S.M. Hajee Abdul Hye Sahib Vs. K.N.S. Hajee Shaik Abdul Kader - Court Judgment

Excerpt:
1. in this petition filed under section 111 of the companies act, 1956, the petitioner has sought for a declaration that the decision of the board of directors of k. n. s. hajee shaik abdul kader labbai sahib company private limited (company) to refuse to register transmission of 117 shares, as null and void and also for a direction to register the transmission of the shares in his name, for the reasons stated in the petition.2. according to the petitioner, his deceased father held 733 shares in the company and by virtue of his being a legal heir sought for registration of transmission of 117 shares (his share in 733 shares), vide his letter dated may 16, 1994, which has been refused by the board as per communication dated july 7, 1994. the grounds of refusal were that the application for transmission should have been accompanied by (a) the original death certificate of the shareholder, (b) original legal heir certificate issued by the competent authorities, (c) consent letter from other legal heirs, (d) order of the competent court granting succession certificate and, finally, the original share certificates in the name of the deceased shareholder. in response to this letter, the petitioner furnished all the documents asked for by the company except the succession certificate, original share certificates as well as the consent letter of the other legal heirs.however, the company once again insisted on production of the consent letters from other legal heirs. the petitioner's attempt to get the consent letters from other legal heirs did not succeed. however, he was able to furnish a succession certificate from the competent court to the company. yet the company has not registered the transmission on the ground that the petitioner having engaged in a competing business was not entitled to become a member as per article 25 of the articles of association of the company.3. the contention of the respondent-company is that the petitioner was originally a shareholder in the company with 213 shares in his name and in view of his running a competing and rival business, the company expropriated the petitioner's shares as per the provisions of article 26 of the articles of association of the company. consequent to this expropriation, the petitioner filed a civil suit o. s. no. 101 of 1993, before the munsiff court at parapanangadi seeking a declaration that articles 23, 25 and 26 of the articles of association are not binding.however, the suit was dismissed in view of the evidence that the petitioner was carrying on a competing business. now, the petitioner has filed an appeal which is pending and there is no stay of the judgment in o. s. no, 101 of 1993. therefore, the company has taken the stand that even if the shares are transmitted in the name of the petitioner they would be liable for expropriation as per article 25/26.further, according to the company, the board is vested with the powers to require such of the documents as the board desires in considering the transmission and the petitioner has not been able to produce the consent letters. even the succession certificate granted by the court at palani is under appeal, which is" pending. the petitioner has not produced the original share certificates. under these circumstances, the action of the company to refuse to register transmission of the impugned shares is in accordance with the provisions of the companies act and the articles of association of the company.4. when the matter was heard, counsel for the petitioner, shri t. dulip singh, submitted that the action of the board of directors of the company was mala fide. the company has been a family company and the petitioner has been a shareholder right from 1947. no doubt he started his own business of which the company was fully aware and as a matter of fact, the company itself appointed the petitioner's firm as a commission agent in 1976. since he has already filed an appeal against the judgment in o. s. no. 101 of 1993 this judgment should not stand in the way of the company registering the transmission in the name of the petitioner. since some of the legal heirs are on the board of the company with a view to ensure that the shares are not registered in the name of the petitioner, these directors are not giving their consent for the transmission. even the original share certificates are with some of the directors of the company and as such the petitioner is not in a position to submit the same. as long as the succession certificate has been submitted it is the duty of the company to register the transmission on the basis of this certificate.5. shri arvind datar, appearing for the respondents, submitted that the decision of the board was a bona fide decision in accordance with the provisions of the articles. since the board has already formed an opinion that the petitioner is not a desirable person to be a member in view of his running a competing and rival business, the fact of which has also been confirmed by the judgment in o. s. no. 101 and has also expropriated even the shares held in his own name, the question of registering the transmission of any shares in the name of the petitioner does not arise. further, even to consider his request, the petitioner has not been able to submit consent letters from other shareholders as well as the original share certificates. according to shri datar, relying on bajaj auto ltd. v. n. k. firodia [1971] 41 comp cas 1 ; air 1971 sc 321, harinagar sugar mills ltd. v. shyam sunder jhunjhunwala [1961] 31 comp cas 387 (sc) and amirthalingam (m. g.) v.gudiatham textiles pvt. ltd. [1972] 42 comp cas 350 (mad) in view of the principle that as long as the decision of the board to refuse registration of transfer is in the interest of the company and they have not acted on a wrong principle or with an oblique motive or for a collateral purpose, the decision of the board should not be impugned by the court. he submitted that the board has acted in good faith and in the interest of the company and in accordance with the provisions of the articles to refuse the registration of transmission. accordingly, he submitted that the company law board should not intervene in this matter of granting any relief to the petitioner.6. we have considered the pleadings and arguments of counsel. the reasons for refusal to register transmission are twofold. one is that the petitioner has not produced certain documents required by the company and the second is that the petitioner is disqualified to become a member since he is carrying on a competing and rival business.7. the company being a private limited company, refusal to register transfer/transmission will have to be on the basis of the powers conferred on the board by articles. the present case relates to register transmission. articles 32 to 34 deal with transmission of shares. article 32 deals with the right of a joint holder/administrator to get registered as a member in respect of the shares of a deceased member. article 33 which reads as follows gives powers to the board to call for evidence of title : article 33.