Company Law Board
Gujarat Industrial Investment ... vs Sterling Holiday Resorts (India) Ltd., ... on 23 August, 2004
Equivalent citations: [2005]124COMPCAS390(CLB), (2005)6COMPLJ511(CLB), [2005]57SCL88(CLB)
ORDER
K.K. Balu, Member
1. This petition is filed under Section 111A of the Companies Act, 1956 ("the Act") against M/s Sterling Holiday Resorts (India) Limited ("the Company") and others seeking directions of this Bench to register the transfer of 22,93,000 shares of the Company pledged by respondents 2 to 4 in favour of the petitioner.
2. According to Shri Arvind P. Datar, learned Senior Counsel, the petitioner, a wholly owned Government of Gujarat financial institution, had extended a corporate loan of Rs. 5 crores in October, 1996 to the Company for conduct of its business, against security of the impugned shares held in the name of the respondents 2 to 4 being the Company's promoters and associates, by way of pledge of 8,39,800 and 17,53,000 shares (25,92,800 shares) made on 06.11.1996 and 28.01.1997 respectively, as borne out by the loan and security documents (Annexure A-2 to A-9). When the Company committed default in repayment of the loan amount, the petitioner was constrained to lodge with the Company the original share certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting registration of the transfer thereof in the name of the petitioner. However, the Company had registered the transfer of only 2,99,800 shares pledged by the respondents 2 & 3, but failed to effect registration of the transfer in respect of the remaining 22,93,000 shares, in spite of forwarding the transfer letter dated 19.07.2001. Thereafter, the Company by a letter dated 23.07.2001 (Annexure A-12) advised the petitioner that the Company is in the process of transferring the balance 22,93,000 shares. In spite of repeated demands and the lawyer's notice dated 29.07.2003 (Annexure A-14), calling upon the Company to transfer the balance 22,93,000 shares in the name of the petitioner in demat form, the Company failed and refused to register the transfer of the pledged shares in favour of the petitioner. In the meanwhile, the respondents 2 to 4 have filed suits in O.S. Nos. 3740, 3741 & 3742/2000 on the file of the City Civil Court, Chennai for a permanent injunction restraining the Company from effecting the transfer of the pledged shares in favour of the petitioner in order to prevent the Company from completing the registration formalities, thereby jeopardising the legal rights of the petitioner as a pledgee. Shri Datar, learned Senior Counsel pointed out that the impugned shares are freely transferable and further that the action of the respondents in not effecting registration of the transfer of the pledged shares is with an oblique motive as well as without sufficient cause and therefore contrary to law and unjustified, especially when the petitioner, being a pledgee is entitled for registration of the transfers in its favour on default committed by the Company in support of which learned Senior Counsel relied on the decisions in Indian Bank v. Kiran Overseas Exports Limited - (2000) 4 Comp LJ 416 and Centurion Bank Limited v. Bellary Steels and Alloys Limited - (2004) 120 CC 439 and therefore prayed for the relief claimed in the company petition.
3. Shri P.H. Arvindh Pandian, learned Counsel appearing for the respondents pointed out that the petitioner's stand in the company petition is that the pledged shares were already transferred in the name of the petitioner as per the Share Transfer Committee meeting held on 30.06.2001, in which case the company petition before the CLB does not lie. Shri Pandian, learned Counsel further pointed out that the petitioner failed to comply with the provisions of Sub-section (1C), according to which the instruments of transfer ought to have been stamped or endorsed by the petitioner and thereafter delivered them to the Company together with the share certificates for registration of the transfer within two months from the date so stamped or endorsed. The requirements of Sub-section (1C)(B)(iv)(1)(c)(2), being mandatory have not been duly satisfied and therefore the Company is not under an obligation to effect the transfer of shares in the name of the petitioner. In this connection, Shri Pandian, learned Counsel relied on Mannalal Khetan v. Kedar Nath Khetan - (1977) 47 CC 185 and A.M.P. Arunachalam v. A.R. Krishnamurthy - 49 CC 662 to show that the provisions contained in Section 108 are mandatory. The Company cannot be compelled to register the transfer of shares until a proper instrument of transfer duly stamped and executed has been delivered to the Company. The prohibition against the transfer without complying with the provisions of Section 108 is emphasised by the negative language used in that section. Therefore, the Company cannot be compelled to register the transfer unless the mandatory requirements are duly complied with. By virtue of the deed of pledge executed by the respondents 2 to 4, the petitioner could dispose of the pledged shares either by public auction or private contract and appropriate the sale proceeds towards the dues of the Company. Therefore, the petitioner does not have the right to get the shares transferred in its name without a corresponding reduction in loan obligations. Shri Pandian, therefore, prayed for dismissal of the company petition.
