M/s. Dove Investments Private Ltd. Vs. Gujarat Industrial Investment Corporation Ltd. (Madras High Court); C.M.A.No. 3188 of 2004 and Civil Misc., Appeal No. 3223 of 2004; 30/12/2004
FACTS OF THE CASE
1. M/s. Sterling Holiday Resorts (India) Limited
2. M/s. Dove Investments Private Limited
3. M/s. Maxworth Investments Private Ltd., and
4. N. Mohan
before the Company Law Board, Southern Region Bench, Chennai.
The Madras High Court held that the provisions of sections 108(1A) and (1C) are directory. The ruling of the Supreme Court in Mannalal Khetan had considered only sub-section 108(1), since the transaction in question, in that case, was prior the insertion of the sub-sections (1A) (IB) (1C) and (ID), and did not warrant their consideration. The court ruled that these new sub-sections were only procedural requirements and technical formalities to be fulfilled and could not outweigh the substance of a transaction.
In the case of transfer of shares in favor of a bank by way of pledge of the shares where along with the share certificate a blank instrument of transfer duly signed by the shareholder is deposited with the bank. A bank granting a loan against. the security of shares may either have them transferred in its name or may, in the alternative, obtain from the borrower shareholder a blank instrument of transfer duly signed, by him as a transferor, along with the related share certificates. If the bank opts for the first alternative, then, in the event of default by the borrower is repayment of the amount of loan, it might sell the shares so that the sale proceeds are applied towards satisfaction of its dues. If, however, the bank chooses the second alternative, it shall, in the event of the borrower’s default, complete the instrument and lodge it with the company for registration of the transfer in its own name or in the name of the buyer thereof. In either case, the bank will have to stamp or otherwise endorse on the instrument of transfer the date on which the bank decides to follow any of the above courses 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 stamped thereon as aforesaid.
Failure by Company to repay the loan to State financial corporation not endorsing stamps itself but getting the endorsement of prescribed authority exercising right to be registered as the owner of shares, company transferring portion of shares. The company is not entitled to justify, failure to register remaining shares on the ground requirement of the section not fulfilled by the corporation.
The respondent company lodged with the appellant company shares pledged with it for effecting transfer of the same in its name. The appellant registered some of the shares and refused to register the balance on the ground that the respondent had failed to comply with the provisions of Section 108(1A) and 108(1C) [Corresponds to section 56 of the Companies Act, 2013]. The respondent was successful before the CLBwhich held that provisions of Section 108(1C) [Corresponds to section 56 of the Companies Act, 2013] are directory and directed the appellant to register the shares.
The appellant challenged the order of the CLB (Now Tribunal) before the High Court. The Appeal was dismissed. According to the High Court, insofar as Sub-section (1C) is concerned, if the transfer of shares falls within any one of the exempted cases mentioned in that Subsection, the requirements as to the presentation of the instrument of transfer in favor of the prescribed authority and delivery thereof to the company within the prescribed time limit, as contemplated in Subsection (1A) are not applicable, provided the conditions stipulated in Sub-section (1C) are satisfied.
In view of the same, if 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, or a corporation 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 of 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 circumstance, they 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 transfer within two months from the date so stamped or endorsed. It was not in dispute that the instruments of transfer were neither stamped nor endorsed by the petitioner, as required under Sub-section (1C) however, stamped by the prescribed authority contemplated under Sub-section (1A).
It was observed by the Karnataka High Court that the requirement of subsection lA (b) (ii) has to be read reasonably, so as to enable its smooth functioning; delivery of an instrument of transfer within a reasonable time should be held as a proper delivery. Further, where the company opines that the instrument of transfer has become stale and that it is improper to act upon it, the instrument of transfer has to be held as liable to be ignored. Further, even the belated delivery can be acted upon under, certain circumstances while moving the Central Government under subsection (1) of section 108(1).
