Award of an arbitrator under Arbitration and Conciliation Act, 1996 would fall within ambit of “transmission by operation of law” as envisaged by second proviso to section 108 of Companies Act
Award by arbitrator is within ambit of “transmission by operation of law”
DECIDED BY: HIGH COURT OF BOMBAY, IN THE CASE OF: Dinesh Nagindas Shah Vs. Pankaj Aluminum Industries Pvt. Ltd., APPEAL NO: Company Appeal No. 59 of 2009 IN Company Petition No. 16 of 2008, DECIDED ON July 7, 2010
1. This is an appeal under section 10(F) of the Companies’ Act, 1956 against an order and judgment of the Company Law Board dated 22.06.2009. The appeal is admitted. With the consent of the parties, the appeal is heard finally.
2. The five appellants were respondent nos.2, 5, 6, 7 and 8 respectively in the Company Petition filed before the Company Law Board. Respondent no.1 herein was respondent no.1 in the Company Petition. Respondent nos.2 to 10 in this appeal were the petitioners in the Company Petition. Respondent nos.11 and 12 were respondent nos.3 and 4 in the Company Petition.
3. The petition was filed for an order directing the respondents to cancel the registration of the transfer of shares belonging to respondent nos.2 to 10 in the names of the appellants, to declare the same as void ab initio and to rectify the registration of members by removing the names of the concerned respondents and restoring the names of the petitioners. Respondent nos.3 and 4 were impleaded only in their capacity as directors and they held no shares in respondent no.1.
4. This appeal is a part of a group of 38 appeals which raise a common question of law. It is stated that the facts in all the appeals are similar. The appeal raises an important question of law as to the ambit of the second proviso to section 108(1) of Companies Act, 1956. The issue is whether an award under the Arbitration and Conciliation Act, 1996 directing the transfer of shares to a party falls within the ambit of the second proviso to Section 108. I have held it does and that accordingly it was not necessary for the Board of Directors of the Company to require a transfer form to be executed by the parties before effecting the transfer in its Register of Members. Section 108 reads as under:
“108. Transfer not to be registered except on production of instrument of transfer. –
(1) A company shall not register a transfer of shares in, or debentures of, 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 the transferee and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares of debentures or if no such certificate is in existence, along with the letter of allotment of the shares or debentures:
Provided that where, on an application in writing made to the company by the transferee and bearing the stamp required for an instrument of transfer, it is proved to the satisfaction of the Board of directors that the instrument of transfer signed by or on behalf of the transferor and by or on behalf of the transferee has been lost, the company may register the transfer on such terms as to indemnity as the Board may think fit:
Provided further that nothing to this section shall prejudice any power of the company to register as shareholder or debenture-holder any person to whom the right to any shares in, or debentures of, the company has been transmitted by operation of law.”
5. There were four groups of shareholders in the first respondent company which may be referred to as the Babulal N. Shah, Harakchand N. Shah, Pravinchandra N. Shah, Sureshchandra N. Shah and Dineshchandra N. Shah groups.
6. Prior to 1.4.03, a joint family business was started by the members of the five groups, which continued for nearly 35 years. The family owns several movable and immovable properties purchased within the joint family and held in the names of different members of the family. The five brothers decided to partition and separate the joint family business with the intention that each group would have its exclusive ownership of the properties. Pursuant thereto, the brothers took charge of the respective companies allotted to them and started managing the same exclusively i.e. to the exclusion of the other brothers and the members of their group. Accordingly, each company was thereafter managed and controlled by the respective brothers and the members of their group. The first respondent company was allotted to the appellants i.e. Dineshchandra N. Shah (appellant no.1) and the members of his group. Three companies remained as a part of the group but were managed by Harakchand N. Shah i.e. (Respondent no.2 herein). According to the appellants, the five brothers started managing the companies coming to them/their group and also dealt with the properties standing in the names of such companies exclusively and without any interference from the members of the other groups.
7. Certain disputes and differences arose between the five groups inter-alia as to the accounts and the statement of assets and liabilities. They decided to refer the same to arbitration. A tribunal of three arbitrators was appointed by the five brothers on 20.6.05.
