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PETITIONER: INDIAN CHEMICAL PRODUCTS

       Vs.

RESPONDENT: STATE OF ORISSA & ANR.

DATE OF JUDGMENT: 05/05/1966

BENCH: BACHAWAT, R.S. BENCH: BACHAWAT, R.S. MUDHOLKAR, J.R. DAYAL, RAGHUBAR

CITATION:  1967 AIR  253            1966 SCR  380

ACT: Company Law-Difference between "transmission" and "transfer" of  shares-Ownership of shares passing by operation of  law- Board  of  directors whether can refuse amendment  of  share register. Indian Companies Act, 1913, s. 38- Court’s power  under-Pro- per exercise of.

HEADNOTE: As  a result of constitutional changes following the  Indian Independence   Act,  1947,  the  ownership  of  the   public properties  of  the  Maharaja of  the  Mayurbhanj  including certain shares in the appellant company passed to the  State of  Orissa.  Although the State had acquired title to  these shares  by  operation  of law, it  also  obtained  from  the Maharaja  by  way of abundant caution, a  deed  transferring these  shares to it.  In 1950, the State  Government  lodged the  share  scrip  and transfer deed with  the  company  and requested  it  to make the necessary changes  in  the  share register.  Despite repeated requests. however, the directors of the company refused to do so.  In 1955 the State filed an application under s. 38 of the Indian Companies Act, 1913 in the  High Court of Orissa, asking for rectification  of  the share  register by inserting its name as the holder  of  the share in place of the Maharaja.  The High Court allowed  the application  and passed a supplemental order  directing  the filing  of  the notice of rectification with  the  Registrar within  a  fortnight.   The  company’s  appeal  before   the Division  Bench failed, whereupon it appealed to this  Court by special leave. It was urged on behalf of the appellant company, inter alia, that under Art. 11 of its Articles of Association as well as under cl. 22 of Table A read with art. 1-A the directors has power to refuse registration of the transfer. HELD:-(i) In Table A which was attracted by art. 1-A  of the company’s Articles of Association, the word transmission is  put  in contradistinction to the word  ’transfer’.   One means  a  transfer by the act of the parties,  the  other  a transmission  by  devolution  of law.  Art.   If  refers  to transfers.  A devolution of title by operation of law is not within  its  purview.   Being a  restrictive  provision  the

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article  must be strictly construed.  In the  instant  case, the  title  to the shares vested in the State of  Orissa  by operation of law and the State did not require an instrument of  transfer  from  the  Maharaja  to  complete  its  title. Article  11  does not confer upon the Board of  directors  a power  to refuse recognition of such a devolution of  title. r383G-384C]. In re Bentham Mills Spinning Company, (1879) 11 Ch.  D. 900, referred to. (ii)Clause 22 of the regulations in Table A read with  Art. 1-A  confers  power  on the Board of  directors  to  decline registration of transmission of title in consequence of  the death or insolvency of a 381 member.   In the instant case, there was no transmission  of title  in consequence of death or insolvency and  clause  22 had, therefore no application, [384 D] (iii)In  so far as the claim of the State was based  on the  transfer  deed it fell within the purview of  Art.  11. But  the refusal of the board of directors to  register  the transfer under that article was mala fide.  The power  under that article was a discretionary power.  The directors  must exercise that power reasonably and in good faith.  The Court can  control this discretion if they act capriciously or  in bad faith. [384 E-F; 385 C-D] (iv)The name of the State of Orissa had without  sufficient reason,  been  omitted  from the  register,  and  there  was default  in  not entering on the register the  fact  of  the Maharaja  having  ceased  to  be  a  member.   The   Court’s jurisdiction  under s. 38 was, there fore,  attracted.   The High Court rightly ordered the rectification in the exercise of its summary powers under s. 38.  The jurisdiction created by  s.  38  is  very  beneficial  and  should  be  liberally exercised. [385G]

