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PETITIONER: LUXMI TEA COMPANY LIMITED

       Vs.

RESPONDENT: PRADIP KUMAR SARKAR

DATE OF JUDGMENT07/11/1989

BENCH: OJHA, N.D. (J) BENCH: OJHA, N.D. (J) VENKATACHALLIAH, M.N. (J) VERMA, JAGDISH SARAN (J)

CITATION:  1989 SCR  Supl. (2)  82  1989 SCC  Supl.  (2) 656  JT 1989 (4)   350        1989 SCALE  (2)1035

ACT:     Companies  Act, 1956: Section 108--Share  Transfer--Con- sideration--Power of Company to examine  correctness--Compa- ny--Whether can refuse registration of transfer of shares if transfer deeds are not properly stamped.     Section    111(2)/Article    42    of    Articles     of Association--Expression  "Or  otherwise"--Scope  of--Whether recognises existence of inherem power to refuse registration of shares.     Company Law--Share Transfer--Board of Directors--Whether has  inherent  power to refuse registration of  transfer  of shares--Residuary, implied or incidental power of  corporate existence--Whether  include  power of  refusal  to  register transfer of shares.     Section 155--Share Register--Application for  rectifica- tion of-Transferor--Whether a necessary party.

HEADNOTE:     The respondent lodged certain fully paid-up shares  with the appellant company for transfer in his name. The Board of Directors of the Appellant company disapproved the registra- tion  of  the shares. The respondent  filed  an  application under section 155 of the Companies Act, 1956 for  rectifica- tion  of the share register i.e. for inserting his  name  in the  share register as a registered share-holder  which  was allowed  by  a single judge of the High Court.  The  Company preferred  an  appeal which was dismissed  by  the  Division Bench of the High Court.     In  appeal to this Court it was contended on  behalf  of the  company  that (i) the Company  had  residuary  inherent power to refuse the registration of the transfer of  shares; (ii) the words "or otherwise" in Article 42 of the  Articles of  Association  and section I 11(2) of  the  Companies  Act recognise  the  existence  of an inherent  power  to  refuse registration  of the transfer of shares; (iii) the  applica- tion under section 155 was not maintainable as the transfer- or  had not been made parties therein; and (iv) the  company was entitled to examine the correctness of transfer consi- 83 deration shown in the transfer deeds and refuse registration of  the  transfer of shares if the transfer deeds  were  not

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duly stamped. Dismissing the appeal, this Court,     HELD: 1. Unless there is any impediment in the  transfer of  a share of a public limited company, a  shareholder  has the  right  to transfer his share. Correspondingly,  in  the absence of any impediment in this behalf the transferee of a share  is  entitled  to have a rectification  of  the  share register  of the company by inserting his name therein as  a registered  shareholder of the share transferred to him.  To have  such  rectification carried out is the  right  of  the transferee and can be defeated by the company or its  Direc- tors only in pursuance of some power vested in them in  this behalf. Such power has to be specified and provided for.  It may  even  be residuary but in that case too  it  should  be provided for and traceable either in the Act or the Articles of Association. Even if the power of refusal is so specified and  provided  for the registration of a  transferred  share cannot be refused arbitrarily or for any collateral purpose, and can be refused only for a bona fide reason in the inter- est  of the company and the general interest of  the  share- holders. If neither a specific nor residuary power of refus- al  has been so provided, such power cannot be exercised  on the  basis  of the so-called undeclared  inherent  power  to refuse  registration on the ground that the company  or  its Directors take the view that in the interest of the  Company and  the general interest of the shareholders,  registration of the transfer of shares should be refused. Indeed making a provision  in  the Act or the Articles of  Association  etc. conferring power of refusal would become futile if existence of an inherent power is assumed, for the simple reason  that the  amplitude  of the so-called undeclared  inherent  power would  itself  take care of every refusal  to  register  the transfer  of share. Assumption of such a power would  result in leaving the matter of transfer of share and its registra- tion  at  the  mercy and sweet will of the  company  or  its Directors, as the case may be. [86E-H; 87A-B]     2. The objects or purposes for which a company is creat- ed  should  be distinguished from the powers  which  it  can exercise.  So far as refusal to register the transfer  of  a share is concerned the power has to be specified and  within the framework of the said specification. There is no  inher- ent power in this behalf. [90B]     In  re Smith Knight & Co., IV Chancery Appeal Cases  20; In re National Provincial Marine Insurance Company, V  Chan- cery  Appeal  Cases 559; Moffatt v. Parqunar,  VII  Chancery Division 591; In re 84 Cawley  & Co., XLH Chancery Division 209; In re  Discoverers Finance Corporation Ltd., [1910] 1 Chancery Division 312 and Sadashiv v. Gandhi Sewa Samaj, AIR 1958 Bom. 247 followed. Palmer’s Company Law 24th Edn. p. 121 referred to.     The  Conservators of the River Tone v. Ash, 109  English Reports 479; Attorney-General v. The Lord Mayor etc. of  the City of Leeds, [1929] 2 Chancery Division 291; E.M. Muthappa Chettiar  v.  Salem Rajendra Mills Ltd., XXV  Company  Cases 283;  Life Insurance Corporation of India v. Escorts Ltd.  & Ors., [1985] Suppl.3 S.C.R. 909 and Bajaj Auto Ltd. v.  N.K. Firodia and Anr., 41 Comp. Cases 1, distinguished.     3. In the context in which the words "or otherwise" have been  used  in  sub-section (2) of section  111,  they  only purport  to  cast a duty or impose an obligation  of  giving notice of refusal to register the transfer of a share  irre- spective  of  the  fact whether such refusal  is  under  the Articles of Association of the Company or de hors the  Arti- cles, which would include even a case where such refusal has