8. The Arbitrators entered upon the reference and passed an interim award dated 2.7.05, paragraphs 10 and 11 whereof read as under:-
“10) As regards the question whether different Companies being run after 31.03.2003 by respective Parties were so run as Owners or Trustee, the Arbitrators were of an unanimous opinion that the respective Companies were allotted willingly to the Parties and have been run by them with the intention of Ownership and hence, respective Parties are Owners of concerned Companies since 01.04.2003 and not Trustees.”
“11) Shares – All the shares held by the groups to be transferred to the family holder of the Company at book value as certified by the Chartered Accountants and the like amount to be gifted back by the seller and the buyer in such manner that gift tax does not become payable. This transaction should be completed within 60 days thereof. Taxes, if any will be borne by the Group. (emphasis
9. Clarifications were sought by some of the members of the groups. The arbitrators passed a further interim award on 25.1.08. Three of the brothers of the other groups on 28.1.08 withdrew their consent and refused to accept any award, if given. On 16.2.08, the arbitrators withdrew from the arbitration and purported to cancel their earlier awards. It is common ground that the arbitrators were not entitled to cancel their award once they were made and published.
10. Respondent no.2 filed Arbitration Petition No.334 of 2008 in which he sought a declaration that the letter of resignation dated 16.2.08 was null and void, an order directing the arbitrators to continue with the arbitration proceedings and to pass a final award and an order to set aside the clarificatory award dated 28.1.08. It is important to note that there was no challenge therein and there has been no challenge even otherwise to the said award dated 2.7.05.
11. (A) In the meantime, on 31.3.06, Sureshchandra N. Shah and the members of his group handed over their shares in the company along with duly executed share transfer forms to the Appellants. The same were transfered by respondent no.1 to the names of the appellants in the Register of Members.
(B) Respondent nos.2 to 10 i.e. the Petitioners in the Company Petition held shares in respondent no.1 as under:-
Name of the Shareholder(s) / Applicants
No. of Share
Harakchand N. Shah
Gunvanti H. Shah
Jayesh H. Shah
Kamini J. Shah
Hitesh H. Shah
Shilpa H. Shah
Hiren H. Shah
Shital H. Shah
Volition Trading (P.) Ltd.
The Board of Directors of respondent no.1 transferred inter-alia these shares to the members of the Appellants group. This action has been challenged in the Company Petition.
12. On 25.7.06, the petitioners requested the company to provide them a list of the latest shareholding along with the members thereof. Respondent no.2/Appellant no.1 by a letter dated 26.7.06 furnished these particulars which indicated the shareholding prior to the impugned transfer as stated above.
13. Respondent nos.2 to 10 i.e. the petitioners averred in the petition that to their shock and surprise while taking a search of the documents of the first respondent Company for some other purposes on 25.6.07, they found that the entire shareholding was transferred on 31.3.06 in the names of respondent nos.5 to 8 i.e. Appellant nos.2, 3, 4 and 5. They stated that none of them had signed or executed transfer forms authorizing the company or its board of directors to so transfer the shares. The shares which are in physical form are in the possession of the respective petitioners who had not signed any transfer documents nor authorized any other person or party to do so. At the hearing, the learned counsel appearing on behalf of the respondent nos.2 to 10 challenged the transfer of the said shares on the ground that it was contrary to section 108 of the Companies Act, 1956 and Articles 15 and 16 of the Articles of Association of the Company which read as under:-
“Notice of desire to be given
15. Every Member or other person referred to in the Articles 19 who intends to transfer shares (hereinafter called `the Vendor’) shall give notice in writing to the Board of his intention that notice shall constitute the Board his agent for the sale of the said shares in one or more lots at the discretion of the Board to the holders of equity shares of the Company at a price to be agreed upon by the Vendor or the Board or in default of such agreement at a price which the Auditors of the Company for the time being shall certify by writing under his hand to be in his opinion the fair selling value thereof as between a willing vendor and a willing purchaser.
Board to give notice to the holders of Equity Shares
16. Upon the price being fixed as aforesaid the Board shall forthwith give notice to all the holders of equity shares of Company of the number and price of the shares, to be sold and invite each of them to state in writing within 21 days from the date of the said notice whether he is willing to purchase any and if so, what maximum number of the said shares.”
