non-disclosure of reasons in spite of being called upon to do so. In the present appeals, the reasons of the Directors have to be  tested  from three points of view.  First,  whether  the Directors  acted in the interest of the  company;  secondly, whether  they  acted  on a wrong  principle;  and,  thirdly, whether  they  acted  with  an  oblique  motive  or  for   a collateral purpose.  This Court in M/s Harinagar Sugar Mills Ltd.  v. Shyam Sundar Jhunihunwala & Ors(1) said  that  "the discretion  of the Directors would be nullified if  it  were



established   that   the   Directors   acted   oppressively, capriciously  or corruptly or in some other way mala  fide". The  decision in Harinagar Sugar Mills Ltd.(2) related to  a case under the Com- (1) [1962] 2 S.C.R. 339. 47 panies  Act,  1956  prior to  the  introduction  of  section 111(5A).   That is why if the Directors under  the  Articles were  not  to disclose reasons it was said  that  the  Court would  presume where the Directors refused to  register  the transfer  of shares that their power of absolute  discretion was exercised bona fide unless corrupt or mala fide  motives were affirmatively pleaded and proved.  It would be for  the aggrieved  transferor to show that the refusal  to  register transfer was exercised mala fide and not in the interest  of the  company and thereby the presumption of bona fide  would be displaced. The words ’bonafide and for the benefit of the company as  a whole’  have  been  considered in  some  English  decisions. Reference  may  be  made to the decision  in  Greenhalgh  v. Arderne Cinemas Ltd.(1) where Evershed, M.R. said that if  a resolution  had  the effect "to  discriminate  ’between  the majority shareholders and the minority shareholders so as to give the former advantage of which the later were deprived", the  resolution could be attacked on grounds of elements  of dishonesty or impropriety.  The acts of the Directors  would have  to be scrutinised as to whether they were  the  honest opinion of the Directors acting for the company as a whole. Mellish, L.J. in Ex-parte Penney(1) said that the  Directors would  have  no right to force a particular  shareholder  to continue as a shareholder and not, to allow him to  transfer shares at all because that would be an abuse of their power. Lord Cozens-Hardy, M.R. in Re.  Bede Steam Shipping  Company Ltd.(2)  said that the personal objections to  a  transferee were  where the transferee would be a quarrelsome person  or he would be an unreasonable person or he would be acting  in the  interest of a rival company.  The Directors  there  had power to refuse to register transfer of shares if "in  their opinion  it is contrary to the interest of the company  that the  proposed  transferee should be a member  thereof".   In that case there were disputes between the Elder brothers who were  Directors.   One of the Elder Brothers  sold  his  two shares  to  a clerk of his and another share to  his  house- keeper.  The other Director said that the company was really a  family  concern and therefore the shares  should  not  be transferred  singly  or  in small lots  to  outside  persons having no interest in, or knowledge, of shipping. In  Bede Steam Shipping Co. (3) the power of  the  Directors was  to  refuse  to register the transfer of  share  to  any person of whom the Directors did not approve as  transferee. The Directors in declining to register the transfer gave two reasons.  First, that there would be increase in expenditure if  the body of shareholders who numerically  increased  and secondly  the individuals, who were neither related  to  the founders family nor connected in (1) [1950] 2 A.E.R. 1120.             (2) L.R. 8 Ch. 446. (3)  [1917] 1 Ch. 123. 48 business  with the company would become members by the  pro- posed transfer.  Neither of. these reasons was held to touch the  fitness  of  the transferees.  The real  power  of  the Directors  in refusing registration of transfer was  on  the ground  of  personal  objections to  the  transferees.   The apprehension on the part of the Directors in the increase in the  number  of shareholders was therefore found  to  be  an



