Company Law Board
Shyama Prasad Murarka vs Calcutta Stock Exchange Association ... on 13 September, 2001
Equivalent citations: [2002]108COMPCAS703(CLB)
ORDER
Das
1. The genesis of disputes in this matter arose in the refusal of The Calcutta Stock Exchange Association Limited ('CSEA') to register share No. 127 in the name of the petitioner, a member of CSEA, purchased by him for valuable consideration from another member of CSEA. Proforma Respondent.
2. The brief facts relating to the case are that on 15-5-1995, Shri Radha Kishan Purohit (Proforma Respondent) sold his share No. 127 in CSEA to the petitioner for a consideration of Rs. 2.00 lakhs. The said sum was duly paid the petitioner by cheque dated 15-5-1995.
On 18-5-1995, Proforma respondent delivered to the petitioner the said share No. 127 with duly executed transfer deed and a letter addressed to CSEA acknowledging receipt of the said sum and requesting transfer of the said share to the petitioner as per article No. 44 of CSEA.
On 30-6-1995, the petitioner addressed a letter to CSEA requesting to transfer the said share No. 127 in his name. With the said letter, the petitioner enclosed the letter dated 18-5-1995 of the Proforma respondent, the share scrip and duly completed and stamped transfer deed and also paid the transfer fee. Thus, all requirements for transfer were completed by the petitioner.
After a lapse of about six months, CSEA by letter dated 10-1-1996, requested the petitioner to send a cheque drawn in favour of CSEA being the consideration value for effecting transfer of the said share No. 127. By letter dated 28-3-1996, the petitioner objected to the said request to pay consideration money as the same has already been paid to Proforma Respondent as provided in Article 44 of the articles of association of CSEA. Inspite of the said protest, CSEA repeatedly by letters of diverse dates called upon the petitioner to deposit with it the consideration value of the said shares.Finally, by letter dated 4-11-1997, CSEA intimated the petitioner that the committee at its meeting held on 21-10-1997, has rejected the petitioner's application for transfer of the said share No. 127. The reasons for such rejection given therein were that Proforma respondent did not comply with several decisions of the arbitration sub-committee in various cases including non-member cases and in spite of repeated intimation he did not appear before the meeting of the defaulter sub-committee. Further, he had not paid membership subscription and fee of the Customers' Protection Fund and CSEA was proceeding to take action against him as per provisions of articles of CSEA. Thereafter, from time to time, letters were exchanged between the parties and ultimately on 16-7-1998 the petitioner filed the present petition for appropriate reliefs.
3. It has been contended by the learned counsel for the petitioner that the application for transfer of the said share No. 127, made on 30-6-1995, was complete in all respect and was in due compliance with Articles 44 and 46 of CSEA. Thus, there was proper lodgement for transfer and the transferee (the petitioner herein) has duly purchased the said shares and properly lodged it for transfer in his name. In that view of the matter, the petitioner has acquired all lawful rights of owner of the said shares and is entitled to transfer and registration of it. CSEA is lawfully bound to register the transfer. It has been further contended that CSEA is obliged to decide the transfer request within two months from the date of its lodgement as provided under proviso to Sub-section (2) of Section 111A of the Companies Act, 1956 ('the Act') but in the present case, CSEA has failed to do so. Within a reasonable time CSEA did not take any action on the said application for transfer and refused to register transfer of the said shares without sufficient cause. It did not reject the same until 21-11-1997 and till then by letters dated 10-1-1997, 29-8-1997 and 16-9-1997, CSEA kept on insisting upon petitioner to deposit with it the consideration amount. Such direction according to the learned counsel for the petitioner is without any lawful authority and contrary to Article 44 and 46 of the articles of association of CSEA. The learned counsel vehemently urged that the refusal to transfer for the reasons contained in the letters dated 21-10-1997 and 26-5-1998, are unlawful and belated and could not create any lawful right in CSEA to exercise any line or forfeit the share in question. Furthermore, the failures complained of on the part of the Transferor and allegations against him happened much long after the transfer application made in June, 1995. Before May, 1996, Transferor was not asked by CSEA to explain anything and only in November, 1997 CSEA decided to expel the transferor. In the circumstances, CSEA has no lawful authority to apply Articles 29(1) and/or 30 and/or and 32 and/or 39 of the articles read with Bye-laws and such lien can not destroy the right of the petitioner which had already accrued to him. In support of his contentions, the learned counsel for the petitioner has relied upon the following cases:--
Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publisher Ltd. 73 Comp. Cas. 80 (Ker.).