JUDGMENT: CIVIL APPELLATE JURISDICTION:- Civil Appeal No. 303 of 1963. Appeal  from the judgment and order dated September 5,  1960 of  the Orissa High Court in Appeal under Orissa High  Court Order No. 4 of 1956. N.   C. Chatterjee, Ranadey Chaudhuri, G. S. Chatterjee  and S.   C. Majumdar, for the appellant. C.   K. Daphtary, Attorney-General, N. D. Karkhanis and R.   N. Sachthey, for respondent No. 1. The Judgment of the Court was delivered by Bachawat,  J.  On  November 29, 1947,  the  Indian  Chemical Products,  Ltd., a limited company, was incorporated  having its  registered offices in Baripada, Mayurbhanj and  in  the town  of Calcutta.  Its authorised capital is Rs.  25  lakhs divided into 25,000 shares of Rs. 100 each.  The company has seven share-holders.  The Maharaja of Mayurbhanj  subscribed and  paid for 7,500 shares.  The remaining six  shareholders hold 150 shares only.  All the shareholders are  signatories to the memorandum of association of the company.  The  State of  Orissa  claims  that by  reason  of  the  constitutional changes  since  the  declaration of  independence,  all  the shares held by the Maharaja of Mayurbhanj have now vested in it  by operation of law.  The State also based its claim  to the  shares on a formal instrument of transfer  executed  by the  Maharaja.  On March 16, 1950, the Government of  Orissa lodged  the  share  scrip and the  transfer  deed  with  the company,  and requested it to make the necessary changes  in the  share register.  The Government as also  the  Maharaja,

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through  his agent, the Imperial Bank of  India,  repeatedly requested  the  company  to register the  Secretary  to  the Government  of Orissa,, Finance Department as the holder  of the  shares in place of the Maharaja.  There was  protracted correspondence in the matter for over three L/S5SCI--26(a) 382 years and eventually on May 16, 1953, the board of directors of  the  company  refused  to  register  the  transfer.   On December, 1, 1953, Sri S. K. Mandal, attorney for the  State of  Orissa, requested the company to record the name of  the State as the owner of the shares in the share register,  but the  company  declined to do so.  On February 9,  1955,  the State  of  Orissa filed’ an application under s. 38  of  the Indian  Companies  Act,  1913 in the High  Court  of  Orissa asking for rectification of the share register by  inserting its  name  as  the  holder of the shares  in  place  of  the Maharaja.   The company and the Maharaja were  impleaded  as respondents.   The application was contested by the  company only.    On  November  22,  .1956,  Ray,  J.   allowed   the application.    On   September  13,  1957,   he   passed   a supplemental  order  directing the filing of the  notice  of rectification  with  the Registrar within a  fortnight.   On September  5,  1960,  a Division Bench  of  the  High  Court dismissed the appeal preferred by the company.  The  company now  appeals to this Court on a certificate granted  by  the High Court. Both  courts  concurrently held that (1) the  title  to  the shares  vested in the State of Orissa by operation  of  law; (2)  the, refusal of the board of directors to register  the transfer was mala fide; (3) the State of Orissa was entitled to rectification of the share register and a proper case for the exercise of the Court’s jurisdiction under s. 38 of  the Indian  Companies  Act,  1913 had been  made  out;  (4)  the petition  was not liable to be dismissed on the ground  that the State had asked the company to register the name of  the Secretary to the Government of Orissa, as the shareholder in place  of the Maharaja.  The appellate Court also held  that under  the articles of association of the company the  board of  directors  had  no power to  refuse  registration  of  a transfer  where the transfer was by operation of  law.   The appellant challenges the correctness of these findings. The  courts below concurrently found that the  7,500  shares were  held by the Maharaja in his capacity as ruler  of  the State of Mayurbhanj.  This finding is amply supported by the documentary  evidence  on  the  record  and  is  no   longer challenged.   The  State  of  Mayurbhanj  was  one  of   the feudatory  States  of  Orissa under the  suzerainty  of  the British   Crown.   As  from  August  15,  1947,   with   the declaration  of independence the paramountly of the  British Crown   lapsed.   Thereafter,  steps  were  taken  for   the integration  of  the State with the Dominion of  India.   On October  17,  1948,  the Maharaja of  Mayurbhanj  signed  an agreement for the merger of the State with the Dominion.  By art.  1 of this agreement, the Maharaja completely ceded  to the Dominion his sovereignty over the State of Mayurbhanj as from  November 9, 1948.  Article 4 of the agreement  allowed the  Maharaja  to  retain  the  ownership  of  his   private properties  only as distinct from the State properties.   On and from November 9, 1948, as a necessary         383 consequence  of  the cesser of sovereignty  all  the  public properties  of the State including the 7,500 shares  in  the company  vested  in the Dominion.  By operation  of  law  in consequence  of  the change of sovereignty, all  the  public