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been  made  arbitrarily  or for any  collateral  purpose.  A fortiorari, this would be the interpretation of even Article 42 of the Articles of Association of the Company inasmuch as on  its plain language which, except for the  provision  for punishment,  is  in  pari materia with  sub-section  (2)  of Section  111 of the Act. The purpose of this Article is  the same as of the said sub-section (2). To introduce a  concept of  either  conferment or recognition of a right  to  refuse registration  of the transfer of a share in sub-section  (2) militates  against and runs counter to the very texture  and purpose of this subsection. [88A-C; 87E]     4. The transferor is not a necessary party to an  appli- cation under section 155 of the Act unless the transfer  was disputed by him. [92B-C]     5.  In the instant case, it has been found as a fact  by the High Court that it had not been proved that the respond- ent had paid higher prices for the shares than those  stated in the transfer deeds. Therefore, there is no  justification for  interfering  with  the said finding of  fact.  On  this finding  the  transfer deeds could not be termed  as  unduly stamped and power to refuse the registration of the transfer of  shares contemplated by section 108 of the Act could  not be invoked. [92D-E]

JUDGMENT:     CIVIL  APPELLATE JURISDICTION: Civil Appeal No. 4565  of 1989. 85     From  the Judgment and Order dated 4.5.1988 of the  Cal- cutta High Court in Appeal No. 806 of 1987     A.K. Sen, P.L. Sen, Bhaskar Sen, D.K. Sinha, A.N.  Chat- terjee, N.D.B. Raju and V.K. Jain for the Appellant.     F.S.  Nariman, R.C. Nag, S.B. Mukharjee,  R.F.  Nariman, Kusum  Agarwal, O.C. Mathur and D.N. Misra for the  Respond- ent. The Judgment of the Court was delivered by OJHA, J. Special leave granted.     This appeal by special leave has been preferred  against the  judgment dated May 4, 1988 of a Division Bench  of  the Calcutta  High  Court in Appeal No. 806 of  1987.  Facts  in brief necessary for consideration of the submissions made by learned  counsel  for the parties are that  the  respondent, Pradip Kumar Sarkar made an application under section 155 of the Companies Act, 1956 (hereinafter referred to as the Act) for rectification of the share register of the appellantcom- pany  by inserting his name therein as a  registered  share- holder  of certain shares transferred in his  favour.  These shares  were fully paid up and the company had no lien  over them.  According  to  the  respondent,  notwithstanding  the shares  being  duly lodged with the Company along  with  the transfer  deeds  and requisite fees for  registration  being paid  the Board of Directors of the Company  disapproved  of the  registration of the said shares. This  disapproval  led the respondent to make the application under section 155  of the Act for rectification of the share register. The case of the  respondent was that the shares in question being  fully paid up and the company having no lien over them the  regis- tration  of the transfer of the shares in his  favour  could not be refused under Article 39 of the Articles of  Associa- tion  of the Company which was the article relevant for  the purpose.     The  application aforesaid was contested by the  Company on various grounds. Overruling the objections raised by  the

