Centurion Bank Limited Vs. Bellary Steels and Alloys - Court Judgment

Excerpt:
1. this petition is filed under section 111a of the companies act, 1956, ("the act") against m/s bellary steels and alloys limited ("the company") and others seeking directions of this bench to transfer 12,00,000 equity shares of the company impugned in the petition in favour of the petitioner.2. shri krishna srinivasan, the learned counsel submitted that the petitioner had extended a term loan of rs. 30 lakhs on 31.03.2000 to the third respondent for conduct of his business, against security of the impugned shares by way of pledge. in this connection, the learned counsel referred to the loan and security documents executed by the third respondent in favour of petitioner (annexure - 2 to annexure 7).when the third respondent committed default in repayment of the loan amount, the petitioner forwarded on 10.07.2002 to the second respondent, the share transfer agent of the company, the original share certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting the registration of transfer thereof in the name of the petitioner. however, the second respondent, on the instructions of the third respondent, refused to register the transfer and returned the original share certificates together with transfer documents for the reasons, that the impugned shares formed part of the promoters' holdings, and further that prior permission of the financial institutions was mandatory for effecting the transfer in favour of the petitioner, as borne out by annexure - 8 to annexure 10. the second respondent adopted the same strategy in june 2003 and refused to register transfer of the impugned shares for which reference has been made annexure a11 to annexure 13. according to shri.krishna srinivasan, the learned counsel, the second respondent's refusal to the register transfer of shares is with an oblique motive as well as without sufficient cause and therefore, contrary to law, malafide, arbitrary and unjustified, especially when the impugned shares are freely transferable. the learned counsel while concluding his submissions urged that the petitioner, being a pledgee, is entitled for the transfer in its favour on default committed by the third respondent in support of which he relied on the decision in indian bank v. kiran overseas exports ltd 2000 (4) clj 416 and prayed for the relief claimed in the petition.3. shri. v. phani kiran, the learned counsel appearing for respondent nos. 1 & 3 while admitting the pledge of the impugned shares by the third respondent in favour of the petitioner contended that the loan proceeds were adjusted against overdue lease rentals due from the company in favour of the petitioner. shri. kiran referring to the letter of lien dated 31.03.2000 (annexure a-5) executed by the third respondent submitted that a lien is different from pledge, though a lien is termed as 'implied pledge', in support of which he referred to the decision in vijay kumar v. jullunder body builders and ors., 1983 (53) comp. cas 125. by virtue of section 176 of the indian contract act, 1872, the pledgee before exercising the power of sale of pledged goods must give to the pledger reasonable notice of the sale. shri.kiran in support of his claim relied upon the following decisions: 1. sri raja kakarlapudi venkata sudarsana sundara narasayyamma garu and ors. v. andhra bank limited air 1960 ap 272 though the third respondent had availed a short term loan against execution of a demand promissory note and pledge of the impugned shares by way of collateral security, the petitioner instead of enforcing the promissory note, proceeded against the collateral security, in violation of the principles of law. shri kiran pointed out that article 12 (e) of the articles of association of company gives absolute power in favour of the board of directors of the company to decline registration of any transfer of shares, if the transferee is not a desirable person. accordingly, the board of directors exercised their power in the interest of company without any oblique motive or collateral purpose declining registration of the transfer of the impugned shares in favour of the petitioner and therefore, the company law board is not to interfere with the unfettered discretion of the board of directors as held in the following cases: 1. amridthalingam (m g) v. gudiyatham textiles p ltd (1972) 42 comp cas 350 (mad) 2. jalpaiguri cinema co. v. p.n. mukherjee (del (db) 1971 comp cas 678 4. vasant investments corporation ltd v. company law board and ors. (bom) 102 comp cas 421 the learned counsel pointed out that the company's refusal to register the share pledged to secure the short term loan should be deemed to be a sufficient cause as held in canara bank v. ankit granites ltd., (1999) 97 comp cas 511 (clb-sr). shri. kiran therefore prayed for dismissal of petition.4. shri. krishna srinivasan, learned counsel in his reply referred to the admissions made in the written objections filed on behalf of the third respondent, regarding pledge of the impugned shares securing the credit facilities extended to the petitioner. the learned counsel pointed out that section 176 of the indian contract act, 1872 stipulates that only when a pledgee before exercising the power of sale of pledged goods must give reasonable notice of the sale and not otherwise as held in kiran overseas exports ltd., (2000) 4 comp l 410 (clb) and further that in the present case, the petitioner is not bringing the impugned shares for sale but only seeks for the transfer in its name. shri. krishna srinivasan, the learned counsel denied that the shares are forming part of the promoters' holdings and that the share certificates do not reveal any restriction against transfer.moreover, the third respondent has been taking contradictory stand from time to time as seen from the reply notice dated 13.03.2003 issued on behalf of the third respondent, wherein the availment of the loan itself has been denied by the third respondent. shri krishan srinivasan, the learned counsel therefore, pressed for the relief claimed in the petition.5. i have considered the pleadings and submissions of the learned counsel. a perusal of the documents before me show that the third respondent had availed the credit facilities from the petitioner which are secured, inter alia, by pledge of the impugned shares belonging to the third respondent as borne by the letter of lien dated 31.03.2000 (pages 50-52 of petition) and the averments made in the written objections filed on behalf of the third respondent, the relevant portion of which reads as under: - "its true that the respondent no. 3 had pledged 12,00,000 equity shares of rs. 10 each with the petitioner bank for adjusting against overdue lease rentals due from the respondent no. 1: annexure vi of the petition evidences the said averment".the above unequivocal admission of the third respondent belies the stand taken in his legal notice dated 13.03.2003 sent in reply to the legal notice dated 20.02.2003 of the petitioner that the third respondent did not avail any loan from the petitioner. the third respondent failed to repay the loan amount, as borne out by the letters dated 03.04.2001, 02.08.2001, 31.01.2002, 12.02.2002 and 03.07.2002 of the petitioner, upon which the petitioner sought to transfer the impugned shares in its favour, and not sale of the shares, in which case there is no requirement of any statutory notice under section 176 of the indian contract act, as held in indian bank v. kiran overseas exports ltd (supra). the power of refusal of registration of the transfer in favour of the petitioner exercised by the board of directors invoking article 12 (e) of the articles of association of the company, apart from not falling within "sufficient cause" specified in section 111a, cannot bar the petitioner to enforce its right, as pledgee of the shares. there is no document to show that the shares allotted in favour of the third respondent are towards the promoters' holdings and that there is any restriction in transferring these shares. the decisions cited on behalf of respondents are not applicable in the facts and circumstances of the case and do not in any way go to their aid. taking into consideration the facts and circumstances of the case, and also the fact that the plea of the defendants is not tenable, i am convinced that the company should register the transfer of impugned shares in favour of the petitioner. accordingly, i hereby direct that the company shall transfer the impugned shares in favour of the petitioner within 30 days of lodging of the share certificates together with instruments of transfer by the petitioner. no order as to costs.