abuse of power.  It was found that the Directors in refusing registration to transfer thought of the proposed transferees as  mere  nominees  who  could adopt  the  attitude  of  the transferor  who  had  disagreed with the  Directors  of  the company.   The  Directors  did  not  look  at  the  relevant circumstances  in  which  they were  placed,  namely,  their status,  their occupation, and, in particular,  whether  the transferees   were  interested  in  any   private   business competing with the company. Reference  may be made to an old decision in Re.  Bell  Bro- thers  Ltd.(1)  as  an  illustration of  the  power  of  the Directors to refuse registration of transfer.  The  relevant Article   in   the  case  of  Bell   Brothers(2)   conferred discretionary power on the Directors to refuse  registration of  transfer of shares on the ground that the Directors  did not approve of the transferee.  Chitty, J. said in  relation to the Directors’ power that the Directors must act in  good faith and in the interest of the company and with due regard to  the  right of a shareholder to transfer his  shares  and they  must fairly consider the question of the  transferee’s fitness at a card meeting.  The Directors in that case  were not required to disclose reasons.  Three propositions can be extracted from that case.  First, where the Directors do not assign  any reason because of the Articles it  is  competent for  those who seek to have the transfer registered to  show affirmatively by proper evidence that the Directors had  not duly exercised their power.  Secondly, if reasons are  given by  the Directors and the reasons are legitimate  the  court will not overrule the Directors decision merely because  the court  itself  would not have come to the  same  conclusion. Thirdly, if the reasons are not legitimate, the court  would hold that the power had not been duly exercised.  An example would  be  where the Directors said that they  rejected  the transfer because the transferor’s object was to increase the voting  power  in respect of his shares  by  splitting  them among his nominees. In  the case of Bell Brothers(1) two Bell brothers John  and Lowthian and the members of their families were shareholders in  Bell  Brothers.   John  died  leaving  a  will  and  the beneficiaries  under the will were his widow  and  children. The  will  provided  for the widow  an  annuity.   The  will contained  a  general trust for conversion.   John’s  shares were sold to provide a fund to meet 49 the annuity.  Hodgson purchased those shares.  The Directors were Lowthian, his son Hugh and his son-in-law.  High was an executor trustee under the will of John and as such was  one of the transferors of the shares of John.  The shares of the testator were in the names of Hugh, the nephew and  Charles, the  son of the testator as executor trustees.   The  shares being  registered  in two names, Hugh as the  first  on  the register  had the right to vote.  Hugh had on the  one  hand expressed  the  opinion  to  sell the  shares  in  the  true interest  of  the beneficiaries and on the other hand  as  a Director opposed the sale to Hodgson on the ground that  the shares  should  be held by the members of the  Bell  family. The Directors did not allow registration either in the  name of Hodgson or his nominees. It  has  been well-settled since the decision in  Pender  v. Lushington(  1) that the Directors are not entitled to  look behind  the  register to.- any purpose.  They  do  not  take notice  of  trust.   Similarly, they  cannot  say  that  the transferee  is  the nominee of some one whom  they  consider objectionable.  The accent is always on personal  objections to  the transferee.  The solicitors of the Directors in  the



case  of Bell Brothers gave the real reason for  refusal  of registration  that Hodgson was holder of shares in  a  rival company.   Chitty,  J.  said that  the  Directors  carefully abstained  from  stating what their  personal  objection  to Hodgson  was and put forward their solicitors to assign  the reason  for  it.  The Directors who had  an  opportunity  of exercising their power attempted to exercise it upon a wrong principle  and therefore their power was gone.  It is  quite likely  that if the Directors had given- evidence  of  their real reason the Court might have accepted it_as  legitimate. The decision in the case of Bell Brothers ( 2 )  illustrates that   where  the  Directors  have  the  power   to   refuse registration  of the transfer of shares, their  exercise  of power on a wrong principle will vitiate the exercise of  the power. It  follows that where the Directors have  uncontrolled  and absolute  discretion in regard to declining registration  of transfer  of shares, the Court will consider if the  reasons are  legitimate  or  the Directors have  acted  on  a  wrong principle  or from corrupt motive.  If the Court found  that the Directors gave reasons which were legitimate, the  Court would  not overrule that decision merely on the  round  that the  Court  would  not have come  to  the  same  conclusion. Reference  may be made to the decision in Balwant  Transport Co.  