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Company  a  learned single judge  allowed  the  application. Aggrieved, the Company preferred the appeal aforesaid before a Division Bench of the High Court which has been  dismissed by the judgment appealed against.     It  has been urged by learned counsel for the  appellant that  even  if the Articles of Association do not  make  any specific provision in this behalf the Company had  residuary inherent power to refuse registra- 86 tion  of the transfer of the shares for the benefit  of  the Company and its existing sharesholders. Power of refusal  to register  the transfer of shares was also sought to  be  de- rived  from the words "or otherwise" used in Article  42  of the  Articles of Association and section 111(2) of the  Act. The  transferor  not being made a party to  the  application under section 155 of the Act was also pleaded in  justifica- tion of the submission that the said application deserved to be dismissed. It was also urged that in view of section  108 of the Act the Company was entitled to go into the  question as  to whether the consideration for transfer of  shares  as shown  in  the  transfer deeds was  real  consideration  for purposes  of  finding out as to whether the  transfer  deeds were duly stamped and refuse registration of the transfer of the shares if the Company was of the view that the  transfer deeds were not duly stamped. For the respondent on the other hand it was urged by his learned counsel that in view of the specific provision contained in this behalf in Article 39 of the Articles of Association and no residuary power whatsoev- er having been conferred on the Company or its Directors  to refuse  registration  of the transfer of shares it  did  not have the power claimed by it in aid of refusal of  registra- tion of the shares transferred to the respondent.     Having  heard learned counsel for the parties we are  of the  opinion  that  unless there is any  impediment  in  the transfer of a share of a public limited company, such as the appellant,  a  shareholder  has the right  to  transfer  his share. Correspondingly, in the absence of any impediment  in this  behalf the transferee of a share, in order  to  enable him to exercise the rights of a sharesholder as against  the Company  and third parties, which is not possible until  the transfer  is registered in the company’s register, is  enti- tled  to have a rectification of the share register  of  the company by inserting his name therein as a registered share- holder of the share transferred to him. To have such  recti- fication carried out is the right of the transferee and  can be  defeated by the company or its Directors only in  pursu- ance of some power vested in them in this behalf. Such power has to be specified and provided for. It may even be residu- ary  but  in  that case too it should be  provided  for  and traceable either in the Act or the Articles of  Association. Even  if the power of refusal is so specified  and  provided for  the registration of a transferred share cannot  be  re- fused arbitrarily or for any collateral purpose, and can  be refused  only for a bona fide reason in the interest of  the company  and the general interest of the  sharesholders.  If neither  a specific nor residuary power of refusal has  been so provided, such power cannot be exercised on the basis  of the so-called undeclared inherent power to refuse  registra- tion on the ground that the 87 company or its Directors take the view that in the  interest of the company and the general interest of the shareholders, registration  of the transfer of shares should  be  refused. Indeed  making  a provision in the Act or  the  Articles  of Association  etc. conferring power of refusal  would  become

