Company Law Board
Estate Investment Company Private ... vs Siltap Chemicals Limited on 26 October, 1998
Equivalent citations: [1999]96COMPCAS217(CLB)
ORDER
1. Estate Investment Company Private Limited (hereinafter referred as "the petitioners") have lodged 1,100 shares -- 500 standing in the name of Mr. Om Prakash Roongta and 600 standing in the name of Mr. Harshvardhan Roongta, with Siltap Chemicals Limited (hereinafter referred as "the respondent-company"), vide its letter dated November 18, 1996, for transfer of these shares in their favour which is the subject-matter of Petition No. 41, Likewise, Govindram Brothers Private Limited (hereinafter referred as "the petitioners") have also lodged 1,000 equity shares for transfer in their name which is the subject matter of Petition No. 42. The respondent-company, vide its letter dated December 18, 1996, informed the petitioners that they are unable to proceed with the transfer of shares on the ground that : (a) there were corrections in the material portion of the transfer deeds which were not authenticated by the signature of the transferor, (b) the adhesive stamps affixed were not duly cancelled, and (c) the transferors, apprehending foul play in respect of their shares had requested the respondent-company not to transfer the shares.
2. The petitioners' case is that between September, 1994, and May, 1995, the petitioners in the course of their business had advanced diverse sums of money as loans, by cheques. As security for these loans, share certificates of various companies were pledged with the petitioners accompanied by blank transfer forms, duly signed by the transferors. In the event of defaults in repayment of loan these shares along with the transfer forms were to be lodged for transfer, in the name of the petitioners. As there is a default in the repayment of the loan, the aforesaid shares have been lodged accompanied by transfer form on November 18, 1996, for transfer in their name.
3. As some defects were pointed out by the company in the transfer forms, the petitioners have been following up with the company and asked for return of the original transfer deeds so that they may be replaced by the new set of transfer forms and relodged but the said transfer deeds along with the share certificates were not returned by the company. However, Estate Investment Company Private Limited lodged fresh transfer deeds in respect of 900 shares, the original share certificates already being with the company so also Govindram Brothers Private Limited tendered fresh transfer forms in respect of 500 shares, the original share certificates already being with the company and asked for the return of the balance share certificates and transfer forms. The respondent-company responded by letters dated May 14, 1997, informing the petitioners that the transfer was being withheld as the transferors had allegedly filed civil suits in the High Court in respect of these shares. According to the petitioners, however, no notice of the said suit has been served on them till the date of filing of these appeals. According to the petitioners, the respondent-company till date has not proceeded with the registration of transfer and is adopting and indulging in blatant dilatory tactics to delay the transfer of the shares at the behest of the transferor and have accordingly filed these appeals seeking directions that the company forthwith transfer 900 and 500 shares respectively of the abovenamed petitioners and rectify the register of members accordingly and return the balance 200 shares and 500 shares respectively to the petitioners along with the transfer forms to enable the petitioners to relodge them and forthwith register the transfer. The petitioners have also asked for the bonus shares and dividend in respect of these shares and have also asked for compensation for the loss suffered due to fall in share prices from the original date of allotment, i.e., November 18, 1996, till date and the cost of litigation etc.
4. The respondent-company in its reply has submitted that there appears to be some dispute between the petitioners and O. P. Roongta and Mr. Harshvardhan Roongta, the registered holders, in respect of shares which the petitioners have lodged with the respondent-company for transfer. They have further submitted that the transferors have filed a civil suit in the Bombay High Court in Suit No. 1668 of 1998 in respect of the said shares therein seeking certain reliefs including a permanent injunction against the transfer of the said shares and the summons in the said suit have been served upon the company. The respondent-company has further submitted that they had informed the petitioners since the matter was subjudice in the Bombay High Court and the transfer of the said shares was withheld pending the orders of the High Court. They have further submitted that from the pleadings in the said suit it appears that there are allegations of fraud and cheating against the petitioners and the company would not like to be involved directly or indirectly in the matter if such allegations were ultimately found to be true by the court. It is further submitted that in so far as the respondent-company is concerned even the transfer deeds which were first lodged with them in respect of the said shares contained material alterations which were unauthenticated. Subsequently, fresh transfer deeds were lodged in respect of some of the said shares under the signature of the transferor, thus giving some credence to the, transferor's contentions in the said suit which requires going into in detail. In this connection, they invited our attention to the decision of the Board in Bipin K. Jain v. Savik Vijay Engineering (P) Ltd. [1997] 26 CLA 255 ; [1998] 91 Comp Cas 855 (CLB) wherein the Company Law Board held that if complicated questions of law or facts arise in a petition under Section 111 which cannot be adjudicated on the basis of documents made available, but could be decided only on trial by evidence, the Company Law Board should relegate the matter to a suit.