--"any person becoming entitled to a share in consequence of the death or bankruptcy of any member may upon producing such evidence of title as the directors shall require with the consent of the directors, himself be registered as holder of the share, or subject to the provisions as to transfers herein contained, transfer the same to some other person." 8. as far as article 34 is concerned, it has no application in the facts of the present case as it deals with the right of a person entitled to a share by transmission to receive dividend, notice, etc.9. the company has relied on the provisions of article 33 in seeking various documents from the petitioner. while the petitioner furnished some of the documents, yet he has not been able to produce consent letters from other legal heirs of the deceased as well as the original share certificates. while it is within the right of the board to call for these documents, yet, if we look at the issues in an objective manner, we find that some of the legal heirs are on the board of directors and that the petitioner has already produced succession certificates from the competent court of law. even though the succession certificate issued by the court is under appeal, the order of the trial court has not yet been stayed. when the petitioner has produced the succession certificate, we are of the view that the company's demand for consent letters from the other legal heirs is not warranted. in case the petitioner was not in a position to produce a succession certificate, the company would be fully justified in asking for the consent letters but not in the present case. as far as the original share certificates are concerned which are reported to be with some of the other legal heirs, there is nothing wrong in the company in registering the transmission in favour of the petitioner in respect of the impugned shares and issuing duplicate certificates by cancelling the original certificates especially when the company is a closely held one and the whereabouts of the certificates should be known to the members of the board, some of whom are also legal heirs of the deceased. accordingly, even though the board had the power to call for documents as per article 33, yet in the instant case, considering the facts and circumstances of the case, we are of the view that the company should have waived the requirement of production of these two documents.10. as far as the second ground taken by the company is concerned that the petitioner is disqualified to be a member (since he ceased to be a member on expropriation of shares held by him earlier) on account of his running a competing business, even though the respondent has produced various documents to establish this fact of his running a rival business, we do not propose to go into the same for the reasons that the matter is already under appeal. as we have already pointed out, the power to refuse transfer/transmission should be exercised in accordance with the articles. articles 25 and 26 deal with shares held by a member who is running a competing business. while as per article 25, the company would acquire the shares of such members, article 26 provides for expropriation. we have already pointed out that we are not going into the validity of these articles or the right of the company to take action as provided under these articles especially when these issues are not before us. the only limited issue before us is whether the company has powers to refuse on the ground of someone carrying on competing business and refusing to admit him as member on transmission.article 25/26 is applicable only in respect of shares of existing members. article 33, which we have already extracted above, only empowers the board to call for necessary evidence of title and any decision to either register or refuse to register on the basis of documents produced or not produced would be within the competence of the board. in other words, there is nothing in these articles to show that a person carrying on a competing business will not be admitted as a member, exercise of powers by the board under article 25/26 would arise only when a person who is a member carries on a competing business. had it been a transfer of shares and not transmission, perhaps, the board could have taken such a stand by the provisions of article 29. according to us, the powers of the board in the case of transmission are limited to the extent of only calling for requisite evidence of title and taking a decision on the same and nothing more.11. the first two cases cited by shri datar relate to transfer of share's and not transmission and as such are not applicable in the facts of the present case. as far as the third case cited by him (amirthalingam's case [1972] 42 comp cas 350 (mad)) is concerned, it relates to transmission, where refusal to register the transmission on the ground that the petitioner was not a desirable person in view of his acting against the interests of the company, was held to be valid.the articles provided that within 60 days after the receipt of the application, the transfer should be effected after an examination by the board that there was no objection. in view of this provision, the court held that the article undoubtedly gave discretion to the board to decide whether there was objection or not to recognise the transfer.therefore, the court refused to accept the contention urged on behalf of the petitioner that under the articles of association of the company, no power was conferred on the board to examine the transfer of shares in cases of devolution by operation of law. in the present case, we do not find any discretion vested in the board of directors to refuse transmission on any ground other than non-production of evidence of title. therefore, the decision taken by the board to refuse registration of transmission on the ground that the petitioner is carrying on a competing business, without any such power being conferred by the articles, is invalid. shri datar pointed out that even if it is registered, the company would be within its right to take action under article 25/26. in the instant petition what we are concerned with is whether the shares are to be registered in the name of the petitioner or not and not what the company would do after such registration.12. thus considering the facts and circumstances of the case, we hereby direct the company to waive the requirement of production of consent letters as well as the original certificates and register the transmission of the impugned shares in favour of the petitioner within a period of one month from the date of receipt of this order. there will be no orders as to costs.