Judgment:
1. This Petition is filed under Section 111A of the Companies Act, 1956, ("the Act") against M/s Bellary Steels and Alloys Limited ("the Company") and others seeking directions of this Bench to transfer 12,00,000 equity shares of the Company impugned in the petition in favour of the petitioner.

2. Shri Krishna Srinivasan, the learned Counsel submitted that the petitioner had extended a Term Loan of Rs. 30 lakhs on 31.03.2000 to the third respondent for conduct of his business, against security of the impugned shares by way of pledge. In this connection, the learned Counsel referred to the loan and security documents executed by the third respondent in favour of petitioner (Annexure - 2 to Annexure 7).

When the third respondent committed default in repayment of the loan amount, the petitioner forwarded on 10.07.2002 to the second respondent, the Share Transfer Agent of the Company, the original share certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting the registration of transfer thereof in the name of the petitioner. However, the second respondent, on the instructions of the third respondent, refused to register the transfer and returned the original share certificates together with transfer documents for the reasons, that the impugned shares formed part of the Promoters' holdings, and further that prior permission of the Financial institutions was mandatory for effecting the transfer in favour of the petitioner, as borne out by Annexure - 8 to Annexure 10. The second respondent adopted the same strategy in June 2003 and refused to register transfer of the impugned shares for which reference has been made Annexure A11 to Annexure 13. According to Shri.

Krishna Srinivasan, the learned counsel, the second respondent's refusal to the register transfer of shares is with an oblique motive as well as without sufficient cause and therefore, contrary to law, malafide, arbitrary and unjustified, especially when the impugned shares are freely transferable. The learned Counsel while concluding his submissions urged that the petitioner, being a pledgee, is entitled for the transfer in its favour on default committed by the third respondent in support of which he relied on the decision in Indian Bank v. Kiran Overseas Exports Ltd 2000 (4) CLJ 416 and prayed for the relief claimed in the petition.

3. Shri. V. Phani Kiran, the learned counsel appearing for respondent Nos. 1 & 3 while admitting the pledge of the impugned shares by the third respondent in favour of the petitioner contended that the loan proceeds were adjusted against overdue lease rentals due from the Company in favour of the petitioner. Shri. Kiran referring to the letter of lien dated 31.03.2000 (Annexure A-5) executed by the third respondent submitted that a lien is different from pledge, though a lien is termed as 'implied pledge', in support of which he referred to the decision in Vijay Kumar v. Jullunder Body Builders and Ors., 1983 (53) Comp. Cas 125. By virtue of Section 176 of the Indian Contract Act, 1872, the pledgee before exercising the power of sale of pledged goods must give to the pledger reasonable notice of the sale. Shri.