Ltd.   Amraoti v. Y. H. Deshpande(3) which is  a  Bench decision of the Nagpur High Court.  Sapate was a shareholder in  the company and owned 31 shares.  One of his shares  was sold  by  public  auction and was  purchased  by  Deshpande. Deshpande  applied  for registration.  The  Article  in  the Nagpur case conferred (1) L.R. 6 Ch.  D. 70.                      (2) 7 Times  Law Reports 689 (3)  A.I.R. 1950 Nag. 20. 50 absolute  and  uncontrolled discretion on the  Directors  to refuse  to  register transfer where in the  opinion  of  the Directors it was not in the interest of the company to admit the proposed transferee to membership.  The evidence in that case  was that Deshpande was the lawyer of  Sapate.   Sapate was  quarrelling  with the company.  Sapate  also  joined  a rival concern.  The Directors decision in those  surrounding circumstances  was found to be a legitimate exercise of  the power of the Directors in the interest of the company, The decision in Re.  Smith & Fawcett Ltd. (1) indicates  the extent  to which the court upholds the exercise of  absolute and  uncontrolled discretion of the Directors to  refuse  to register  any transfer of shares.  In that case  there  were two  Directors  who held the shares in equal  numbers.   One died.   The other Director refused to register the  transfer of  shares  in the names of the executors  of  the  deceased Director except in respect of a part of the holding and upon the  condition  that  the  balance  be  transferred  to  the surviving Director.  It was found to be a justifiable act of the Director in the interest of the company. In  the  old Bombay decision in  Kaikhosro  Muncherji  Heera ’Maneck  & Ors. v. The Coorla Spinning & Weaving  Company  & Ors(1) the Board of Directors might decline to register  any transfer of shares, unless the transferees were approved  by the  Board.   A  shareholder became  insolvent.   His  share vested in the Official Assignee.  The Official Assignee sold the  shares.  The purchaser applied for  registration.   The Directors declined to approve of the transferees unless  the transferees would pledge themselves not to oppose a  certain change  in  the  mode  of remunerating  the  Agents  of  the company,  which the Directors desired to effect,  and  which



they believed would be very advantageous to the company.  It may  be  mentioned  here that the purchaser  of  the  shares required  the Official Assignee to register transfer in  the names  of the two nominees who were already the  holders  of shares  in the company.  The company, however, did not  take any  objection to the nominees in their  personal  capacity. The Directors acted on wrong principle and in abuse of power in insisting on obtaining a pledge from the transferees  not to oppose change in remuneration of the Managing Agents. A  Bench  decision of the Allahabad High Court in  The  Muir Mills  Company Ltd. of Cawnpore v. T. H. Condon &  Anr.  (3) related  to  the absolute power of the Directors  to  refuse registration’  of transfer of shares on personal  objections to the transferee.  The’ Muir Mills in that case  disallowed the  transfers  on  the ground  that  the  transferees  were subordinates of McRobert, the Managing (1) 19 42 Ch. 304. (3) I.L. R. 22 All. 410. (2) I.L.R. 16 Bom 80. 51 Director  of Cawnpore Mills.  There was  personal  animosity between Johnson, the Managing Director of the Muir Mills and McRobert.  The Directors of the Muir Mills came to a conclu- sion  that McRobert should not add to his voting  power  and ’harass  the  management’.   It was found  to  be  abuse  of fiduciary  discretionary  power of the Directors  when  they wanted  to  safeguard  the.   Directors  personal   interest against McRobert. The first reason of the appellant company for the refusal of registration  of  transfer of the shares  was  that  Firodia acted  in a treacherous fashion against the interest of  the company and behind the back of the Board of Directors.   The evidence  is that the Managing Agents of the Bajaj group  in the year 1965 failed to obtain from the Government  approval of  an  extension  of term for  10  years.   The  Government sanctioned  the  term  for about three years  which  was  to expire on 31 March, 1968.  In the month of August, 1967 when Kamalnayan Bajaj of the Bajaj group proposed an extension of the  term of the Managing Agents Firodia represented to  the Board that Firodia was opposed to the same.  No  application for  extension  of the term of Managing Agents was  made  at that time.  