Judgment:
1. In this petition filed under Section 111 of the Companies Act, 1956, the petitioner has sought for a declaration that the decision of the board of directors of K. N. S. Hajee Shaik Abdul Kader Labbai Sahib Company Private Limited (company) to refuse to register transmission of 117 shares, as null and void and also for a direction to register the transmission of the shares in his name, for the reasons stated in the petition.

2. According to the petitioner, his deceased father held 733 shares in the company and by virtue of his being a legal heir sought for registration of transmission of 117 shares (his share in 733 shares), vide his letter dated May 16, 1994, which has been refused by the board as per communication dated July 7, 1994. The grounds of refusal were that the application for transmission should have been accompanied by (a) the original death certificate of the shareholder, (b) original legal heir certificate issued by the competent authorities, (c) consent letter from other legal heirs, (d) order of the competent court granting succession certificate and, finally, the original share certificates in the name of the deceased shareholder. In response to this letter, the petitioner furnished all the documents asked for by the company except the succession certificate, original share certificates as well as the consent letter of the other legal heirs.

However, the company once again insisted on production of the consent letters from other legal heirs. The petitioner's attempt to get the consent letters from other legal heirs did not succeed. However, he was able to furnish a succession certificate from the competent court to the company. Yet the company has not registered the transmission on the ground that the petitioner having engaged in a competing business was not entitled to become a member as per Article 25 of the articles of association of the company.

3. The contention of the respondent-company is that the petitioner was originally a shareholder in the company with 213 shares in his name and in view of his running a competing and rival business, the company expropriated the petitioner's shares as per the provisions of Article 26 of the articles of association of the company. Consequent to this expropriation, the petitioner filed a civil suit O. S. No. 101 of 1993, before the Munsiff Court at Parapanangadi seeking a declaration that articles 23, 25 and 26 of the articles of association are not binding.

However, the suit was dismissed in view of the evidence that the petitioner was carrying on a competing business. Now, the petitioner has filed an appeal which is pending and there is no stay of the judgment in O. S. No, 101 of 1993. Therefore, the company has taken the stand that even if the shares are transmitted in the name of the petitioner they would be liable for expropriation as per Article 25/26.

