Company Law Board
Joy Holdings Pvt. Ltd. vs Indian Railway Finance Corporation ... on 19 June, 1995
Equivalent citations: [1996]85COMPCAS13(CLB)
ORDER
1. This is an appeal filed under Section 111(2) of the Companies Act, 1956, by Joy Holdings P. Ltd. against the decision of refusal to register 2.5 lakhs 9 per cent, tax-free bonds of Rs. 1,000 each by Indian Railway Finance Corporation (hereinafter referred to as "IRFC")." These bonds are covered in 25 certificates each of the value of Rs. 1 crore consisting of 10,000 bonds each.
2. The facts of the case are that the appellants lodged on September 29, 1994, 30 bond certificates consisting of 2.5 lakhs, 9% tax-free secured redeemable non-convertible bonds (NCBs) of Rs. 1,000 ("A" series) each and 50,000 9% tax-free secured redeemable NCBs of Rs. 1,000 ("B" series) each totalling Rs. 30 crores. These bonds were purchased by the appellant from Videocon International Limited on September 28, 1994. Of these bonds, IRFC registered 50,000 bonds of "B" series while no intimation was given to the appellant regarding the 2.5 lakhs "A" series bonds. On enquiry, IRFC sent a letter dated December 6, 1994, to the appellant that "on account of certain disputes pending with the management of Canara Bank, we are unable to register transfer of these bonds for the present." In view of this, the appellant has filed the instant appeal on December 29, 1994, with the prayer that IRFC be directed to register these bonds in the name of the appellant. IRFC in its reply has stated that Can Bank Financial Services Ltd. (Canfina) a wholly owned subsidiary of Canara Bank, has failed to pay its debts to IRFC. Since Canfina is merely a division of Canara Bank, the latter is squarely liable for the debts of Canfina. According to IRFC, negotiations were going on between Canfina and Canara Bank for settlement of Canfina's debts to IRFC and till such time the matter was settled, Canara Bank and its subsidiaries were to hold all the bonds issued by IRFC. But, in the instant case, Canara Bank has sold the impugned bonds to Videocon which was fully aware of the dispute between IRFC and Canara Bank. In spite of this knowledge, Videocon not only purchased these bonds from Canara Bank but had also transferred the same to the appellant, which is a front company of Videocon. It is further stated by IRFC that Videocon should have instead of transferring the bonds to the appellant returned the same to Canara Bank and should have collected back the consideration paid. Since Videocon had knowledge of the dispute it could not be treated as a bona fide purchaser of these bonds and the appellant, being a front company of Videocon, can also not be termed a bona fide purchaser. It is also alleged by IRFC that Canara Bank, without honouring the commitment of holding on to these bonds till the settlement of the dispute, transferred the bonds to Videocon mala fide. Accordingly, IRFC has pleaded that instead of directing registration of the impugned bonds in the name of the appellant, it should be directed to return the bonds to Canara Bank and get the refund of the consideration paid.
3. Canara Bank, the second respondent, in its reply has stated that these bonds were sold to Videocon for valuable consideration and the appellant who has purchased them from Videocon is entitled to have its name registered in respect of these bonds.
4. In a hearing on March 30, 1995, we directed the appellant to implead Videocon also as a party to the proceedings and also ordered that IRFC should keep the interest payable as on April 1, 1995, on these bonds in a separate bank account in a fixed deposit for a period of six months. On impleading, Videocon filed its reply stating that it had sold these bonds to the appellant for valuable consideration and Videocon was not in the knowledge of any dispute between Canary Bank and IRFC at the time when it purchased the impugned bonds from Canara Bank.