The appellant however behind the back of Firodia wrote  to  the Company Law Board in the month  of  December, 1967  and though Firodia was the Chief Executive the  letter was signed by the Secretary and kept concealed from Firodia. Firodia  came to know of the letter, in the month of  March, 1968 and he wrote to the Company Law Board that the  company had made "false statement" in the application for  extension of  the  term,  namely, that the appellant  company  gave  a wrong,  impression  that  it  had  received  permission   to increase its production to 60,000 scooters per year  whereas in  fact no such permission had been granted.  Firodia  also pointed  out that the appellant suggested that its  progress was  because  of the Bajaj group and made  no  reference  to Firodia who was the Chief Executive of the appellant. In 1965 the appellant asked for appointment of the  Managing Agents for ten years.  The Company Law Board approved of the appointment upto 31 March, 1968.  It is true that there  was a  resolution of the appellant company in the year 1965  for the  appointment of the Managing Agents for a period of  ten years.  That resolution of 1965 after the appointment of the Managing Agents for a term of less than three years and,  in particular, after an agreement had been entered into between the  appellant  company  on the one hand  and  the  Managing Agents on the other in that behalf. was exhausted, and spent



its force and could not be said to have either a life of its own  for 10 years or to spring into action in the year  1968 for  a  revival of the resolution to  enable  the  appellant company  to  ask for appointment of Managing  Agents  for  a period  of  seven  years on the  basis  of  any  resolution. Firodia rightly 52 protested  against  the  absence of any  resolution  of  the shareholders and also against the absence of any publication of  proposal  for appointment of Managing Agents  for  seven years.   Firodia  furthermore rightly cavilled  against  the total  obscuration  of his name or of any reference  to  his activities in relation to the affairs of the company and the contrary suggestion in the letter that the prosperity of the appellant  company was an account of Kamalnayan Bajaj.  This aspect is important to show that the allegations of  Firodia were  against the Managing Agents and further  that  Firodia was acting in the larger interest of the company whereas the Managing  Agents were actuated by their personal motives  of preservation and aggrandisement of their power.  The  letter written  by the appellant to the Company Law Board  was  not circulated to the shareholders.  Firodia came to know  about the letter and that is why he informed the Company Law Board of the state of affairs. On  this evidence it is apparent that Firodia wrote  to  the Company  Law  Board in the larger interest of  the  company. Firodia’s  allegations  were against  the  Managing  Agents. Firodia  was  justified in opposing  re-appointment  of  the Managing  Agents  without  a  specific  resolution  of   the shareholders  of the company and without a public notice  to the  shareholders  to represent their views in  the  matter. The Bajaj group acted behind the back of Firodia and  wanted to  steal a march.  The real motive of the Bajaj  group  was revealed  first  by imposing restrictions in  the  month  of March,  1968 on the powers of Firodia as Chief Executive  of the appellant, company and secondly by the resolution in the month  of May, 1968 to terminate the services of Firodia  as Chief Executive.  The refusal to register the transfers  was at  the meetings of the Board held in the months of May  and June, 1968. The  Directors  had a hostile, feeling against  Firodia  and they  had  the dominant desire to keep Firodia  out  of  the company.   The Directors did not act in the interest of  the company  and their discretion was tainted by unfair  conduct and unjustifiable attitude against Firodia. The  second reason given by the appellant company  was  that the  Firodia  group  acquired the shares with  a  design  of acquiring interest in the company which was likely to result in  a threat to the smooth functioning of the management  of the  company  and to vote down the passing  of  the  special resolution.   There  are well recognised  safeguards  as  to notice and content for passing special resolution.   Special resolutions are for limited purposes and are not matters  of daily  occurrence or of daily routine  administration.   The mere  apprehension  that  special resolutions  will  not  be passed  is hot a legitimate reason.  The  shareholders  will bestow their 53 intention   on  matters  forming  the  subject  ’matter   of resolution.  Passing of special resolutions will depend upon the  mandate of the shareholders.  It is manifest  that  the reason  given  by the Directors was a  camouflage  to  cover their  collateral  and  corrupt  motive  of  preserving  the hegemony of the Bajaj group.  The motive is corrupt  because the Bajaj group acted for their personal interest and not in