Kiran in support of his claim relied upon the following decisions: 1. Sri Raja Kakarlapudi Venkata Sudarsana Sundara Narasayyamma Garu and Ors. v. Andhra Bank Limited AIR 1960 AP 272 Though the third respondent had availed a Short Term Loan against execution of a Demand Promissory Note and pledge of the impugned shares by way of collateral security, the petitioner instead of enforcing the Promissory Note, proceeded against the collateral security, in violation of the principles of law. Shri Kiran pointed out that Article 12 (e) of the Articles of Association of Company gives absolute power in favour of the Board of Directors of the Company to decline registration of any transfer of shares, if the transferee is not a desirable person. Accordingly, the Board of Directors exercised their power in the interest of Company without any oblique motive or collateral purpose declining registration of the transfer of the impugned shares in favour of the petitioner and therefore, the Company Law Board is not to interfere with the unfettered discretion of the Board of Directors as held in the following cases: 1. Amridthalingam (M G) v. Gudiyatham Textiles P Ltd (1972) 42 Comp Cas 350 (Mad) 2. Jalpaiguri Cinema Co. v. P.N. Mukherjee (Del (DB) 1971 Comp Cas 678 4. Vasant Investments Corporation Ltd v. Company Law Board and Ors.

(Bom) 102 Comp Cas 421 The learned Counsel pointed out that the Company's refusal to register the share pledged to secure the Short term Loan should be deemed to be a sufficient cause as held in Canara Bank v. Ankit Granites Ltd., (1999) 97 Comp Cas 511 (CLB-SR). Shri. Kiran therefore prayed for dismissal of petition.

4. Shri. Krishna Srinivasan, learned Counsel in his reply referred to the admissions made in the written objections filed on behalf of the third respondent, regarding pledge of the impugned shares securing the credit facilities extended to the petitioner. The learned Counsel pointed out that Section 176 of the Indian Contract Act, 1872 stipulates that only when a pledgee before exercising the power of sale of pledged goods must give reasonable notice of the sale and not otherwise as held in Kiran Overseas Exports Ltd., (2000) 4 Comp L 410 (CLB) and further that in the present case, the petitioner is not bringing the impugned shares for sale but only seeks for the transfer in its name. Shri. Krishna Srinivasan, the learned Counsel denied that the shares are forming part of the promoters' holdings and that the share certificates do not reveal any restriction against transfer.

Moreover, the third respondent has been taking contradictory stand from time to time as seen from the reply notice dated 13.03.2003 issued on behalf of the third respondent, wherein the availment of the loan itself has been denied by the third respondent. Shri Krishan Srinivasan, the learned Counsel therefore, pressed for the relief claimed in the petition.

5. I have considered the pleadings and submissions of the learned counsel. A perusal of the documents before me show that the third respondent had availed the credit facilities from the petitioner which are secured, inter alia, by pledge of the impugned shares belonging to the third respondent as borne by the letter of lien dated 31.03.2000 (pages 50-52 of petition) and the averments made in the written objections filed on behalf of the third respondent, the relevant portion of which reads as under: - "its true that the Respondent No. 3 had pledged 12,00,000 equity shares of Rs. 10 each with the Petitioner Bank for adjusting against overdue lease rentals due from the Respondent No. 1: Annexure VI of the petition evidences the said averment".

The above unequivocal admission of the third respondent belies the stand taken in his legal notice dated 13.03.2003 sent in reply to the legal notice dated 20.02.2003 of the petitioner that the third respondent did not avail any loan from the petitioner. The third respondent failed to repay the loan amount, as borne out by the letters dated 03.04.2001, 02.08.2001, 31.01.2002, 12.02.2002 and 03.07.2002 of the petitioner, upon which the petitioner sought to transfer the impugned shares in its favour, and not sale of the shares, in which case there is no requirement of any statutory notice under Section 176 of the Indian Contract Act, as held in Indian Bank v. Kiran Overseas Exports Ltd (Supra). The power of refusal of registration of the transfer in favour of the petitioner exercised by the Board of Directors invoking Article 12 (e) of the Articles of Association of the Company, apart from not falling within "Sufficient Cause" specified in Section 111A, cannot bar the petitioner to enforce its right, as pledgee of the shares. There is no document to show that the shares allotted in favour of the third respondent are towards the promoters' holdings and that there is any restriction in transferring these shares. The decisions cited on behalf of respondents are not applicable in the facts and circumstances of the case and do not in any way go to their aid. Taking into consideration the facts and circumstances of the case, and also the fact that the plea of the defendants is not tenable, I am convinced that the Company should register the transfer of impugned shares in favour of the petitioner. Accordingly, I hereby direct that the Company shall transfer the impugned shares in favour of the petitioner within 30 days of lodging of the share certificates together with instruments of transfer by the petitioner. No order as to costs.