Gower 3rd Edn. Pages 407, 408 and 409.
Pennington 4th Edn. 316, 347 and Braidford Banking Co. v. Brigg. [1886] 12 AC 29 (HL).
Unity Co. (P.) Ltd. v. Diamond Sugar Mills AIR 1971 Cal. 18, 36.
Sha Malchand & Co. Ltd. v. Jawahar Mills Ltd. AIR 1953 SC 98, 104.
4. The learned counsel appearing for CSEA argued that on proper interpretation of Section 111A, the present application is not maintainable as the request to transfer the share was made by the petitioner on 30-6-1995 and there was no refusal by CSEA within a period of two months. The refusal was made after two months and the instant application was made within two months from the date of refusal. In this connection, he drew our attention to Ramaiya's Guide to companies Act, fourteenth Edition, page 1071 under the heading 'Scope of Section'. It has been further argued that CSEA had a lien in respect of the share in question and forfeited the same in exercise of its powers provided in the Articles of Association and its Bye-laws. He relied upon Articles 29, 30, 31, 32, 34, 39, 40, 45 and 46. It has been further submitted that ninety five arbitration claim cases were instituted against the Proforma Respondent for diverse breaches and defaults committed by him and two of such claims were instituted on 17-2-1995 and 17-4-1995, which were long prior to the sale of share in question on 18-5-1995. Inasmuch as at least two cases were pending against the Proforma Respondent prior to the date of sale, the said Proforma Respondent Could not have sold and the petitioner could not have purchased the same. It has been further contended that CSEA in terms of its articles ultimately forfeited the share in questing after giving numerous and repeated opportunity of hearing to both the transferor and transferee and inasmuch as there was no refusal on the part of CSEA to register the share within a period of two months from the date of lodgement. Accordingly, CSEA is not now bound to register such share in the name of the petitioner.
It has also been contended by the learned counsel for CSEA that the petitioner being an existing member of CSEA ought to have checked whether there was an existing lien of CSEA over and in respect of the share and the so called sale of the share is hit by the provisions of Section 16 of the Sale of Goods Act and the principle of Caveat Emptor-Buyer be aware.
In the conclusion, it has been argued that the right of the petitioner is against the Proforma Respondent. CSEA having lien over the share there was never any concluded sale between the petitioner and Proforma Respondent and as such the petitioner has no locus standi to maintain the present petition as purchaser of the share in question. In support of his contentions, the learned counsel for CSEA relied upon the decisions reported in Mathrubhumi Printing & Publishing Co. Ltd.'s case (supra); 1983 Vol. II Comp. L.J. page 69 and Luxmi Tea Co. Ltd. v. Pardip Kumar Sarkar 67 Comp. Cas. 518 (SC).
5. In reply to the aforesaid contentions of CSEA the learned counsel for the petitioner contended that CSEA is a public limited company and therefore, the application has been properly made under Section 111A. The time of two months is given to the company to accept or refuse the transfer. Hence, obviously the appeal against refusal cannot be made until the expiry of the said two months. A proper reading meaning and intention of proviso to Sub-section (2) of Section 111A is that the refusal even after two months is appealable. This is also clear from the provision of Sub-section (3) thereof. If the contention of the company is accepted and upheld, the company will merely sleep over the matter and allow two months to expire and the transferee will be without remedy. It is also contended that there were admittedly only two claim cases pending against transferor on the date of transfer for a total sum of approximately Rs. 15,000 only. It was mere claim not adjudicated against the transferor.
The security deposit of the transferor lying with CSEA under Article 15 was available to CSEA against such claims, if any. There is no prohibition in its articles against sale of share during pendency of claim. Under Articles 39, CSEA has a lien over and upon the proceeds of sale of the share. Hence, it implies that transfer of share can be effected during pendency of claims. As on the date of sale and transfer and lodgement of transfer with CSEA, there was no debt or adjudicated liability of the transferor. The CSEA had never intimated its members or public that claims were pending against the transferor or he was a defaulter until May, 1996 and therefore no blame could be put against the petitioner and Section 16 of the Sale of Goods Act had no application. The CSEA did not until 14-8-1997, even decided to declare the transferor as a defaulter. By notice dated 21-8-1997, CSEA asked its members to furnish particulars of pending arbitration claims, if any, against the transferor. Hence, CSEA had no lien over the share and no right to forfeit the same as on date of transfer and lodgement of transfer.