the bonafide general interest of the company. The third reason given by the appellant company was that the shares  were being acquired by the Firodia group not with  a view of bonafide investment but with a malafide purpose  and evil  design  of obstructing the business of  the  appellant company.   Acquisition  or  transfer  of  shares  under  the Articles  of  the  present case does  not  suffer  from  any restrictive   impediment   like  pre-emption   or   personal objections  to the transferees.  There is no  evidence  that the transferees belonged to a rival concern.  Equally, there is no evidence that the Firodia group ever obstructed in the management  of  the company.  On the contrary,  the  Firodia group  advanced  large sums of money.  Firodia  was  largely responsible for the gradual growth of the appellant  company and for the prosperity of the company.  It was therefore  an abuse  of the fiduciary power of the Directors to refuse  to register  transfer  of  shares.  The  Bajaj  group  obtained transfer  of  16230 shares in their favour in the  month  of March, 1968.  The Bajaj group purchased shares in the market at a maximum value of Rs. 411 per share.  The holding of the Bajaj  group  prior  to the acquisition of  the  said  16230 shares  was  28600 shares or according to  the  Bajaj  group 31,500 shares.  The Firodia group on the other hand prior to the  proposed  transfer had 23,400 shares or  21,735  shares according  to  the  Bajaj group.  The  general  public  held 52,250  shares.   This  was the position  in  the  month  of February,  1968.   The Bajaj group by  the  acquisition-  of 16230 shares would have a numerical strength of 44830 shares whereas  the Firodia group would be having 26863  shares  if the  proposed transfers were allowed by the Directors.   The Bajaj group paid Rs. 411 per share.  The Firodia group  paid roughly  about  Rs. 200 per share.  Firodia was not  on  the Board  of  Directors of the appellant  company.   The  Bajaj group  and  their friends were the Directors.  In  the  year 1967  the  Firodia group loded 4243 shares for  transfer  in their  names and the transfers were registered.   Again,  in the month of February, 1968 when the Firodia group lodged 68 shares   with  the  appellant  company  for  transfer,   the appellant  company  accepted  the  said  transfer.   It  is, therefore,  revealed that after the appellant came  to  know that Firodia wrote to the Company Law Board in the month  of March,  1968  that the Directors of  the  appellant  company developed   antipathy  against  Firodia.   The  refusal   to register  the shares was a sequel to the termination of  the appointment of Firodia as Chief 54 reasons and in their own interest. Counsel  on  behalf of the appellant contended that  of  the seven  Directors only Kamalayan Bajaj belonged to the  Bajaj family  and each Director was an  independent  industrialist and  could not be described to be of Bajaj  group.   Neither the  status  and wealth of the Directors nor their  lack  of relationship  with the Bajaj family could be decisive as  to whether they exercised their discretion on correct principle or  without any corrupt motive.  The Firodia  group  alleged that  Kamalnayan  Bajaj  was an  arbitrator  in  the  family dispute  of Ramnath A. Podar and that Shriyans  Prasad  Jain was a close associate of Kamalnayan Bajaj.  Irrespective  of these  allegations,  we  have  already  indicated  that  the Directors  failed to exercise their discretion  properly  by refusing to register transfer of shares on wrong  principles and for corrupt and oblique motives. The  discretion  of  the Directors is to be  tested  as  the opinion  of  fair and sensible men in the  interest  of  the company.   In the pro,-sent case, the Directors did not  act



bonafide  nor  did they act in the general interest  of  the company.  On the contrary, they acted upon a wrong principle and  for the oblique motive of squeezing out  Firodia.   The inescapable   conclusion   is  that  the   Directors   acted arbitrarily and unjustifiably. For  these reasons we are of opinion that the appeals  fail. They  arc  dismissed with costs.  The  respondents  will  be allowed one set of hearing fees. R.K.P.S.                                             Appeals dismissed. 55