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futile if existence of an inherent power such as claimed  by the  company in the instant case is assumed, for the  simple reason that the amplitude of the so-called undeclared inher- ent power would itself take care of every refusal to  regis- ter the transfer of share. Assumption of such a power  would result  in leaving the matter of transfer of share  and  its registration  at the mercy and sweet will of the company  or its  Directors,  as the case may be. In the absence  of  any valid  and compelling reason it is difficult  to  comprehend such a proposition. Even  the  submission based on the words "or  otherwise"  in subsection  (2) of Section 111 of the Act and in Article  42 of  the  Articles of Association to the  effect  that  these words recognise the existence of an inherent power to refuse registration  of the transfer of the share does not  commend itself  to  us. The words "or otherwise"  were  inserted  in sub-section (2) of Section 111 of the Act in 1960 and it  is this subsection so amended which is applicable to the  facts of the instant case. Sub-section (2) of Section 111 does not confer  any  right but only casts a duty to give  notice  of refusal to register the transfer of a share and provides for punishment in case of default in doing so. Giving of  notice is necessary, inter alia, to facilitate the exercise of  the right  of  appeal conferred by sub-section (3)  and  (4)  of Section 111. To introduce a concept of either conferment  or recognition of a right to refuse registration of the  trans- fer of a share in sub-section (2) militates against and runs counter to the very texture and purpose of this sub-section. Such an interpretation would have the effect of imputing  to the  legislature an intention of making an effort to  fix  a square  peg in a round hole, when the purpose, if it was  to confer  or recognise any inherent power to refuse  registra- tion  of the transfer of a share, could plainly be  achieved by inserting the words "or otherwise" after the words "under its  articles" and before the words "to refuse to  register" in  sub-section (1) of Section 111 which is the  sub-section relevant for such purpose.     The words "or otherwise" take colour from the context in which  they are used. In our opinion, the words  "under  its articles" in subsection (2) of Section 111 of the ’Act  have been used in the same sense as is expressed in legal  termi- nology by the familiar words "conferred by law". Consequent- ly, if the opening part of sub-section (2) is read as "If  a Company refuses, whether in pursuance of any power conferred by 88 law  or otherwise" it would be incongruous to  suggest  that the  legislature in using the words "or otherwise"  intended to give recognition to a power to refuse registration of the transfer  of a share even otherwise than in accordance  with law. This would be tantamount to putting a premium on taking the  law  into one’s own hands. The  legislature  cannot  be imputed  with any such intention. For these reasons, we  are of  the  view  that in the context in which  the  words  "or otherwise" have been used in sub-section (2) of Section 111, they only purport to cast a duty or impose an obligation  of giving notice of refusal to register the transfer of a share irrespective  of the fact whether such refusal is under  the Articles of Association of the Company or de hors the  Arti- cles, which would include even a case where such refusal has been  made  arbitrarily  or for any  collateral  purpose.  A fortiorari, this would be the interpretation of even Article 42 of the Articles of Association of the Company inasmuch as on  its plain language which, except for the  provision  for punishment,  is  in  pari materia with  sub-section  (2)  of

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Section  111 of the Act, the purpose of this Article is  the same as of the said sub-section (2). Even the marginal  note of Article 42 lends support to this interpretation.     At  this  place, we may point out that it has  not  been disputed before us by learned counsel for the appellant that the  shares  in question having been fully paid up  and  the Company having no lien over them, Article 39 of the Articles of  Association could not be invoked to refuse  registration of the transfer of these shares.     We  may  now advert to the text books  and  the  decided cases  on which reliance has been placed by learned  counsel for  the  appellant in support of the  submission  that  the Company had an inherent power to refuse registration of  the transfer of the shares. It was pointed out that the board of directors  is  now  the principal organ of  a  company.  The management  of the affairs of the company is vested  in  the board of directors and all powers excepting those which  are specifically reserved for the general meeting by the act  or the articles or memorandum of association or otherwise  must now  be done by the board of directors vide section  291  of the  Act (The New Frontiers of Company Law by S.C. Sen  1971 Edition  Page 51). Whatever may fairly be regarded as  inci- dental to the objects for which the Corporation was  created is  not to be taken as prohibited. The incidental  power  is one  that  is directly and immediately  appropriate  to  the execution of the specific power created and not one that has a slight or remote relation to it. Furthermore, the want  of an  express  enumeration  of powers does  not  exclude  such incidental powers as are reasonably 89 necessary  to  accomplish the corporate  purpose.  The  mere creation  of  a  corporation was alone  sufficient,  in  the absence of prohibition, to confer upon such corporation  all those  powers  which are regarded as incident  to  corporate existence. (Thomsons’ Commentaries on the Law of Corporation 3rd Edition Vol. 3 Pages 820 to 822) As to the  relationship between the general meeting and the directors to some extent a  more exact analogy would be with the division  of  powers between  the Federal and State Legislatures under a  Federal Constitution  and the residual powers are in this case  with the directors (Gower’s Principles of Modern Company Law  4th Edition  Page 147). Corporate authority (powers) are  deter- mined by reference to (1) charter, (2) incorporation law  or act, (3) general and special corporation statutes  relevant, (4)  other applicable statutes, (5) case decisions (6)  cus- tomary  practices, and (7) treatises and other  discussions. They  include (1) general powers usually recognized  in  all corporations,  (2)  general  powers  usually  recognized  in corporations of the particular type, (3) powers inherent  in or  limited  by the purposes or business as  stated  in  the charter, and (4) implied powers to do all things  reasonably and  properly incidental to the specified purpose and  busi- ness. (Modern Corporation Law by Howard L. Oleck Vol. 1 Page 865) It is a well-recognised rule that a Corporation is  not restricted to the exercise of the powers expressly conferred upon  it  by its charter but has the implied  or  incidental power to do whatever is ’reasonably necessary to  effectuate the powers expressly granted and to accomplish the  purposes for which it was conferred unless a particular act sought to be  done is prohibited by the law or its charter.  (American Jurisprudence  2nd Edition Vol. 19 Page 431) Every  corpora- tion is of course created with certain express powers but in addition to those every corporation has also certain  powers which  attach to it as an incident to its  corporate  exist- ence. The powers which are incidental to corporate existence