5. The respondent-company has further submitted that it is not necessary for the company to enter into the arena of disputes between the transferor and the petitioner and would rest content by saying that it denies that it has acted in a mala fide manner or it is trying to help the transferor or the transferor has any influence whatsoever in the affairs and management of the company and the fact that the transferor is the company secretary of Supreme Industries Limited, has no bearing on the present case as both companies are separate legal entities managed by the board of directors. The respondent-company has further submitted that they deny that the objections raised by the company to the transfer of the said shares are frivolous and that the company is indulging in blatant dilatory tactics to delay the transfer of the said shares at the behest of the transferor. It is further submitted that the transfer deeds and share certificates relating to the said shares have not been returned to the petitioner in order to prevent the destruction of evidence and to protect the interest of the company.
6. The petitioners in their rejoinder have submitted that there is no dispute between the transferor, O. P. Roongta, Mr. Harshvardhan Roongta, and the petitioner. It is submitted that in the course of their business activities the petitioners became the bona fide transferee/holders of the subject shares with duly executed/signed transfer forms. The transferor having signed the transfer forms, was estopped from questioning the validity of the title of the bona fide transferee, being the petitioner. It is further submitted that it is an accepted position in law that the transferor on signing blank transfer forms loses his rights in the shares as soon as he executes the transfer in blank. It is further submitted that the transferor has raised this dispute as an afterthought and the respondent-company being "a separate legal entity" is only too happy playing along with the transferors' instructions. It is further submitted that without prejudice to the fact that there is no dispute, the transferor has been content to file the suit in the High Court and wait for the matter to reach in the ordinary course without making any urgent application therein for any reliefs whatsoever, particularly, obtaining ad interim injunction against transfer. It is further submitted that this reluctance on the part of the transferor, indicates that the transferor is well aware that he is not entitled to any reliefs and has therefore, abstained from making the same. It is further submitted that the respondent-company is not concerned with the fact that a suit has been filed, as no orders have been passed by the High Court restraining the company from transferring the shares. It is further submitted that the respondent-company has admitted that the transfer forms and the shares have not been returned on O. P. Roongta's instructions and now they cannot take the plea of filing the case in High Court. It is further submitted that having signed blank transfer forms the transferor is there after estopped from questioning the validity of the transferee title having washed his hands of the shares himself. It is further submitted that no allegations have been raised that the signatures on the transfer forms are not those of the transferor. It is further submitted that the documents on record will themselves bear out the fact since the transfer forms are valid and fulfil all the requirements of law, the respondent-company has no right to raise the question of the title of the petitioner. It is further submitted that the company is trying to have the matter relegated to the High Court. By so doing the company is once again trying to help the transferor. It is further submitted that it is a clear indication that the respondent-company and the transferor are hand in glove, operating as they do from exactly the same premises and have conspired to defeat the just and legal rights of the petitioner. It is further submitted that Mr. Saboo, has tried to deliberately misinterpret the order of the Bench of July 14, 1997, as if the shares are being withheld as per Company Law Board's orders. It is further submitted that in order to keep the records straight, the Bench has merely taken note of the undertaking given by Mr. Saboo, that the shares in question as well as the bonus shares are being withheld pending interim/ad interim orders of the Bombay High Court. It is further submitted that the respondent-company had no right to withhold the transfer of shares without the orders of a competent court and the company cannot escape the punishment for violation of the provisions of the Companies Act. It is further submitted that the very fact that the company is not returning the original shares along with their original transfer deeds to the petitioners, admittedly at the instance of the transferor despite various judgments by the Company Law Board and directives of the Department of Economic Affairs, Ministry of Finance, to the effect that the company has to return them to the party who lodged them in the first place, i.e., the petitioners in this case, belies their affirmation on oath that there is no nexus. It is further submitted that if at all there is any fraud being played there, it is by the transferor who wilfully and with full knowledge of the fact that he has signed blank transfer forms, is now seeking to deny the same and deprive the petitioners of their rightful dues. It is further submitted that by falling in line with the transferor, the company is also abetting fraud particularly when they have admitted through correspondence which is on record that they are doing so on the transferors' instructions.