4. Shri Datar, learned Senior Counsel, in his reply to the arguments advanced on behalf of the respondents contended that the plea of non-compliance with the requirements of Section 108(1C) has neither been raised before the civil court nor in the present proceedings. At the same time, the Company has already given effect to the transfer of 2,99,800 shares. Furthermore, the Company by a letter dated 23.07.2001 (Annexure A-12) categorically admitted that it is in the process of transferring and converting the balance of 22,93,000 shares into marketable lots. By virtue of Sub-section (3) of Section 108, the petitioner is entitled to claim the transfer of the impugned shares by the Company. The respondents 2 to 4 have categorically contended in the civil suits that they cannot have any objection for the transfer of the pledged shares in favour of the petitioner. Their only grievance in the civil suits is that the petitioner is attempting to transfer the pledged shares in its favour at a value far below the market value. The Company has therefore waived its rights to enforce the requirements of Sub-section (1C) of Section 108. The requirements of Section 108(1C) are only directory and not mandatory. Shri Datar, learned Senior Counsel, in support of this legal proposition relied on the decision in Mukundlal Manchanda v. Prakash Roadlines Limited - (1991) 72 CC 575 to show that the High Court of Karnataka after exhaustively examining the provisions of Section 108 and the decision of the Apex Court in Mannalal Khetan came to the conclusion that the provisions of Section 108(1A) are directory and not mandatory. The provisions of Sub-sections (1A), (1B) and (1C) were inserted for the first time by the amending Act 31 of 1965. The Supreme Court was interpreting Section 108 as it stood at the time of the impugned transaction therein and the Supreme Court had no occasion to make any observation concerning Sub-section (1A) of Section 108. According to Shri Datar, learned Senior Counsel, the principles enunciated by the High Court in Mukundlal Manchanda v. Prakash Roadlines Ltd., (Supra) shall apply to Sub-section (1C) and therefore, the decision of the Supreme Court in Mannalal Khetan will not be applicable to Sub-sections (1A), (1B) and (1C). The language of these sub-sections is not couched by the negative language as has been used in Section 108(1). Thus, the provisions of Sub-sections (1A), (1B) and (1C) are directory in nature and not mandatory. Merely because the instruments of transfer were delivered to the Company beyond the period specified in Sub-section (1C)(B)(2), such instruments of transfer do not become invalid. By virtue of the deed of pledge, the respondents 2 to 4 have unequivocally agreed for disposal of the pledged shares either by public auction or by private contract in the event of default in repayment of the loan amount by the Company and apply the net sale proceeds of the pledged shares towards the repayment of the outstanding loan amount due from the Company. The petitioner has every right to effect the transfer of the impugned shares in its favour, in view of the default committed by the Company. Shri Datar, learned Counsel, while concluding his submissions urged that while Section 108(1) applies to the transfers effected by members in the ordinary course, Section 108(1C) is a complete code for pledge of shares in favour of the financial institutions. As against the loan amount of Rs. 5 crores availed in the year 1996, the present outstanding amount as on August, 2003 payable by the Company comes to Rs. 38,84,50,713/-. The Company is neither settling the dues nor giving effect to the transfer of the pledged shares in the name of the petitioner in terms of the loan agreement, thereby jeopardising the public interest, on account of the huge public money blocked in the subject transaction. Therefore, no sympathy should be shown to a chronic defaulter and the requirements of Sub-section (1C) being only directory, the CLB in exercise of powers vested in Section 111A may direct the Company to effect registration of the transfer of the remaining pledged shares in the name of the petitioner.