Further, according to the company, the board is vested with the powers to require such of the documents as the board desires in considering the transmission and the petitioner has not been able to produce the consent letters. Even the succession certificate granted by the court at Palani is under appeal, which is" pending. The petitioner has not produced the original share certificates. Under these circumstances, the action of the company to refuse to register transmission of the impugned shares is in accordance with the provisions of the Companies Act and the articles of association of the company.

4. When the matter was heard, counsel for the petitioner, Shri T. Dulip Singh, submitted that the action of the board of directors of the company was mala fide. The company has been a family company and the petitioner has been a shareholder right from 1947. No doubt he started his own business of which the company was fully aware and as a matter of fact, the company itself appointed the petitioner's firm as a commission agent in 1976. Since he has already filed an appeal against the judgment in O. S. No. 101 of 1993 this judgment should not stand in the way of the company registering the transmission in the name of the petitioner. Since some of the legal heirs are on the board of the company with a view to ensure that the shares are not registered in the name of the petitioner, these directors are not giving their consent for the transmission. Even the original share certificates are with some of the directors of the company and as such the petitioner is not in a position to submit the same. As long as the succession certificate has been submitted it is the duty of the company to register the transmission on the basis of this certificate.

5. Shri Arvind Datar, appearing for the respondents, submitted that the decision of the board was a bona fide decision in accordance with the provisions of the articles. Since the board has already formed an opinion that the petitioner is not a desirable person to be a member in view of his running a competing and rival business, the fact of which has also been confirmed by the judgment in O. S. No. 101 and has also expropriated even the shares held in his own name, the question of registering the transmission of any shares in the name of the petitioner does not arise. Further, even to consider his request, the petitioner has not been able to submit consent letters from other shareholders as well as the original share certificates. According to Shri Datar, relying on Bajaj Auto Ltd. v. N. K. Firodia [1971] 41 Comp Cas 1 ; AIR 1971 SC 321, Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 31 Comp Cas 387 (SC) and Amirthalingam (M. G.) v.Gudiatham Textiles Pvt. Ltd. [1972] 42 Comp Cas 350 (Mad) in view of the principle that as long as the decision of the board to refuse registration of transfer is in the interest of the company and they have not acted on a wrong principle or with an oblique motive or for a collateral purpose, the decision of the board should not be impugned by the court. He submitted that the board has acted in good faith and in the interest of the company and in accordance with the provisions of the articles to refuse the registration of transmission. Accordingly, he submitted that the Company Law Board should not intervene in this matter of granting any relief to the petitioner.

6. We have considered the pleadings and arguments of counsel. The reasons for refusal to register transmission are twofold. One is that the petitioner has not produced certain documents required by the company and the second is that the petitioner is disqualified to become a member since he is carrying on a competing and rival business.

7. The company being a private limited company, refusal to register transfer/transmission will have to be on the basis of the powers conferred on the board by articles. The present case relates to register transmission. Articles 32 to 34 deal with transmission of shares. Article 32 deals with the right of a joint holder/administrator to get registered as a member in respect of the shares of a deceased member. Article 33 which reads as follows gives powers to the board to call for evidence of title : Article 33.--"Any person becoming entitled to a share in consequence of the death or bankruptcy of any member may upon producing such evidence of title as the directors shall require with the consent of the directors, himself be registered as holder of the share, or subject to the provisions as to transfers herein contained, transfer the same to some other person." 8. As far as Article 34 is concerned, it has no application in the facts of the present case as it deals with the right of a person entitled to a share by transmission to receive dividend, notice, etc.