Shri Omprakash Roongta, one of the transferors of the relevant shares in question in respect of these two petitions, has joined the proceedings as an intervenor and has filed his written submissions. It appears that Shri Roongta has been dealing in shares through S. J. Tibrewala, a share broker and registered member of the Mumbai Stock Exchange and during the course of his dealings with the said broker the petition shares have been pledged with him. Shri Roongta has further submitted that at all times he continued to be the sole and absolute owner of the shares and the said broker never had or acquired any right, title or interest whatsoever in respect of the said shares as purchaser or transferee or pledgee or in any other capacity whatsoever. He has further submitted that the said broker had no right or authority to effect any pledge/transfer or disposal thereof. It is further submitted that the petitioners as the purported transferees of the said shares, cannot and did not acquire any title to the said shares in as much as the said broker had no title to the said shares. It is further submitted, without prejudice and assuming whilst denying, that the said broker was a pledgee thereof, the purported sale or transfer by the said broker was without reasonable notice to them as mandatorily required by law and, therefore, the purported sale or transfer by the said broker is void, illegal and not binding on him. He also pointed out that the fact of alterations in material portions which are unauthorised and unauthenticated makes the documents non-transferable and outdated. It is further submitted that the said S. J. Tibrewala, is a necessary party to the present proceedings and without making him a party, no effective adjudication can be carried out by this Bench. In his further submissions, Shri Roongta has informed that the dispute between him and Shri Tibrewala, has now been referred to arbitration before the stock exchange and the Stock Exchange Arbitral Forum is seized of the entire matter which shall go into the same in detail including hearing the evidence led by the parties and, therefore, this Bench ought not to make any order which would restrict the scope of the jurisdiction of the said Arbitral Forum in adjudicating matter in its entirety. He has also in the submissions submitted that the relief as sought for ought not to be granted on the ground that the issues raised herein require evidence to be led for examination of various persons who are not parties to the petition and for the reasons more particularly stated before this Bench to delegate this matter to the forum of a civil court.
7. The respondent-company in its rejoinder has submitted that the title to the said shares passed immediately upon the intervener/respondent signing and delivering the shares along with blank transfer forms to the holder thereof who can thereafter deal with them as he pleases, The very fact that the original shareholder has so acted is prima facie evidence that he is aware of what he is doing and he is well aware that he is transferring the title to the shares. It is, further submitted that these shares were pledged as security with the petitioners against the finance provided by the petitioners. On the understanding that in the event of some default in repayments of the sums advanced as finance, the petitioners would be entitled to lodge the shares for transfer. It is further submitted that the title having already passed, the intervener/respondent has no locus standi now to raise a dispute in respect thereof. It is further submitted that the petitioners acquired the shares in good faith and on the understanding that being in possession of blank transfer deeds conferred on the holder the right, title and interest thereto, the holder thereof was entitled to dispose of the same. It is further submitted that the petitioners being the holders of the shares and transfer deeds in good faith and for due consideration, subsequent to default in repayment of advances made by the petitioners, the petitioners' right to have the said shares transferred in their name crystallised and the petitioners are, therefore, entitled to have the shares transferred in their name and the register of members rectified accordingly. It is further submitted that the intervener/respondent knowingly signed away his title to the shares, and now is admitting that the company was instructed by him not to effect the transfer of the shares and to retain the original transfer deeds and share certificates. It is a blatant admission of collusion and connivance between the company and the transferor and, therefore, the petition should be made absolute with costs. It is further submitted that in the event there was any defect in the deeds that were lodged, the same should have been returned to the petitioners to enable them to rectify the defects in accordance with the directives of the Department of Economic Affairs, Ministry of Finance. However, the company in blatant disregard of the same acted on the instructions of the intervener/respondent in not returning the transfer deeds and the share certificates. It is further submitted that the defects, if any, could very easily have been rectified by the petitioners, had the deeds been returned to the petitioner. The very fact, that the company chose to act on the instructions of the intervener/respondent indicates that the two are in cahoots with each other and have accordingly submitted that the company be directed forthwith to transfer the shares and rectify the register of members.