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properties of the State which were vested in the Maharaja as the  sovereign  ruler  devolved  on  the  Dominion  as   the succeeding sovereign. As from January 1, 1949, the Government of India in exercise of  its  powers  under  s.  3(2)  of  the  Extra  Provincial Jurisdiction Act (47 of 1947) delegated to the Government of Orissa the power to administer the territories of the merged State.   On  August 1, 1949, the States  Merger  (Governors’ Provinces)  Order, 1949 came into force, and in  consequence of s. 5(1) of the Order, all property vested in the Dominion Government for purposes of    governance of the merged State became from that date vested in    the Government of Orissa, unless the purposes for which the  property  was  held  were central purposes. By a certificate dated     November    10, 1953, the Government of India declared that the   7,500 shares  were  not  held  for  central  purposes.  Under  the Constitution  which  came into force on  January  26,  1950, the       territories  of the merged State were included  in the State of   Orissa.   By  reason  of   these   successive constitutional changes, the   shares  became vested  in  the State of Orissa. The State is now the   legal  owner of  the shares and the directors of the company are  bound to  enter its name in the register of members, unless there      is one  restrictive provision in the articles authorising  them to   refuse the registration.  The company contends that under its articles,               the directors   have  the power to refuse  the               registration.  It  relies on  art.  11,  which               reads:-               "The Board of Directors shall have full  right               to  refuse  to register the  transfer  of  any               share or shares to any person without  showing               any  cause  or  sending  any  notice  to   the               transferee or transferor,               The Board may refuse to register any  transfer               of shares on which the Company has lien." Article 1-A attracts the regulations in Table A of the First Schedule  to the Indian Companies Act, 1913 so far  as  they are       applicable  to  private  companies  and  are   not inconsistent with the    articles. The regulations in  Table A make a distinction between  transfer  and transmission  of shares. In respect of a transfer, they  require   that   the instrument of. transfer shall be executed both by      the transferor  and the transferee. A transmission by  operation of   law  in  not such I transfer. In In re.  Bentham  Mills Spinning  Company(1), James, L.J. said "In Table A the  word ’transmission’ 384 is  put  in contradistinction to the word  ’transfer’.   One means a transfer by the act of the parties, the other  means transmission  by  devolution of law." Article 11  refers  to transfers.  A devolution of title by operation of law is not within  its  purview.  Being a  restrictive  provision,  the article  must be strictly construed.  In the  instant  case, the  title  to the shares vested in the State of  Orissa  by operation  of  law,  and  the  State  did  not  require   an instrument  of  transfer from the Maharaja to  complete  its title.,  Article  11  does  not confer  upon  the  board  of directors a power to refuse recognition of such a devolution of  title.   We may add that we express no  opinion  on  the question  whether such an article applies to an  involuntary transfer  of  shares by a Court sale having  regard  to  the provisions  of O.21, r. 80 of the Code ’of  Civil  Procedure with  regard  to  the execution of  necessary  documents  of transfer.