In the light of the said provision, even though the discretion lies in the company either to recognize the transfer or not to recognize it depending upon the staleness of the instrument, the affected person can very well move the Central Government under subsection (ID) by explaining the circumstances under which the delay occurred and the hardship that resulted by the non-recognition of the transfer. It was rightly concluded that in the light of the scheme of section 108, particularly after the insertion of subsection (1A) (IB), (1C) and (ID), the courts have to bear in mind that the 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. Though the matter was taken up by way of appeal before the Divisional Bench of the Karnataka High Court, the Division Bench and not gone into the said aspect, namely,-Whether mandatory or directory, however, confirmed the judgment of the Single Judge on merits. In the light of the above discussion, considering the scheme of the said provisions, the view expressed by the Single Judge in Mukundlal Manchanda’s case was to be upheld, and accordingly, it was. held that except section 108(1) other provisions namely subsection (1A) and (1C) are directory and not mandatory in nature.
In this present case decision of the court was natural. The court dismissed the Appeals, based on the raised by the parties and by referring Supreme court judgments like – Mannalal Khetan v. Kedar Nath Khetan, the question that was considered by the Supreme Court, in this case, was whether the provisions of Section 108 of the Companies Act, 1956 are mandatory in regard to the transfer of shares.
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 (1-A) (b)(ii) does not say that the company shall not accept the instrument of transfer delivered thereafter. The stipulation of time for the performance of an act is not read as a mandatory stipulation under certain circumstances. Nowhere the Companies Act declares that a duly executed instrument of transfer ceases to be effective or becomes void after the period referred to in sub-section (1-A) of Section 108. In fact, under certain circumstances, those instruments can be acted upon by moving the Central Government under sub-section (1-D) of Section 108. But later this decision was taken away in case Mukundlal Manchanda v. Prakash Roadlines Ltd., 1995 (1) Com. L.J. 126 (Kar.)
In Mohan Singh v. International Airport Authority of India, regarding the use of words “shall” or “may”. The Supreme Court held that the distinction of mandatory compliance or directory effect of the language depends upon the language couched in the statute under consideration and its object, purpose, and effect.
In P.T. Rajan v. T.P.M. Sahir, while considering certain provisions in the Representation of the People Act, 1951, the Supreme Court has held that even if a statute specifies a time for publication of the electoral roll, the same by itself could not have been held to be mandatory and such a provision would be directory in nature. The Supreme Court further held that where a statutory functionary is asked to perform a statutory duty within the time prescribed therefor, the same would be directory and not mandatory.
They also held that a provision in a statute which is procedural in nature although employs the word “shall” may not be held to be mandatory if thereby no prejudice is caused and that the Court cannot supply casus omissus
According to the understanding of the case – The conduct of the Company is also not appreciable. They borrowed a sum of Rs. 5 Crores and repaid only Rs. 2.5 lakhs. It is the stand of the company that the loan would never have been given, but for the pledge of the shares. It is not disputed that the petitioner is a State Government undertaking and the amounts advanced are public funds. The Company had raised frivolous technical objection only to prevent the petitioner from realizing its dues. So the company should be held liable for not registering the left Share in respect of the remaining 22,93,000 shares. It has been observed that. regard must be had to the context, the subject matter, and object of the statutory provision in question in determining whether the same is mandatory or directory. No universal principle of law could be laid down in that behalf as to whether a particular provision or enactment shall be considered mandatory or directory. It is the duty of the court to try to get the real intention of the Legislature by carefully analyzing the whole scope of the statute or section or a phrase under consideration.
 Rectification of Register on transfer
 Annual report by Central Government. The Central Government shall cause a general annual report on the working and administration of this Act to be prepared and laid before both Houses of Parliament, within one year of the close of the year to which the report relates
 AIR 1977 SC 536
 Section 108 (IC) (b) of Companies Act 1956
 Company Law Board
 National Company Law Tribunal
 Mukundlal Manchanda v. Prakash Roadlines Ltd. (1971) Comp Cas 575
 1977 (47) Com
 1997 (9) SCC 132
 2003 (8) SCC 498
 a situation omitted from or not provided for by statute or regulation and therefore governed by the common law.