8. T.N. Subramanian, advocate, appearing for the petitioners submitted that the provisions of Section 111A of the Companies Act are mandatory whereby alt these shares are freely transferable and there is a sufficient cause for deletion of the name of the intervenor and for entering the name of the petitioner in the register of members of the company. While reiterating the submissions made in the petition and in the affidavit in rejoinder, he submitted that the company has initially taken the plea that there are material alterations and the stamps have not been cancelled but they had not returned those shares as they are mandatorily required to do so. Even then the petitioners have filed the fresh transfer forms ; but the company has not taken any action on relodgment of the fresh transfer forms. The company ought to have transferred the shares in question and for the balance shares they should have returned the original transfer deeds and share certificates to the lodger as has been held in Jagatjit Industries Limited v. Mohan Meakin Ltd. [1994] 80 Comp Cas 411 (CLB) and in the matter of Bharat Hotels Ltd., In re [1994] 81 Comp Cas 896 ; [1994] 1 Comp LJ 460 (CLB). It is further submitted that the shares in question were pledged with Shri Tibrewala, and in turn they have been acquired for consideration by the petitioners. On default in payment, the relevant transfer forms were filled in and lodged with the respondent-company for transfer. He further submitted that once the transferor has signed the blank transfer form, he cannot question the transaction. He also placed reliance on Section 178A of the Contract Act and submitted that there are no pleadings that the petitioners had knowledge of the bad title. Further, in so far as the petitioners are concerned, there has been no notice to them at the time of lodgment of these shares that the broker is not entitled to sell or transfer these shares. He further submitted that the shares are movable property and as per Section 30(2) of the Sale of Goods Act, 1930, once the transferor has given the shares with blank transfer deeds it has to be presumed that the shares have been parted with with his consent and could be sold and as such the question of suspecting fraud does not arise. In this connection, he placed reliance on Central National Bank v. United Industrial Bank, AIR 1954 SC 181, wherein it has been held that if an innocent purchaser or pledgee obtains goods from the person in possession thereof, whose possessory right is defeasible on the ground of fraud but had not actually been defeated at the time when the transaction took place, there is no reason why the rights of such innocent purchaser or pledgee should not be protected.
9. He further submitted that Shri Roongta has parted with the shares to Shri Tibrewala and who in turn has given possession of the shares to the petitioners, who was acting as the mercantile agent of the owner and his acts would be as effective as those of the owner himself. In this connection, he placed reliance on Sumitra Debi Jalan v. Satya Narayan Prahladka, AIR 1965 Cal 355, wherein it has been held that generally no person can pass a better title to another than he himself possesses but there may, however, arise a case when a person having no title to the property may confer and/or pass a good title to a bona fide purchasers for value without any knowledge or notice of any defect in the title of the person conveying the same. He submitted that in the present case Shri Roongta has given the blank transfer deeds duly signed along with the share certificates, was negligent in exercising his rights diligently in respect of the alleged transfer of the said shares in question. He further submitted that the broker is a mercantile agent and during the course of his business, he is entitled to pass on the title to the third party. He further placed reliance on Hindustan Dorr Oliver Limited v. A. K. Menon [1994] 80 Comp Cas 384 (Special Court) wherein it has been viewed that if the goods are left with authority to sell, then it would not matter whether they were left conditionally, or in other words, the broker must be in possession with an authority to sell. In such cases even if the conditions are not fulfilled, the provisions of the Sale of Goods Act would go into play and the bona fide purchaser for value would get good title. He accordingly summed up, that since the transferors have given the shares in pledge with blank transfer deeds duly signed with the share certificates, they have given the authority to the broker who acting as a mercantile agent on their behalf was entitled to transfer the title and the petitioners having purchased these shares in bona fide belief have got proper and good title.