5. During the final hearing, Sri P.A.S. Rao, advocate for IRFC, stated that IRFC had issued bonds worth over Rs. 750 crores on private placement basis to Canfina on the understanding that the amount of consideration paid by Canfina would be deposited by IRFC with Canfina as FD for a certain period but when the FDs matured for repayment the same was not repaid by Canfina. This is due to the fact that Canfina lost heavily during the scam period and, therefore, discussions were going on with Canara Bank which is the holding company of Canfina for the recovery of these amounts. In view of the huge amount owed by Canfina, IRFC had decided not to effect the transfer on the impugned bonds inasmuch as they have been bought from Canara Bank. He also alleged that the entire episode of transfer of the impugned bonds by Canara Bank to Videocon and subsequent transfer to the appellant was a sort of gameplan with a view to ensure that IRFC does not have any hold on Canara Bank in respect of these bonds. He also questioned the capability of the appellant, having a paid-up capital of only Rs. 20,000, to buy the impugned bonds worth Rs. 25 crores. He also filed copies of reports of the committee appointed by the RBI to enquire into the security transactions of banks and financial institutions and also the report of the Joint Parliamentary Committee which enquired into the irregularities in securities and banking transactions and the annual reports of Canara Bank, to indicate that Canara Bank was actively involved in rescuing Canfina from the losses incurred by the latter in the scam. He pleaded that even though these impugned bonds were not originally issued to Canfina, yet Canara Bank, having come into the possession of these bonds, should not have transferred these bonds without fulfilling its commitment to clear the debts of Canfina to IRFC.
6. Sri N. Ganapathy, advocate for the appellant, pointed to us, with reference to the photocopies of the impugned bond certificates, that there have been at least four prior transfers and registration of these bonds thus clearly indicating that the bona fides of these bonds had not been disputed by IRFC- He also stated that even though the paid-up capital of the appellant was meagre yet it had raised resources for purchase of these impugned bonds by way of loans and the appellant has been in the business of purchase and sale of securities right from its incorporation. He also disputed the claim that the appellant was a front company of Videocon.
7. We have considered the pleadings and arguments of counsel. At the outset we pointed out to counsel for IRFC that no resolution of the board, wherein the board considered and refused registration of transfer of the impugned bonds, has been filed with us. There is only one letter from IRFC to the appellant wherein it is stated that IRFC was unable to register the transfer of impugned bonds in view of certain disputes between them and Canara Bank. There is nothing in the letter that the board had ever considered any of the allegations which have been made in the reply to the appeal regarding the conduct of Videocon/appellant. On our direction, after the hearing was completed, IRFC has furnished a copy of the resolution of the board dated July 14, 1994, which reads as follows :
"On the question of adjustment of outstandings of Canfina, the board desired that in order to exert pressure on Canara Bank to own the liabilities of Canfina being its fully owned subsidiary, IRFC should advise the banks which have been authorised to encash interest warrants, not to honour the interest warrants relating to bonds held by Canara Bank, Canfina and Canbank Mutual as and when they are presented for re-encashment. Simultaneously, IRFC should also withhold registration of bonds, transferred by Canara Bank, Canfina and Canbank Mutual to other parties. The Board further desired that the question of recovery of outstandings from Canfina should be referred to IRFC to a legal firm of repute seeking their advice on the options available with IRFC to recover these outstandings."
8. A reading of the resolution shows that it is an omnibus resolution and it was passed on July 14, 1994. In other words there is nothing to indicate on record that the impugned bond certificates which were lodged by the appellant on September 29, 1994, were ever independently considered by the board of directors. Perhaps even the letter dated December 6, 1994, indicating the inability of IRFC to register the transfer of the bonds has been issued only on the basis of the resolution of the board dated July 14, 1994. The power of a company to refuse registration of shares/other transferable securities has been considered by various courts and now it has become a settled law that there should be specific powers in the articles for such refusal and even if such powers are vested by the articles the reason for refusal should be legitimate. While IRFC has not produced before us any authority given to the board by the articles to refuse registration, a mere reading of the omnibus resolution clearly indicates that the object of refusal of registration of transfer of securities held by Canfina, Canara Bank and Canbank Mutual was only to exert pressure on Canara Bank to own the liabilities of Canfina. How, through such resolution, the company could affect the rights of third parties who acquired these bonds for valuable consideration was not explained except to say that the decision of the board was only in the interest of the company and the Company Law Board, being a court of equity, should consider all the circumstances which had led the board to take such a decision. We are of the view that in the guise of business interest of the company, third party rights arising out of legitimate transactions where consideration has already passed cannot be affected. It is a matter of record that while the appellant lodged for transfer both "A" series and "B" series bonds, all of which were purchased from Videocon, which had in turn purchased these bonds from Canara Bank, IRFC chose to register the transfers of the "B" series bonds but not of the "A" series bonds, despite the omnibus resolution as stated above which is the subject-matter in this appeal. When we questioned counsel for IRFC as to how, if the intention of the company was not to effect registration of bonds held and transferred by Canbank, the "B" series bonds could be registered, no satisfactory explanation came from him.
