KLG Systel Ltd v. Prakash Mal Jain & Ors.

Authorities. It is contended that the procedure for transfer of shares under Section 108 of the Act is to protect the Company from fraudulent and unwarranted transfers; therefore, the procedure of recording transfer on production of original share certificates with transfer deeds is contemplated. But, where there is no dispute about the purchase of the property in the shares by the respondent, then the Company is bound to recognize transfer of shares in favour of the transferee such as the respondent. It is also pointed out that though the earlier petition in respect of 1700 shares was dismissed, but it was dismissed for the reason that the respondent has not made the transferors as parties to the proceedings. Since the transferors are parties in the present proceedings in respect of 8100 shares, therefore, the order passed by the learned Board on 13.03.2001 dismissing the petition in respect of 1700 shares does not oust the jurisdiction of the Board to grant the relief sought for by the respondents. A perusal of the order passed by the Company Law Board on

13.03.2001 (Annexure P-15) shows that the Board was apprised of the dispute in respect of shares allegedly purchased from Shri N.C.Ranka. It was found that the original share-holder is claiming consideration for the said shares. It was also noticed that the petitioner has not made the transferors as parties in the present proceedings. The relevant extract of the order dated 13.03.2001 reads as under : “….Though the petitioner has not furnished the details of Suit filed by Shri N.C.Ranka but it appears from the copy of the statement that Suit has been filed for recovery of the sale Company Appeal No.20 of 2007 5 consideration. In other words, original shareholder is claiming the consideration for the said shares. If the consideration has not been paid by the petitioner the contract in question prima facie would not be valid. We are no expressing any opinion on the said case, as the same is pending in other Court. The petitioner has not made the transferors as parties in the present proceedings. The petitioner has failed to make out any case for grant of relief from the company.” In the present case, the transferors have been made parties to the proceedings. None has contested the proceedings either before the Board or before this Court, even though they were served by publication in this Court. The documents on record show purchase of 8100 shares by respondent No.1 from other respondents, who were impleaded as respondents before the Board as well. In view of the finding recorded and the fact that the transferors are party to the present proceedings, therefore, the previous order of the Board will not operate as binding on the respondent in respect of other shares as well. There is no dispute raised by any of the transferors that such shares were not sold to the respondents. Since the transfer of property in the shares is not disputed, the question which is required to be examined is whether on account of non-payment of the balance application money, the shares can be forfeited or whether the respondent has a right to deposit the balance application money at this stage, as directed by the Board. As per Section 82 of the Act, the shares are movable property, transferable in the manner provided by the articles of the company. Section 2 (46) of the Act defines ‘share’ to mean share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied. Section 2 (7) of the Sale of Goods Act, Company Appeal No.20 of 2007 6 1930, defines ‘goods’ to mean every kind of movable property other than actionable claims and money; and includes stock and shares. Section 19 of the Sale of Goods Act, 1930 provides that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Thus, the shares being movable property are transferable in the manner provided by the articles of company. Where a company has no article of its own, the regulations in Table ‘A’ of Ist Schedule will apply. The Articles No.40 to 42 of the Company are as under : “40. If a member fails to pay any call or installment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or installment remains unpaid, serve a notice on him requiring payment of so much of the call or installment as is unpaid together with any interest which may have accrued and all expenses that may have been incurred by the Company by reason of such non-payment.

41. The notice aforesaid shall :- (a) name a further day (not earlier than the expiry of 30 (thirty days) from the date of service of notice) on or before which the payment required by the notice is to be made; and (b) state that, in the event of non-payment on or before the day so named. The shares in respect of which the call was made, will be liable to be forfeited.

42. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time, thereafter before the payment required by the notice has been made, be forfeited by a resolution of the Board to the effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the date of forfeiture, which shall Company Appeal No.20 of 2007 7 be the date on which the resolution of the Board is passed forfeiting the shares.” The statutory provisions of transfer of shares and debentures are contained in Section 108 of the Act, and the manner in which it is required to be registered by the Companies. By virtue of Companies (Amendment) Act, 1988, Section 155 was omitted which conferred power on the Court to rectify Register of Members and substituted Section 111 providing registration of shares by the Company and its refusal an appeal before the Company Law Board. It was in exercise of such powers conferred under Section 111 of the said Act, the respondent have approached the Company Law Board for rectification of the Members of the Register. Sections 108 and 111 of the Act read as under: “108. Transfer not to be registered except on production of instrument of transfer : -- (1) A company shall not register a transfer of shares in, or debentures of, the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, alongwith the letter of allotment of the shares or debentures; Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit.” “111. Power to refuse registration and appeal against refusal – (1) If a company refuses, whether in pursuance of any Company Appeal No.20 of 2007 8 power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal. (2) The transferor or transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, may appeal to the Tribunal against any refusal of the company to register the transfer or transmission, or against any failure on its part within the period referred to in sub-section (1), either to register the transfer or transmission or to send notice of its refusal to register the same. (3) An appeal under sub-section (2) shall be made within two months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within four months from the date on which the instrument of transfer, or the intimation of transmission, as the case may be, was delivered to the company.” Hon’ble Supreme Court in a case reported as Vasudev Ramchandra Shelat Vs. Pranlal Jayanand Thaker AR 1974 SC 1728, was considering the issues arising out of gift of certain shares by a registered gift deed accompanied by blank transfer deeds, i.e. deed signed but material particulars not filled in. It was observed that a distinction ought to be made between the title to get on the register of the members and the full property in the shares in a company. The court recognized that a transferee acquires the title in the shares in the normal mercantile from by delivery accompanied by a blank transfer form and vests in him an enforceable right Company Appeal No.20 of 2007 9 therein so long as there is nothing in the articles of association which prevent such transactions. The Court held to the following effect : “8. Thus, we find that, in Barucha’s case (supra) a distinction was made between “the title to get on the register”, and “the full property in the shares in a Company”. The first was held to have been acquired by mere delivery, with the required intention, of the share certificate and a blank form signed by the transferor. The second is only obtained when the transferee, in exercise of his right to become a shareholder, gets his name on the register in place of the transferor. This antecedent right in the person to whom the share certificate is given with a signed blank transfer form under a transaction meant to confer a right or title upon him to become a shareholder, is enforceable so long as no obstacle to it is shown to exist in any of the articles of association of a company or a person with a superior right or title, legal or equitable, does not appear to be there. We think that Section 6 of the Transfer of Property Act justifies such a splitting up of rights constituting “property” in shares just as it is well recognised that rights of ownership of a property may be split up into a right to the “corpus” and another to the “usufruct” of the property and then separately dealt with.

11. We think the learned Counsel for the appellant rightly contended that, even in the absence of registration of the gift deed, the delivery of the documents mentioned above to the donee, with the clear intention to donate, would be enough to confer upon the donee a complete and irrevocable right, of the kind indicated above, in what is movable property. He relied upon Kalyanasundaram Pillai Vs. Karuppa Mooppanar, 54 Ind App 89 = (AIR 1927 PC 42); Venkatsuba Shrinivas Hedge Vs. Company Appeal No.20 of 2007 10 Subba Rama, ILR 52 Bom 313 = (AIR 1928 PC 86): Firm Sawan Mal Gopi Chand Vs. Shiv Charan, AIR 1924 Lah 173.

12. The requirements of form or mode of transfer are really intended to ensure that the substantial requirements of the transfer have been satisfied. They subserve an object. In the case before us, the requirements of both Section 122 and Section 123 of the Transfer of Property Act were completely met so as to vest the right in the donee to obtain the share certificates in accordance with the provisions of the Company Law. We think that such a right is in itself “property” and separable from the technical legal ownership of the shares. The subsequent or “full right of ownership” of shares would follow as a matter of course by compliance with the provisions of Company Law. In other words, a transfer of “property” rights in shares, recognized by the Transfer of Property Act, may be antecedent to the actual vesting of all or the full rights of ownership of shares and exercise of the rights of shareholders in accordance with the provisions of the Company Law.”

13. The Companies Act of 1913 was meant “to consolidate and amend the law relating to trading companies and other associations”. It is concerned with the Acts and proceedings relating to the formation, running, and extinction of companies, with rights, duties, and liabilities of those who are either members or officers of such companies, and of those who deal with companies in other capacities. Its subject-matter is not transfer of property in general. It deals with transfers of shares only because they give certain rights to the legally recognised shareholders and imposes some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share held but also to participate in certain proceedings relating to the company concerned. It is for this purpose that Section 34 of the Companies Act 1913 enables the making of “an application for the registration of the transfer of shares in a company … either by the transferor or the transferee”. A share certificate is a prima facie evidence, Company Appeal No.20 of 2007 11 under Section 29 of the Act, of the title to a share. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for “registration” of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of Company law, has to be provided, as indicated by Section 28, by the articles of the Company, and, in the absence of such specific provisions on the subject, regulations contained in Table ‘A’ of the 1st Schedule of the Companies Act apply. In Canbank Financial Services Ltd. Vs. Custodian and others (2004) 8 Supreme Court Cases 355, though the Court was considering the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, but considering the nature of shares, it held to the following effect : “84. Right, title and interest in a movable property can pass by delivery of possession and upon paying of the considerations in view of the provisions of the Sale of Goods Act. Passing up of a title in favour of the transferee would not be illegal, unless it is forbidden by law. For the said purpose, the transaction must attract the wrath of Section 23 of the Contract Act and not otherwise. Section 3 of the Act does not contemplate extinction of right of a third party. For getting the transaction invalidated in law, only Section 4 of the Act can be taken recourse to.” In the present case, it has been pleaded by the respondent- transfree and not controverted by the transferors that the share certificates were handed over to the transferee along with transfer deeds and that such shares and transfer deeds have been mis-placed. The factum of transfer of the shares by handing over the share certificates and the transfer deeds could be controverted by the transferors alone but none has come forward to Company Appeal No.20 of 2007 12 deny the sale of the goods i.e. shares, therefore, the property in the shares would be deemed to be transferred in favour of the transferee. The first proviso of Section 108 (1) provides that if the Board of Directors are satisfied that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the Company may register the transfer on such terms as to indemnity as the Board may think fit. The stand of the respondents that the share certificates and the transfer deeds have been lost is supported by a Daily Dairy Report registered with the Police Authorities. None of the transferors have come forward to controvert the assertions of the respondent that such shares were, in fact, transferred. Therefore, between the transferors and the transferee, the transaction of sale is complete. The Company was bound to register the transferees as its members. Learned counsel for the appellant has relied upon Article 29 of Table A of Schedule I of the Act, to contend that if a Member i.e. the shareholder failed to pay any call or installment of a call on the day appointed for payment thereof, the Board is required to serve a show cause notice to the defaulter. In terms of Article 31, if the payment is not made, the shares are deemed to be forfeited. The relevant Articles read as under : “29. If a member fails to pay any call, or instalment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued.