Shri Phiroze Palkhiwala, appearing on behalf of the transferor, has submitted that it is not clear from the petition and the pleadings as to who has given the loan, when it was given, how much amount was given and who pledged the shares. He placed reliance on the provisions of Sections 173, 176 and 178 of the Contract Act and submitted that the shares were only pledged and the transferor continues to be the owner of the shares. In this case, as there is a dispute between Shri Tibrewala and the transferor and no money is due or payable to Shri Tibrewala, he had no authority to sell these shares. In any case no due notice was given to the transferor nor his consent obtained for sale of the shares. He further submitted that as per Section 27 of the Sale of Goods Act whereby goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell. He submitted that since in this case neither the broker had authority to sell the shares, nor these shares have been sold with the consent of the transferor, the buyer does not acquire any title. He further submitted that even the proviso to Section 27 of the Sale of Goods Act would not come to the rescue of the petitioner as the said broker was not acting as a mercantile agent for the transferor. In this connection, he placed reliance on Hindustan Dorr Oliver Limited v. A.K. Menon [1994] 80 Comp Cas 384 (Special Court) wherein it has been held that before the proviso to Section 27 of the Sale of Goods Act, 1930, can apply it must be shown that the goods have been left with a mercantile agent as such, i.e., as an agent for the purpose of sale, even though the goods may be pledged in favour of a party who is otherwise a mercantile agent. The proviso to Section 27 would only apply in cases where the goods have been left with the intention of sale. If goods are left with authority to sell, then it would not matter whether they were left conditionally. Thus, the broker must be in possession with an authority to sell.
He further submitted that the benefit under Section 178 of the Contract Act is also available only when it is known that the broker is acting in the ordinary course of business as mercantile agent with the consent of the owner only. In this case, Shri Tibrewala was not acting as mercantile agent. In this connection, he placed reliance on Ah Cheung v. Ah Wain, AIR 1938 Rang 243. He further submitted that on the available facts as brought out on record by the transferor, it is clear that Mr. Tibrewala, was not acting as the mercantile agent and as such had no authority to deal with these shares and pass on the title. There is a dispute to the title and it can be resolved on the basis of oral evidence and other records and particularly when Mr. Tibrewala, who is the necessary party is not present in these proceedings. He further submitted that the Company Law Board has time and again decided that when complicated questions of law or facts arise in a petition like this which cannot be adjudicated on the basis of documents available, but could be decided only on trial by evidence, then the Company Law Board would relegate the matter to a suit. He further placed reliance on Bipin K. Jain v. Savik Vijay Engineering (?) Ltd. [1997] 26 CLA 255 ; [1998] 91 Comp Cas 835 (CLB) and submitted that this is a fit case for relegating to a suit. He further submitted that in fact the transferor has already filed a civil suit in respect of these shares which are the subject matter of these petitions in the Bombay High Court and that the matter be decided by that court. He further submitted that a pledgee has no title to the property pledged by him. His rights are those that are under sections 173 to 176 of the Contract Act. He can only retain possession of the goods pledged till the amount borrowed is discharged. Under the said Section 176, if the pawnor makes default in payment of the money, the pawnee may bring a suit against the pawnor after giving due notice to the pawnor. He further submitted that the provisions of Section 178A of the Contract Act are not applicable to the present case. He placed reliance on Belgaum Pioneer Urban Co-operative Credit Bank Limited v. Swamiji, AIR 1962 Mys 48, and submitted that since nothing is due and payable to Shri Tibrewala, ho has no right to the pledged shares and they are to be returned to the transferor.
10. On the basis of the material available we are inclined to agree with the petitioners that there is a collusion between the transferor and the respondent-company. We are constrained to observe that the company has not acted in the spirit of the listing agreement as well as the various laws--cases decided on the subject, in not returning the shares and transfer deeds once it has decided not to effect the registration of transfer of shares. From the material available it is clear that the company has been acting as per the liking of the transferor rather than as per the listing agreement and the decided law cases. When the shares and the transfer deeds were lodged in November, 1996, and the company decided not to register the transfer of shares, it ought to have immediately returned the transfer deeds and the said share certificates to the lodger rather than retaining the same at the behest of the transferor. If the transferor suspected some fraud in the matter, the right course for the company would have been to ask him to file a criminal complaint rather than hold the shares just at his behest. Further, when the petitioners have relodged the fresh transfer deeds, in the normal course the company should have taken the decision either to transfer the shares or not to transfer the shares. In a case like this, the company should have asked the transferor to obtain a restraint order from the court within a reasonable time otherwise it should have proceeded in the matter. We are not even sure whether the matter has at all been considered by the board of directors of the respondent-company as in the pleadings nowhere it is mentioned that the board of directors of the respondent-company have considered the matter and taken the decision in the matter.
