Case Law Details
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
- M/s. Gujarat Industrial Investment Corporation Limited is a Government of Gujarat Undertaking, filed Company Petition No. 13/111A/SRB of 2003 under Section 111A[1] of the Companies Act, 1956 against
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.
- To register the transfer of 22,93,000 shares of the company pledged by respondents 2 to 4 in favor of the petitioner.
- It is seen that the Gujarat Industrial Investments Corporation Ltd., a wholly-owned Government of Gujarat financial institution advanced a loan of Rs. 5 Crores in 1996 to the company for the conduct of its business, for which the company offered the shares held in the name of respondents 2 to 4 being the Company’s promoters and associates, by pledging the shares.
- Since the Company committed default in repayment of the loan amount, the petitioner lodged with the Company, the original certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting registration of the transfer thereof in their name. It is the grievance of the petitioner that though the Company had registered the transfer of 2,99,800 shares pledged by respondents 2 and 3, it failed to effect the registration of the transfer in respect of the remaining 22,93,000 shares.
- It is also the claim of the petitioner that in spite of repeated demands and lawyer’s notice dated 29.7.2003, 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 favor of the petitioner.
- In order to circumvent the claim of the petitioner, the respondents 2 to 4 have filed Civil Suits in City Civil Court, Chennai for permanent injunction restraining the Company from affecting the transfer of the pledged shares in favor of the petitioner.
- The respondents 2 to 4 filed a common counter affidavit wherein it is stated 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 Section 108 of Companies Act 1956, 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.
- The petitioner filed a rejoinder stating 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. The Company has already given effect to the transfer of 2,99,800 shares.
ISSUES
- Whether the obligation to register a transfer of shares within a particular period of time was mandatory or directory?
- Whether the company can cancel or reject the transfer where stamps on transfer form were not defaced or canceled?
- Whether the transfer of shares was valid in nature or not?
- Can a company reject the transfer form if it was resubmitted and by that time it’s validity period has expired?
RULES
- Section 108 of The Companies Act, 1956
Transfer not to be registered except on production of instrument of transfer - Section 108 1A of The Companies Act, 1956
Every instrument of transfer of shares shall be in such form as may be prescribed within sub-sub-clause (a) and (b) - Section 108 1B of The Companies Act, 1956
Notwithstanding anything contained in sub-section (1A), an instrument of transfer of shares, executed before the commencement of section 13 of the Companies (Amendment) Act, 1965 (31 of 1965) or executed after such commencement in a form other than the prescribed form, shall be accepted by a company with sub-clauses (a) and (b) of 108 1B. - Section 108 1C of The Companies Act, 1956
Nothing contained in sub-section (1A) and (1B) shall apply to conditions mentioned in sub-sub-clause A, B, or C. - Section 108 1D of The Companies Act, 1956
Notwithstanding anything in sub-section (1A) or sub-section (1B) or sub-section (1C) wherein the opinion of the Central Government, it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub-sections by such further time as it may deem fit whether such application is made before or after the expiry of the periods aforesaid; and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638[2]. - Section 56 of The Companies Act, 2013
Transfer and transmission of securities
JUDGMENT
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[3] 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.[4]
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.
ANALYSIS
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 CLB[5]which 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)[6] 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[7] 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.
CONCLUSION
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[8], 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[9], 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[10], 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[11]
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.
References –
[1] Rectification of Register on transfer
[2] 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
[3] AIR 1977 SC 536
[4] Section 108 (IC) (b) of Companies Act 1956
[5] Company Law Board
[6] National Company Law Tribunal
[7] Mukundlal Manchanda v. Prakash Roadlines Ltd. (1971) Comp Cas 575
[8] 1977 (47) Com
[9] 1997 (9) SCC 132
[10] 2003 (8) SCC 498
[11] a situation omitted from or not provided for by statute or regulation and therefore governed by the common law.
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