30. The notice aforesaid shall -- (a) name a further day (not being earlier than the expiry of fourteen days from the date of service of the notice) on or before which the payment required by the notice is to be made; Company Appeal No.20 of 2007 13 (b) state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited.”

31. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect.

32. (1) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. (2) At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks fit.

33. (1) A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company all moneys which, at the date of forfeiture, were presently payable by him to the company in respect of the shares. (2) The liability of such person shall cease if and when the company shall have received payment in full of all such moneys in respect of the shares.

34. (1) A duly verified declaration in writing that the declarant is a director, the manager or the secretary, of the company, and that a share in the company has been duly forfeited on a date stated in the declaration, shall be conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share. (2) The company may receive the consideration, if any, given for the share on any sale or disposal thereof and may execute a transfer of the share in favour of the person to whom the share is sold or disposed of. (3) The transferee shall thereupon be registered as the holder of the share. (4) The transferee shall not be bound to see to the application of the purchase money, if any, nor shall his title to the share be Company Appeal No.20 of 2007 14 affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share. It is contended by the learned counsel for the appellant that since the member has failed to pay the balance allotment money within the time prescribed and failed to do so even after serving of a notice, the shares stand forfeited. After forfeiture, the respondent has no right to claim any interest in the aforesaid shares. Therefore, the transferee of such forfeited shares have no right to seek rectification of the Register of Members in respect of share certificates, which stand forfeited on account of non-payment of call money. Thus, at this stage, the question to be examined is effect of forfeiture of shares. In terms of Articles 40 to 42, reproduced above, the shares can be forfeited if the call money is not paid and when called upon to do so. However, Clause 32 of Table ‘A’ Schedule I provides that a forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. Clause 33 contemplates that a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company all moneys which, at the date of forfeiture, were payable by him. Section 108 of the Act provides for different situations in respect of transfer of shares. Sub-section (1) is transfer of shares on the basis of transfer deeds. First proviso is for transfer of shares on payment of requisite fee, on plain paper on satisfaction of the Board of Directors that the instrument of transfer stands lost; whereas second proviso deals with transfer of shares etc by operation of law. In Naresh Chandra Sanyal Vs. The Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422, it has been held that the share forfeited Company Appeal No.20 of 2007 15 must be reallotted or otherwise disposed of. It cannot be retained by the Company. The share after forfeiture in the hands of the Company is subject to an obligation to dispose it of. On that account there is no reduction of capital by mere forfeiture. Thus, even if the shares have been forfeited for non-payment of the call money, it does not amount reduction of the share capital of the Company. Such forfeited shares could be sold or otherwise disposed of, as the Board may think fit. But it was not done. Article 33 provides that a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company in respect of the shares. Such liability ceases if and when the Company receives payment in full moneys in respect of such shares. Sub-clause (2) of Article 34 permits the receipt of consideration given for the share on any sale or disposal thereof and a transfer of the share in favour of the person to whom the share is sold or disposed of. The transferee is to be registered as the holder of the share as well. A cumulative reading of the above provisions would show that even if the Board has passed a resolution of forfeiture of shares, still the Member is liable to make balance payment due on the shares. As per Article 32, the forfeited shares can be disposed of by the Company. Article 34 contemplates that the Company may receive consideration for any share on any sale or disposal thereof and shall register the transferee as the holder of the share. Such forfeited shares could be disposed of by the Company. But it is not even suggested by the appellant that forfeited shares were disposed of in any manner. Therefore, such forfeited shares could be restored to the transferee from the original allottee on satisfaction of Company Appeal No.20 of 2007 16 equitable condition of deposit of the balance call money and interest thereon. In view thereof, the directions of the Company Law Board to register the Transferee as the purchaser of the shares on payment of the balance money along with interest at the rate of 15% cannot be said to be suffering from any patent illegality or irregularity. In view of the above discussion, I do not find any merit in the present appeal. The same is accordingly dismissed.

12.08.2010 Vimal (HEMANT GUPTA) JUDGE