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and  which  are  always implied in the  absence  of  express restrictions  are: (1) The power to have  perpetual  succes- sion, or succession during the period for which the corpora- tion is created which includes the power to elect members in the  place of those who are removed by death  or  otherwise, (2)  The  power to have a corporate name, (3) The  power  to purchase and hold land and chattels for authorised corporate purposes, (4) The power to have a common seal, (5) The power to  make by-laws for the government of the corporation,  (6) The  power to disfranchisement or removal of members  except in  the  case of modern  joint-stock  corporations.  (Corpus Juris Secundum Vol. XlX Pages 372-373)     Suffice  it  to say in this behalf that  what  has  been stated above with regard to residuary, implied or incidental powers is calculated to 90 accomplish  the objects, the corporate purpose or  corporate existence of the corporation. Refusal to register the trans- fer of a share obviously does not fall in this category.  As has  been pointed out in Palmer’s Company Law  24th  Edition Page  121  the objects or purposes for which  a  company  is created should be distinguished from the powers which it can exercise.  So far as refusal to register the transfer  of  a share  is  concerned  it is almost the  consistent  view  in decided cases that the power has to be specified and can  be exercised only in the manner specified and within the frame- work  of the said specification. There is no inherent  power in  this behalf. (See: In re Smith, Knight, & Co., IV  Chan- cery Appeal Cases Page 20; In re National Provincial  Marine Insurance Company, V Chancery Appeal Cases Page 559; Moffatt v. Parqunar, V11 Chancery Division Page 59 1; In re Cawley & Co.,  XLII Chancery Division Page 209; In re  Discovers  Fi- nance Corporation, Limited, [1910] 1 Chancery Division  Page 312  and Sadashiv v. Gandhi Sewa Samaj, A.1.R.  1958  Bombay Page 247)     Reliance  was  then placed by learned  counsel  for  the appellant on The Conservators of the River Tone v. Ash,  109 English Reports Page 479. In that case by an Act for  making and  keeping the river Tone navigable, it was enacted,  that the thirty persons therein named and their successors should be conservators of the river; and should have various powers referred  to therein. By a subsequent Act some  more  powers were  conferred on them. A question arose as to whether  the conservators  were entitled to sue in their  corporate  name for an injury done to their real property. It was held  that as it manifestly appeared from the different clauses of  the Acts of Parliament that the conservators should take land by succession  and not by inheritance, although they  were  not created  a  corporation  by express words they  were  so  by implication  and that being so they were entitled to sue  in their  corporate  name  for an injury  done  to  their  real property.  In our opinion, on the basis of this decision  it is difficult to cull out any power in the board of directors of the company in the instant case to refuse to register the transfer of a share by implication.     Reliance was also placed on Attorney-General v. The Lord Mayor Etc. of the City of Leeds, [1929] 2 Chancery  Division Page 291 where it was pointed out that a corporation  incor- porated by royal charter stands on a different footing  from a  statutory  corporation,  the difference  being  that  the latter  species of corporation can do only such acts as  are authorised directly or indirectly by the statute creating it whereas the former can, speaking generally, do anything that an ordinary individual can do. If, however, the  corporation by charter be a