5. I have considered the pleadings and arguments of learned counsel. The short issue that arises for my consideration is whether the Company shall be directed to register the transfer of 22,93,000 shares pledged by the respondents 2 to 4, in the name of the petitioner in the facts and circumstances of the present case?
The facts beyond dispute are that the Company had on its failure to repay the outstanding loan amount due to the petitioner had on 30.06.2001 effected the transfer of only 2,99,800 shares out of 25,92,800 shares pledged by the respondents 2-4, in name of the petitioner. While according to the Company, the provisions contained in Section 108 (1C) of the Act are mandatory, without compliance of which the petitioner cannot seek for the relief of registration of the remaining 22,93,000 in favour of the petitioner, it is on the other hand contended on behalf of the petitioner that the provisions of Sub-section (1C) of 108 are only directory, the requirement of which is waived by the Company by way of effecting the transfer of 2,99,800 shares out of 25,92,800 pledged shares in the name of the petitioner. Before going into merits of these contentious issues, it would be appropriate to deal with the relevant provisions of Section 108. Section 108 (1) provides that a company shall not register a transfer of shares in 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 transferee has been delivered to the company. The provisions contained in Section 108(1), are found to be mandatory by the Apex Court in Mannalal Khetan v. Kedar Nath Khetan (supra) and therefore the Company cannot be compelled to register the transfer of shares until the mandatory requirements of law are complied with, as held in A.M.P. Arunachalam v. A.R. Krishna Murthy (Supra). According to Section 108 (1A)(a) every instrument of transfer, before it is signed by or on behalf of transferor, and before any entry is made therein, be presented to the 'prescribed authority', who shall stamp or otherwise endorse thereon the date on which it is presented to him. After an instrument is dated by the prescribed authority and completed in all respects, it shall be delivered to the company for registration of the transfer, together with related certificate(s) of shares or the letter of allotment, within the time limit specified in Clause (b) of Sub-section (1A). It is in this context the decision of the High Court of Karnataka in Mukundlal Manchanda v. Prakash Roadlines Ltd., (Supra), wherein it has been held that the requirement as to the time limit for delivery of the instrument of transfer under Sub-section (1A) is of directory nature and not mandatory, in my view, assumes importance for adjudicating the issue in dispute. The High Court of Karnataka before coming to the conclusion that "delivery of the instrument of transfer to the company no doubt, is a mandatory requirement as per Section 108(1), but the time limit of two months stated in Sub-section (1A)(b)(ii) does not say that the company shall not accept the instrument of transfer delivered thereafter", is found to have taken due cognizance of the decision in Mannalal Khetan v. Kedar Nath Khetan (supra) and categorically held that the Supreme Court had no occasion to make any observation concerning Sub-section (1A), in view of the fact that the Supreme Court was dealing with the case concerning Section 108, when it did not contain Sub-section (1A). Sub-section (1B) is not relevant in the context of the subject dispute. According to Sub-section (1C), if the transfer of shares falls within any one of the exempted cases mentioned in that sub-section, the requirements as to presentation of the instrument of transfer in favour of the prescribed authority and delivery thereof to the company within the prescribed time limit, as contemplated in Sub-section (1A) are not applicable, provided the conditions stipulated in Sub-section (1C) are satisfied. Accordingly, any bank or financial institution or the Central Government or a State Government or any corporation owned or controlled by the Central Government or a State Government, as envisaged in Sub-section (1C), granting a loan against the security of shares, intends to get such shares registered in its own name, in the event of failure on the part of the borrower to repay the amount loan, it shall complete the instrument of transfer and lodge it with the company for registration of the transfer in its own name. In such a case, the bank or financial institution as the case may be will have to stamp or otherwise endorse on the instrument of transfer the date on which the bank or financial institution decides to get such share registered in its own name and the instrument so stamped or endorsed will have to be delivered to the company, together with the share certificate, for registration of the transfer