Company Law Board
Canara Bank vs Ankit Granites Limited on 20 November, 1998
Equivalent citations: [1999]97COMPCAS511(CLB)
ORDER
1. This is a petition originally filed under Section 111(4) of the Companies Act, 1956 (hereinafter referred to as "the Act") and subsequently considered under Section 111A on an application made by the petitioner against M/s. Ankit Granites Limited (hereinafter referred to as "the company") for rectification of the register of members of the company by entering the name of the petitioner in respect of the shares impugned in the petition. The petition came up for hearing from time to time and finally on October 13, 1998.
2. The facts of the case, in brief, are that the petitioner, being a nationalised bank, had extended certain credit facilities to the company against the security of, among other things, pledge of the impugned shares held by promoters of the company. The pledged shares are required to be transferred in the name of the petitioner in accordance with Circular No. DBOD No. SIC.BC.114/C.739(A4) of 1986, dated October 24, 1986, issued by the Reserve Bank of India. Accordingly, the petitioner, had lodged 6,01,270 shares with the company on April 21, 1995, for effecting transfer in favour of the petitioner. In spite of protracted correspondence, the company failed to effect the transfer in favour of the petitioner. Hence, the petition.
3. According to the company, the promoters though offered the impugned shares as collateral security had not pledged them. They had neither agreed to transfer the shares in favour of the petitioner. The facilities availed of by the company are temporary in nature and hence the Reserve Bank of India circular dated October 24, 1986, is inapplicable. The company is, however, ready and willing to liquidate the outstanding loan amount due to the petitioner. The company had acted in accordance with clause 47 of the articles of association of the company while communicating the reasons for not transferring the impugned shares in favour of the petitioner. The company has, therefore, prayed for dismissal of the petition.
4. During the hearing, Shri R. Parthasarathy, authorised representative for the petitioner while reiterating the submissions made in the pleadings submitted that the petitioner had extended foreign bills discounting facility for carrying on business of the company. The impugned shares were pledged by the promoters of the company in favour of the petitioner. The Reserve Bank of India guidelines stipulate that whenever advances granted by banks against the security of shares exceed Rs. 10 lakhs, the said shares are required to be transferred in the bank's name. The company being a listed company failed to comply with the requirements of Section 22A of the Securities (Contracts) Regulation Act, 1956, and also clause 47 of the articles of association of the company before refusal of transfer of the impugned shares. The credit facility being enjoyed by the company since June, 1994, to carry on its day-to-day operations cannot be said to be temporary in nature. The shares are, therefore, required to be transferred in favour of the petitioner in accordance with the Reserve Bank of India guidelines. The petitioner will comply with the listing agreement as and when the impugned shares are transferred by the company. As the shares are yet to be transferred in favour of the petitioner, there is no violation of the listing agreement entered into between the company and the stock exchange. In view of the indebtedness of the company, Shri Parthasarathy sought for transfer of the impugned shares in favour of the petitioner.
5. Shri K. Manoj Menon, advocate, for the company, while reiterating the averments made in the counter statement submitted that the promoters of the company pledged the impugned shares in favour of the petitioner securing the financial assistance extended in favour of the company. The petitioner is now seeking to enforce such security by securing the transfer of impugned shares in their favour. He further submitted that the company has become a sick industrial company and consequently made a reference to the Board for Industrial and Financial Reconstruction (BIFR) under Section 15(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). The company has been declared by the BIFR in its order dated November 25, 1997, as a sick industrial company and appointed the ICICI as the operating agency to examine the viability of the company's operations. By virtue of Section 22 of the SICA, the petitioner is barred from enforcing any security against the company or any guarantee in respect of any loan granted to the company, unless consent of the BIFR is obtained. The jurisdiction of civil courts is excluded on account of Section 26. It is, in these circumstances, Shri Manoj Menon submitted, that the petition is liable to be dismissed.
6. We have considered the pleadings as well as arguments of the authorised representative for the petitioner and counsel for the company. On the basis of the pleadings and submissions of both the sides the following issues arise for our consideration :
(i) Whether the company is justified in having refused to register the transfer of the impugned shares in favour of the petitioner ?