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Clause  22 of the regulations in Table A read with art.  1-A confers  power  upon  the  board  of  directors  to  decline registration of transmission of title in consequence of  the death or insolvency of a member.  In the instant case, there is  no  transmission  of title in consequence  of  death  or insolvency,  and  clause 22 has no application.   Under  the articles,  the  directors had therefore no power  to  refuse registration  of  the devolution of title on  the  State  of Orissa   by   operation  of  law  in  consequence   of   the constitutional changes. Though the State of Orissa had acquired title to the  shares by operation of law, by way of abundant caution it  obtained a  deed of transfer and lodged it with the company  together with  the share scrip.  The transfer deed was  duly  stamped and complied with all the formalities required by law.   The claim  of the State of Orissa based upon the  transfer  deed was within the purview of Art. 11.  Even with regard to this claim, the Courts below concurrently held that the board  of directors  acted  mala  fide in  refusing  to  register  the transfer.  This finding is amply supported by the  materials on  the  record.  In spite of the fact that  the  State  had filed  with  the company a certificate of the  Collector  of Stamp Revenue.  West Bengal, that no stamp duty was  payable on  the transfer, the company raised the objection that  the transfer deed must be stamped.  To avoid this objection, the Government  stamped  the deed and again lodged it  with  the company.   For  over  three  years,  the  directors  delayed registration of the transfer on frivolous pretexts.  On  May 16,  1953,  the  directors  without  assigning  any   reason declined  to register the transfer.  Before the High  Court, the  company  asserted  that the  registration  was  refused because  the Maharaja of Mayurbhanj was under an  obligation to  execute an agreement conferring valuable rights  on  the company  and the State of Orissa had failed to  honour  this obligation.  Reliance was, placed on cl. 6 of the  company’s memorandum of association, which stated that the company and the Maharaja proposed to 385 enter into an agreement and a copy of the proposed agreement was  annexed.   Clause  6 shows that there  was  a  proposal between  the parties to enter into an agreement,  but  there was  no concluded agreement between them, nor was there  any binding obligation on the Maharaja to execute an  agreement. The  directors  could not use their power  of  declining  to register  the  transfer  under Art. 11 for  the  purpose  of forcing  the  State  of Orissa to enter  into  the  proposed agreement.   Actually, the reason given at the trial was  an afterthought.   The Imperial Bank of India representing  the Maharaja was pressing for registration of the transfer.   By its  letter  dated March 17, 1953, the company  assured  the Bank  that  the  registration  would  be  effected  shortly. Nevertheless,  on  May 16, 1953 the  directors  capriciously refused to register the transfer. The power under Art. 11 to refuse registration of the trans- fer  is a discretionary power.  The directors must  exercise this  power  reasonably and in good faith.   The  Court  can control their discretion if they act capriciously or in  bad faith.  The directors cannot refuse to register the transfer because  the  transferee will not enter  into  an  agreement which  the directors conceive it to be for the interests  of the company. We cannot accept the contention that the petition was liable to  be dismissed because the State of Orissa had  asked  for registration   in  the  name  of  the   Secretary,   Finance Department.   No  such objection was taken by  the  company,

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although it had taken numerous other objections.   Moreover, by  letter  dated December 1, 1953, Shri S. K.  Mandal,  the attorney for the State of Orissa, had definitely called upon the company to record the name of the State as the owner  of the shares in the share register.  In spite of this  letter, the company refused to make the necessary registration. The Maharaja of Mayurbhanj has ceased to be the owner of the shares.   The State of Orissa, is now their owner,  and  has the  legal  right  to  be a member of  the  company  and  is entitled  to  say  that the  company  should  recognise  its membership and make an entry on the register of the fact  of its  becoming a member and its  predecessor-in-title  having ceased to be a member.  The name of the State of Orissa has, without  sufficient reason, been omitted from  the  register and  there  is default in not entering on the  register  the fact  of  the Maharaja having ceased to be  a  member.   The Court’s  jurisdiction under S. 38 is, therefore,  attracted. The  High  Court rightly ordered the  rectification  in  the exercise   of   its  summary  powers  under  S.   38.    The jurisdiction created by S. 38 is very beneficial and  should be  liberally  exercised.  We see no reason  why  the  Court should deny the applicant relief under S. 38.  The directors of the appellant company on the most frivolous of objections have prevented the State of Orissa from becoming a 386 member for the last 16 years.  It is a matter of regret that justice  has been obstructed so long.  There is no merit  in this appeal. The  appeal is dismissed with costs.  The appellant  company do forthwith carry out the order of rectification passed  by the Courts below in case the order has not been carried  out yet. Appeal dismissed. 387