within two months from the date so stamped or endorsed. In the present case, admittedly the instruments of transfer are neither stamped nor endorsed by the petitioner, as required under Sub-section (1C), but stamped by the prescribed authority contemplated under Sub-section (1A). Though nothing contained in Sub-section (1A) shall apply to any share deposited by any person with any bank or financial institution specified in Sub-section (1C), yet the instruments of transfer in respect of the impugned shares duly stamped by the prescribed authority under Sub-section (1A) and not the petitioner, going by the tenor of law that every instrument of transfer must either be stamped or endorsed, cannot, to my mind render the instruments invalid on account of the trivialities. The next question as to whether delivery of the instruments of transfer beyond two months from the date so stamped as specified in Sub-section (1C) is proper must be considered in the light of the decision of the Karnataka High Court in Mukundlal Manchanda v. Prakash Roadlines Ltd., (Supra), wherein it has been categorically held that the limit of two months stated in Sub-section (1A) (b)(ii) for delivery of the instrument to the company for registration of the transfer is not a mandatory stipulation. In this connection, the reasoning of the High Court shall be borne in mind, the relevant portion of which is reproduced here below:-
"While understanding the scheme of Section 108 of the Companies Act, 1956, the court has to bear in mind that trivialities would not render an act futile and technical formalities required to be complied with for a valid transaction cannot outweigh the importance to be given to the substance of the transaction. Under Section 108(1A), delivery of the instrument of transfer has to be made within the period of two months. But the provision does not say that a company shall not accept the instrument of transfer delivered thereafter. Nowhere does the Companies Act declare that a duly executed instrument of transfer ceases to be effective or becomes void after the period referred to in Sub-section (1A) of Section 108. The reasonable manner of understanding the scheme of Section 108 will be, not to render delivery of an instrument of transfer after the period specified in Sub-section (1A) in valid, but as vesting a discretion in the company either to recognise the transfer or not to recognise it depending upon the staleness of the instrument. In fact, in the latter case, the affected person may move the Central Government under Sub-section (1D) by explaining the circumstances under which the delay occurred and the hardship that results by the non-recognition of the transfer".
Though the decision of the Karnataka High Court came to be rendered, while interpreting Sub-section (1A), dealing with transfers in the normal course, yet the analogy adopted for Sub-section (1A), in my view, shall be applicable to cases falling under Sub-section (1C)(2), which deal with specified transfers and therefore, the requirement as to the time limit for delivery of the instrument of transfer specified in Sub-section (1C) is directory in nature and not mandatory. It is on record that the instruments of transfer duly stamped and executed both on behalf of the transferor and transferee were already delivered to the Company in accordance with the requirements of Section 108 (1). Moreover, the Company had already effected the transfer in respect of 2,99,800 pledged shares in the name of the petitioner, though the relevant instruments of transfer were admittedly delivered beyond the time limit prescribed under Sub-section (1C). The Company by a letter dated 23.07.2001 (Annexure A-12) said in clear terms that it is "in the process of transferring and converting the balance of 22,93,000 shares into marketable lots." Thus the Company having waived the requirements of Sub-section (1C), cannot now take a different stand, while the petitioner seeks for registration of the transfer in respect of the remaining shares pledged securing the dues of the petitioner exceeding several crores of rupees. The claim of the respondents is neither justified in the light of the huge public funds becoming sticky in the hands of the Company. The civil suits filed by the respondents 2 to 4, in the absence of any restraint order against the Company and the petitioner for not giving effect to the transfer of shares, do not have any bearing on the prayer made by the petitioner. The other averments raised in the counter statement are neither argued nor found to be germane to the issue in question. For these reasons, the Company is hereby directed to register the transfer of 22,93,000 shares in the name of the petitioner within 30 days of receipt of this order. With these directions the company petition stands disposed of. No order as to cost.