11. We have considered the various averments made before us. Shri Roongta's case is that he has given these shares in pledge in margin account for an understanding arrived at with Shri Tibrewala whereby he was required to purchase one lakh shares of Finolex on his account from the market. The said Shri Tibrewala, was to arrange for 80 per cent. finance and for the balance he has to provide for funds and margin. Accordingly, the shares in question along with blank transfer forms duly signed by him were given to Shri Tibrewala. Shri Tibrewala has not actually purchased the shares in his account. The shares which he had purchased have been registered in the name of the other parties. Thus, the mutual understanding of purchasing one lakh shares has not been carried out by Shri Tibrewala and consequent thereto the shares along with the blank transfer deeds given in pledge in the margin account cannot be acted upon as nothing is payable to Shri Tibrewala. In fact he has already filed a suit for recovery of more than Rs. 23 lakhs from Shri Tibrewala. On the other hand the petitioners' case is that they have acquired these shares during the course of their financing business with a clear understanding that in the event of default they would get these shares transferred in their name. Since there was default in payment, the shares in question after filling in the blank transfer deeds along with the share certificates have been lodged with the company for registering the transfer of shares in their favour. According to them as the shares have been acquired for consideration and without any knowledge of the dispute between the transferor and Shri Tibrewala, proper titles have passed and they are entitled to get the shares transferred in their name. The question for consideration is whether Shri Tibrewala, had an authority to sell these shares and pass on the title to the parties: whether he was dealing with these shares acting as the mercantile agent so also whether the shares have been sold after due notice to the transferor. The transferor and the respondent-company have taken the plea that since Shri Tibrewala is not before this Bench who is a necessary party to all the transactions, the matter cannot be adjudicated as oral or otherwise evidence would be required to be led. It is further submitted that the Board has time and again viewed that the proceedings under Section 111/111A are of summary nature and wherever there are complicated issues to be adjudicated, in that event this Board would relegate the matter to a suit. On the other hand, the petitioners' case is that they have acquired shares for consideration and once the transferor has given to the broker, signed blank transfer deeds and the share certificates, he has consented to pass on the title. It is the case of the petitioners that there is no dispute between them and the broker. Further, it is contended that as shares are freely transferable, the respondent-company ought to have registered the same.
12. These two petitions have been filed under Section 111A since the shares impugned in these two petitions relate to a public limited company. Section 111A was inserted by the Depositories Ordinance by which the provisions of this section are made applicable in the matter of rectification of register of members of a public limited company. The relevant portion of this section is as follows :
"(1) In this section, unless the context otherwise requires, "company" means a company other than a company referred to in Sub-section (14) of Section 111 of this Act.
(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable ;
Provided that if a company, without sufficient cause, refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it shall direct such company to register the transfer of shares.
(3) The Company Law Board may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or the intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or records."
The proviso to Sub-section (2) was not there when Section 111A was inserted in the Companies Act through the Depositories Ordinance Act. Since the Depositories Act envisaged electronic mode of transfer, without involvement of the company concerned, rectification of register of members after registration of transfer under certain circumstances, was provided under Sub-section (3). Later, in view of the fact that still manual transfers are prevalent, with a view to ensure that registration of transfer of shares is not refused by companies indiscriminately, the proviso to Sub-section (2) was inserted later.
Thus, the proviso to Sub-section (2) deals with pre-registration issues while Sub-section (3) deals with post-registration issues. Further, it is also clear from the provisions of this section that (1) the shares of a public company are freely transferable (2) in case there is a refusal to transfer without sufficient cause, the transferee may appeal to the Company Law Board (3) in case the Company Law Board finds that the company has refused without sufficient cause, the Company Law Board shall direct the company to register the transfer. Therefore, when a company refuses to register transfer the Company Law Board has to examine whether such refusal is with sufficient cause or not and if it finds that the refusal is without sufficient cause, then the Company Law Board is bound to direct the company to register the transfer.