(ii) If not, whether the company is bound to transfer the impugned shares in favour of the petitioner and rectify the register of members by incorporating the petitioner's name in the facts and circumstances of the case.
Issue No. (i) :
The company is admittedly a public company. The provisions of Section 111A shall be made applicable in the matter of rectification of the register of members of a public company. The relevant portion of Section 111A runs 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."
7. A careful scrutiny of the above provisions of Section 111A reveals that while the proviso to Sub-section (2) deals with pre-registration issues, sub-section (5) deals with post-registration issues. It is beyond doubt that the shares of a public company are freely transferable ; and that if the transfer is refused without sufficient cause, the transferee may appeal to the Company Law Board, which shall examine whether such refusal is with sufficient cause or not. If the refusal is without sufficient cause, the Company Law Board will direct the company to register the transfer. The term "sufficient cause" has to be interpreted with reference to the provisions of Section 111A. Under Sub-section (3) of Section 111A, the register of members can be ordered to be rectified in case of post-registration issues on the following grounds :
(i) If the transfer is in contravention of the provisions of the Securities and Exchange Board of India Act, 1992, or regulations made thereunder ; or
(ii) the Sick Industrial Companies (Special Provisions) Act, 1985 ; or
(iii) any other law for the time being in force.
8. It is thus, seen that the statute itself has restricted the grounds on which a register can be rectified after registration of the transfer. The term "sufficient cause" as used in the proviso to Sub-section (2) has, therefore, to be seen with reference to the ground under which a register can be rectified after registration. Accordingly, only when the company refuses to register the transfer of shares on any of the grounds that the transfer is in violation of the provisions of SEBI Act or regulations thereunder, the SIC 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 sufficient cause within the meaning of Section 111A. Now, it has to be examined whether the petition before is within the aforesaid legal framework. According to the company, registration of the transfer of the impugned shares in favour of the petitioner was refused for the following among other reasons :
(i) The impugned shares have been offered as collateral security but not pledged in favour of the petitioner.
(ii) The facilities availed of by the company from the petitioner are temporary in nature and consequently the impugned shares are not required to be transferred in terms of the Reserve Bank of India circular dated October 24, 1986.
9. It is, therefore, beyond doubt that the reasons offered by the company for the refusal of registration of the transfer do not fall within "sufficient cause" specified in Section 111A. Therefore, refusal of the company in not having registered the transfer of the impugned shares in favour of the petitioner is not justified. This issue is accordingly answered.
10. Issue No. (ii) :
The undisputed facts are that the company availed of bill discounting facilities from the petitioner to carry on its business against the security of pledge of the impugned shares held by the promoters, The impugned share certificates together with blank transfer forms duly signed by the promoters were lodged with the petitioner securing the credit facilities availed of by the company. The dues of the company are not closed in full. The company is now a sick industrial company in terms of Section 3(1)(o) of the SICA and as such the BIFR declared it as a sick company by its order dated November 25, 1997, in terms of the provisions of the SICA. The company is declared to be a sick company subsequent to the filing of the present petition. By virtue of Sub-section (1) of Section 22 of the SICA, no proceedings for the winding up of the industrial company or for execution, distress or the like against any of the properties of the industrial company or for the appointment of a receiver thereof and no suit for recovery of money or for the enforcement of any security against the industrial company or of any guarantee in respect of any loans, or advance granted to the industrial company shall lie or be proceeded with further, except with the consent of the BIFR. In the present case, the petitioner is seeking to enforce the security against the company, being the impugned shares offered by the promoters securing advance granted to the company, which cannot be proceeded with further, except with the consent of the BIFR. The petitioner, being a nationalised bank is already represented in the proceedings before the BIFR. In the circumstances, the petitioner is at liberty to make their claim before the BIFR for transfer of the impugned shares in their favour.
11. With the above observations, the petition stands disposed of.
12. No order as to costs.