9. It is also worth referring to the terms and conditions of issue of these bonds which have been printed on the face of the bond itself. Clause 6 of the bond reads as follows :
"Every registered holder of bonds will be recognised by the company as entitled to his/her bond free from any equity, set off or cross-claim on the part of the company against original payee, holder in due course or endorsee in accordance with the law. The company shall, subject to articles, register the transfer in the books."
10. Admittedly, the bonds are transferable bonds. Even, as per the terms of issue, the company cannot have any claim or set-off. The only condition is that it is subject to the articles as we have already indicated. The company did not produce before us the articles of association of the company to indicate the nature of powers in this regard. We have also seen, as rightly pointed out by counsel for the appellant, that each of the impugned bonds had been subject to at least four transfers prior to the instant lodgment and we also note that none of the bonds had originally been issued to Canfina and as such cannot form part of the original agreement with Canfina by which the company was to deposit with Canfina the consideration received for the bonds. In respect of these bonds, we find that Canfina had held these bonds for some time as transferees only and had transferred the same to others. Even assuming that Canfina had some liability towards IRFC, the above clause protects all the subsequent registered holders from any liability. Canara Bank is one such subsequent registered holder and the said clause completely protects Canara Bank. If there is any understanding between IRFC and Canara Bank regarding non-disposal of the bonds, IRFC can take appropriate steps to safeguard its interest but it cannot affect the third party rights. If the company had at all wanted to implement its decision, there should have been a proper notice to the prospective purchasers of the bonds either through public notice or otherwise which is completely absent in the present case. No doubt IRFC claims that Videocon had been given notice orally by share transfer agents that in view of the dispute between Canara Bank and IRFC the bonds' might not be transferred, yet in the absence of any specific notice on the face of the bond or specific prior intimation before purchase, visible on record, we do not think that Videocon should be considered to have any knowledge of the dispute. As we have earlier indicated, even assuming that the board has powers for refusal, the reason for taking the omnibus decision, as is obvious from the resolution of the board itself, that it was for the purpose of putting pressure on Canara Bank to come to a settlement regarding dues by Canfina which, according to us, cannot be a reasonable reason to refuse registration of the bonds acquired by bona fide purchasers for valuable consideration. It was also brought to our notice that the disputes between Canfina and IRFC are already before the committee of the Government constituted to resolve disputes among public sector undertakings.
11. On the date of final hearing, Sri Rao, advocate for IRFC, presented an application to direct the appellant and Videocon to answer certain interrogatories and discover certain documents as per annexures to the application. Both interrogatories to be answered and documents to be produced, according to us, were irrelevant inasmuch as the decision of the board, even assuming that it bad power to pass such resolution, was not with reference to the impugned bonds but was of a general nature. The appellant or Videocon answering the interrogatories or discovering documents, is not going to throw any light on the reason for refusal as the decision of the company to refuse registration was on the basis of the decision taken by the board in a general way and not with specific reference either to Videocon or to the appellant. Therefore, we informed counsel that there was no need to entertain the application and as such we did not admit the application.
12. On an overall assessment of the facts and circumstances of the case, we find that there was no justification on the part of the company to refuse registration of these bonds and, therefore, we hereby order that the bonds covered in the appeal shall be registered in the name of the appellant within ten days from the date of receipt of this order. The amount of interest which was ordered to be kept in fixed deposit in a bank shall be paid to the appellant together with the accrued interest in that account within ten days of the date of receipt of the order.