9. The company has relied on the provisions of Article 33 in seeking various documents from the petitioner. While the petitioner furnished some of the documents, yet he has not been able to produce consent letters from other legal heirs of the deceased as well as the original share certificates. While it is within the right of the board to call for these documents, yet, if we look at the issues in an objective manner, we find that some of the legal heirs are on the board of directors and that the petitioner has already produced succession certificates from the competent court of law. Even though the succession certificate issued by the court is under appeal, the order of the trial court has not yet been stayed. When the petitioner has produced the succession certificate, we are of the view that the company's demand for consent letters from the other legal heirs is not warranted. In case the petitioner was not in a position to produce a succession certificate, the company would be fully justified in asking for the consent letters but not in the present case. As far as the original share certificates are concerned which are reported to be with some of the other legal heirs, there is nothing wrong in the company in registering the transmission in favour of the petitioner in respect of the impugned shares and issuing duplicate certificates by cancelling the original certificates especially when the company is a closely held one and the whereabouts of the certificates should be known to the members of the board, some of whom are also legal heirs of the deceased. Accordingly, even though the board had the power to call for documents as per Article 33, yet in the instant case, considering the facts and circumstances of the case, we are of the view that the company should have waived the requirement of production of these two documents.

10. As far as the second ground taken by the company is concerned that the petitioner is disqualified to be a member (since he ceased to be a member on expropriation of shares held by him earlier) on account of his running a competing business, even though the respondent has produced various documents to establish this fact of his running a rival business, we do not propose to go into the same for the reasons that the matter is already under appeal. As we have already pointed out, the power to refuse transfer/transmission should be exercised in accordance with the articles. Articles 25 and 26 deal with shares held by a member who is running a competing business. While as per Article 25, the company would acquire the shares of such members, Article 26 provides for expropriation. We have already pointed out that we are not going into the validity of these articles or the right of the company to take action as provided under these articles especially when these issues are not before us. The only limited issue before us is whether the company has powers to refuse on the ground of someone carrying on competing business and refusing to admit him as member on transmission.

Article 25/26 is applicable only in respect of shares of existing members. Article 33, which we have already extracted above, only empowers the board to call for necessary evidence of title and any decision to either register or refuse to register on the basis of documents produced or not produced would be within the competence of the board. In other words, there is nothing in these articles to show that a person carrying on a competing business will not be admitted as a member, Exercise of powers by the board under Article 25/26 would arise only when a person who is a member carries on a competing business. Had it been a transfer of shares and not transmission, perhaps, the board could have taken such a stand by the provisions of Article 29. According to us, the powers of the board in the case of transmission are limited to the extent of only calling for requisite evidence of title and taking a decision on the same and nothing more.

11. The first two cases cited by Shri Datar relate to transfer of share's and not transmission and as such are not applicable in the facts of the present case. As far as the third case cited by him (Amirthalingam's case [1972] 42 Comp Cas 350 (Mad)) is concerned, it relates to transmission, where refusal to register the transmission on the ground that the petitioner was not a desirable person in view of his acting against the interests of the company, was held to be valid.

The articles provided that within 60 days after the receipt of the application, the transfer should be effected after an examination by the board that there was no objection. In view of this provision, the court held that the Article undoubtedly gave discretion to the board to decide whether there was objection or not to recognise the transfer.

Therefore, the court refused to accept the contention urged on behalf of the petitioner that under the articles of association of the company, no power was conferred on the board to examine the transfer of shares in cases of devolution by operation of law. In the present case, we do not find any discretion vested in the board of directors to refuse transmission on any ground other than non-production of evidence of title. Therefore, the decision taken by the board to refuse registration of transmission on the ground that the petitioner is carrying on a competing business, without any such power being conferred by the articles, is invalid. Shri Datar pointed out that even if it is registered, the company would be within its right to take action under Article 25/26. In the instant petition what we are concerned with is whether the shares are to be registered in the name of the petitioner or not and not what the company would do after such registration.

12. Thus considering the facts and circumstances of the case, we hereby direct the company to waive the requirement of production of consent letters as well as the original certificates and register the transmission of the impugned shares in favour of the petitioner within a period of one month from the date of receipt of this order. There will be no orders as to costs.