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91 municipal corporation then it is subject to the  restriction imposed  by the Municipal Corporations Act, 1882. The  ques- tion  in connection with which the above  observations  were made  was  whether  the Corporation of  Leeds,  a  municipal corporation,  was entitled to work or run certain  omnibuses along any route whether within or without the boundaries  of the  City  of  Leeds. This again was  obviously  a  question relating  to the business of the corporation to work or  run omnibuses  and has no bearing on the question as to  whether the  directors of the appellant-company in the instant  case had  inherent  power to refuse to register the  transfer  of shares.     In  E.M. Muthappa Chettiar v. Salem Rajendra Mills  Ltd. XXV  Company Cases Page 283 it was held that if a person  is of such a character as to throw their company into confusion and if he was not a desirable one, then the Board of  Direc- tors would certainly be acting in the best interests of  the company  in refusing to register the shares in his name  and such a reason is quite a valid reason. Suffice it to say  so far as this case is concerned that Article 56 which was  the relevant  article dealing with the refusal to  register  the transfer  of a share itself clearly conferred power  on  the board  of directors to refuse to register the transfer of  a share  inter  alia "if the transferee of the  share  is  not approved". It was thus a case where power had been conferred by  an  article and was not a case of  refusal  to  register under any inherent power.     Lastly,  reliance was placed on Life Insurance  Corpora- tion of India v. Escorts Ltd. & Ors., [1985] Supp. 3  S.C.R. Page 909. In that case with reference to an earlier decision of this Court in Bajaj Auto Ltd. v. N K. Firodia and  Anoth- er,  41  Company Cases page 1, it was held  that  where  the articles permitted the directors to decline to register  the transfer of shares without assigning reasons the court would not necessarily draw adverse inference against the directors but  will assume that they acted reasonably and  bona  fide. Here again, as is apparent from the decision in the case  of Bajaj Auto Ltd. (supra) Article 52 of the  appellant-company in  that  case provided that the directors  might  at  their absolute and uncontrolled discretion decline to register any transfer of shares. This too was, therefore, a case of power being  conferred  by the articles of association and  not  a case  of exercise of inherent power. We may also  point  out that  at page 997 of the Reports of Escorts Ltd. (Supra)  it was  held  that even though it was open to the  company  and indeed  it was bound to refuse to register the  transfer  of shares  of  an Indian company in favour  of  a  non-resident where  the requisite permission under the FERA was  not  ob- tained but 92 once  permission  was obtained whether before or  after  the purchase the shares, the company could not thereafter refuse to register the transfer of shares.     The  third  submission made by learned counsel  for  the appellant that the application under section 155 of the  Act was  not maintainable as the transferors had not  been  made parties therein, may now be considered. A similar submission had  been made before the Division Bench of the  High  Court also and was repelled by holding that the transferor is  not a necessary party to an application under section 155 of the Act unless the transfer was disputed by him. It was  pointed out that even though in the instant case the transferors had been  served with notice and in any event had  knowledge  of the proceedings for registration of transfer of shares  they

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had not disputed the transfer of the shares. We do not  find any infirmity in the order of the High Court on this point.     Likewise,  we find no substance even in  the  submission made  by learned counsel for the appellant based on  section 108 of the Act for the simple reason that after taking  into consideration  the evidence produced by the parties  it  has been found as a fact by the High Court that it had not  been proved  that the respondent had paid higher prices  for  the shares  than those stated in the transfer deeds. We find  no justification for interferring with the said finding of fact in  the present appeal. On this finding the  transfer  deeds could  not be termed as unduly stamped and power  to  refuse the  registration of the transfer of shares contemplated  by section 108 of the Act would not be invoked.     In  the result, we find no substance in this appeal  and it is accordingly dismissed with costs assessed at Rs.2,000. T.N.A.                                 Appeal dismissed. 93