6. We have considered the rival submissions and facts of the case and the cases cited by the parties. We can not accept the contention of CSEA that if the company sleep over the request for transfer for two months, the transferee has no remedy under Section 111A. Two months time has been allowed to the company to consider and decide the transfer lodged. Therefore, obviously the transferee has to wait till the expiry of the period of two months. The Transferee can come to Company Law Board only after expiry to two months whether the company sleep over or refused to transfer within or after two months, when the transfer is refused without sufficient cause. Shares of a public limited company are freely transferable. It can be refused only on the grounds as set out in Sub-section (2) of Section 111A.
Further, as appears from the facts, the sale and transfer in the instant case, was made in May, 1995, and the share was lodged with CSEA for transfer in the name of the petitioner on 30-6-1995. No defect was pointed out in that regard all along till September, 1997. The CSEA wrongfully and contrary to its Articles 44 contained asking the petitioner transferee to deposit with CSEA the sale consideration. Article 44 permits the transferor itself to receive the sale consideration. There is no provision in the articles of CSEA that the sale consideration must be deposited with CSEA. The CSEA did not until October/November, 1997, decide to reject the transfer application for alleged failure of the transferor to comply with the decision of Arbitration Sub-Committee and for his alleged non-appearance and non-payment. Expulsion and forfeiture of the share of the transferor was made in November, 1997 and not prior thereto.
Further, the two claim cases pending against the transferor prior to the date transfer were decided first on 20-6-1995 for Rs. 1,360 only and the second on 17-7-1995 for Rs. 13,440 as appear from information furnished by CSEA. All other cases were dated and decided much later and not within two months period from the date of lodgement. Hence, the above two cases and decision or other claims cannot defeat the instant transfer. The CSEA also not disclosed to the Company Law Board the amount of security deposit kept by transferor and lying with CSEA under Article 15 and other regulations. It is not the case of CSEA that security deposit of transferor was not adequate to meet claim, if any, against the transferor and why it had not adjusted its claims, if any, from the said security deposit. Under Article 15, sale deposit is charged with due payment of all debts due by and all obligation of the member to CSEA and its members. There is no such restriction in respect of sale of shares of CSEA. Article 30 applies only after a member has been declared a defaulter or suspended. Right of CSEA to forfeit a share of a member arises only after a member ceases to be a member or expulsion or declared insolent under Article 30 or 29 or 29A and do not arise prior thereto. Until such forfeiture, Articles 35 and 37 have no application. The so called lien over the share of a member for his debts or liabilities can arise only in case the company has no prior notice of an equitable interest already credited out of the share. The company cannot claim priority of its lien. Article 39 itself provides for lien over the sale proceeds of the share. The decision of House of Lords in Braidford Banking Co.'s case (supra) referred to by Pennington at page 347 (Fourth Ed.) and Grower 3rd Ed. Page 407, is clearly applicable in this case.
Grower 3rd Ed. Page 409 reads as under:--
'a transferee takes subject to all claims by the company against the transferor which arose under the contract prior to the transfer' Pennington 4th Ed. 316 reads as under:--
'If before the lien becomes effective by the holder of the share becoming indebted to the company, it has notice of an equitable interest already created out of the shares, the company cannot claim priority for its line'.
In view of the said principles and prior equitable interest of petitioner arising herein, we hold that CSEA had no lien and cannot claim any lien over the share under Article 39 to defeat the rights of the petitioner. It is well established that any forfeiture in exercise of right of lien is bad in law. Unity Co. (P.) Ltd.'s case (supra).
In our opinion Section 16 of the Sale of Goods Act and the Principle of Caveat Emptor have no application in this case. Such principles have no application to any assume right of lien or otherwise of the company over the share. A purchaser of a share (transferee) cannot be expected to find out before purchase if the company has any prior lien over the share. A company generally will not furnish such information on a hypothetical request by a potential purchaser. Such duty cannot be cast on the purchaser to defeat his claim.
7. For the reasons recorded aforesaid, we reject the contentions of CSEA and uphold the claim of the petitioner as the refusal to register the transfer the share of the petitioner is without sufficient cause and not on any other grounds under Section 111A(3). We set aside the refusal of CSEA to transfer share No. 127 from the name of Proforma Respondent (transferor) to the name of the petitioner (transferee) and forfeiture thereof as recorded in its letters dated 4-11-1997 and 26-5-1998. We hold that the refusal of CSEA to record and register the transfer of the said share in the name of the petitioner was not legal. Accordingly, we direct CSEA to record and register the transfer of the said share No. 127 in the name of the petitioner and rectify its share register accordingly and return the said share to the petitioner duly transferred in his name within a period of one month from the date of receipt of this order. The application of the petitioner is, thus, allowed.
There is no order as to costs.