13. Even though the term "sufficient cause" has been interpreted in various manners with reference to Section 111, now in view of this term having been used in Section 111A, the same has to be examined with reference to the provisions of this section. As we have already pointed out the provisio to Sub-section (2) relates to pre-registration issues, while Sub-section (3) relates to post-registration issues. In the case of post-registration, the register of members can be ordered to be rectified only on three grounds i.e., if the transfer is in contravention of the provisions of the Securities and Exchange Board of India Act or regulations thereunder, provisions of the Sick Industrial Companies (Special Provisions) Act or any other law for the time being in force. In other words, the statute itself has restricted the grounds on which a register can be rectified after registration or transfer. The term "sufficient cause" as used in the proviso to Sub-section (2) has, therefore, to be seen with reference to the grounds under which a register can be rectified after registration. Under these circumstances, only when a company refuses to register the transfer of shares on the grounds that transfer is in violation of the provisions of the Securities and Exchange Board of India Act or regulations thereunder, the provisions of the Sick Industrial Companies (Special Provisions) Act or any other law for the time being in force, such refusal could be considered to be with sufficient cause. Refusal on any other ground in respect of a public company cannot be considered to be a sufficient cause for such refusal.
14. Now, we have to examine the petitions before us within the said legal framework. The ground for refusal of the shares in question are that, there is a dispute between the petitioner and the registered holder of the shares, the registered holders have filed a civil suit in Bombay wherein there is a prayer for permanent injunction against the transfer of the shares and that the transfer deeds do not conform to the requirements of Section 108 of the Act. Obviously, the first ground cannot fall within "sufficient cause". In respect of the second ground, even though there is a prayer in the civil suit for permanent injunction against the transfer of shares, no interim order has been passed. The mere filing of a civil suit cannot entitle the company to take cognizance of the same and refuse registration of transfer. The third ground that there is contravention of the provisions of Section 108 is the only ground which would fall within the term "sufficient cause". However, as per the version of the petitioners, in respect of 1,400 shares, there has been subsequent compliance with the provisions of Section 108, which has not been controverted by the respondent-company. Therefore, as far as these shares are concerned, the refusal of the company to register the transfer has to be declared to be without sufficient cause and as such we have to direct the company to register the shares in the names of the petitioners and rectify the register of members accordingly.
15. However, it is on record that the petitioners did not acquire the shares directly from the registered holders of the shares but have acquired the same from a share broker by way of security for certain loans given by the petitioners to the said broker and that on failure of repayment of the loans, the petitioners have sought to have the shares registered in their names. According to the registered shareholders, the shares were lodged with the share broker by way of pledge and as such he was not acting in the normal course of his business as a share broker in respect of these shares. The proceeding in respect of rectification of the register of members has been confirmed to be a summary proceeding by the Supreme Court in its latest decision in Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. [1998] 94 Comp Cas 310 ; [1998] 30 CLA 355. In this case the Supreme Court has held that even in a summary proceeding, the court should first see whether prima facie what is stated is a complicated question or not and even if fraud is alleged, on the basis of the documents available, the court should be able to come to some conclusion. In other words, the Supreme Court has laid down the law that even though proceedings under Section 155 (presently sections 111 and 111A) are summary in nature, even complicated question of fact or law, if could be decided on the basis of material available before the court should be decided by the court without relegating the parties to a suit.
16. In the present case before us, no doubt, the refusal by the company does not fall within the meaning of "sufficient cause" as elaborated by us earlier, yet, without the determination of the nature of transaction between the registered holders of the shares, and the share broker, it will not be possible to decide whether the share broker could have passed on a better title to the petitioners than what he had. Even though, the Company Law Board has powers to decide, by virtue of the provisions of Section 111A(7) read with Section 111(7), any question relating to the title of any person who is a party in the application and also any question which is necessary or expedient to decide, in connection with the application for rectification, yet, the same has to be done with reference to the material before us. While it is the assertion of the registered holders of the shares that the impugned shares were lodged with the broker as pledge and not in his normal course of business as a share broker, the arguments of the counsel for the petitioners is that they had acquired the shares without knowledge of want of authority, if any, on the part of the share broker. It is an admitted position that the petitioners themselves have not acquired the shares from the share broker in his normal course of business but obtained the shares by way of pledge. Thus, the status of the share broker vis-a-vis the shares becomes very relevant for us to decide on the rectification. In the absence of the broker before us, it is not possible to decide the same unilaterally. It is on record that the registered holders of the shares have already filed certain civil suits in regard to the arrangement with the share broker in which the subject shares have also been impugned. Thus, the petition suffers from non-joinder of necessary parties to determine essential question of facts, without which the prayer of the petitioners cannot be considered. Under these circumstances we dismiss these two petitions.
17. There will be no order as to costs.