14. To challenge the action of the company in transferring the shares standing in the names of the members of the other groups to the names of the members of the Dineshchandra N. Shah group, 19 company petitions were filed before the Company Law Board by various members of the other groups for the same relief namely rectification of the register of members of the company. By the impugned order and judgment dated 22.06.09, the Company Law Board allowed the petitions by directing the Company to reverse all the transfers holding the same to be illegal and void. The members of the Dineshchandra N. Shah group and the Company filed 19 appeals each under section 10(F).
15. The reasoning in the impugned order is limited to the following observations:-
“Both the family settlement as well as the arbitration efforts have failed and there are lot of disputes among the brothers to be resolved. I agree with the respondents of this petition that this Bench has no jurisdiction to pass any adjudication on the disputes arising out of the family settlement or out of arbitration. The authority to adjudicate upon these disputes is a Civil Court. However, the petition before this Bench is under Sec.111 of the Companies Act with regard to wrongful entries made in the register of members by wrong transfers. I consider the prayers in the petition and agree that as decided in the Hon’ble Apex Court, the shares have to be transferred only when applied as envisaged under section 108 of the Companies Act, 1956 or as envisaged by the arbitrators in their now resented order dated 2nd July, 2005 at clause 10 & 11 which is referred in the earlier part of this order. The respondents have not submitted or proved that they followed the procedure prescribed by arbitrators at clause 10 and 11 of arbitration award dt. 2nd July, 2005. If any share transfer is made by the Board of Directors of the Respondent Company in violation of Sec.108 or in noncompliance of the procedure prescribed by the arbitrators then the said transfer is without authority and is void. Therefore, the Board of Directors are directed to reverse all the illegal and void transfers affected by them.”
16. The Company Law Board has therefore, passed the order only on the basis of section 108 and Articles 15 and 16 of the Articles of Association of the Company. The arguments before me were also limited only to this extent.
17. The first question is whether the registration of the shares in the names of the appellants by the board of directors from the names of the respective respondents was contrary to section 108 of the Companies Act, 1956.
18. The transfers were effected not pursuant to any application from the respective respondents but only on the basis of the award. The appellants admit that the concerned respondents had not signed any share transfer forms nor authorized any of the appellants or the company to effect the said transfers in any manner. There are several authorities that hold that section 108 does not apply to involuntary transfers. For instance, in Unity Company v. D. Sugar Mills AIR 1971 Cal. 18 it was held not to apply in a case of forfeiture where the company sells the shares in exercise of its lien. I intend basing this judgment on the second proviso to section 108. I will presume, therefore, that in the absence of the second proviso to section 108, the transfers would have been illegal as section 108 is mandatory. The question that arises for consideration is whether in view of the second proviso the board of directors was entitled to effect a transfer of the said shares in the names of the appellants only on the basis of the award to wit in the absence of a share transfer form.
19. The words `transfer’ and `transmission’ have been used in section 108. The legislature must, therefore, be deemed to have ascribed to each of the terms a different meaning. In any event, the ambit of each of the terms `transfer’ and `transmission’ could not have been intended to be the same.
20. (A) The term `transmission’ can also indicate a transfer of interest. Blacks Law Dictionary 8th Edition defines the terms as under:
“transfer – 1. To convey or remove from one place or one person to another; to pass or hand over from one to another, esp. to change over the possession or control of. 2. To sell or give.
Transmission – The passing of an inheritance to an heir.
Transmit – 1. To send or transfer (a thing) from one person or place to another. 2. To communicate.
(B) The Concise Oxford English Dictionary defines the word transmit to also mean “cause to pass on from place or person to another”.
21. The terms are used interchangeably. I will therefore, presume that the terms `transmit; or `transmission’ can also imply a transfer between persons. However, the legislature having used both the terms in the same section as well as in the other provisions of the Act, must be deemed to have ascribed a different meaning to each of the terms and intended them to have a different ambit.
22. There is little doubt about the scope of the term `transfer’ as it is used in Section 108 of the Companies Act. It certainly refers to a transfer between persons pursuant to a voluntary act. The term `transmission’ on the other hand, to my mind, is limited to involuntary acts such as in the case of inheritance.
23. The language of section 108(1) indicates that the term transfer of shares applies to the voluntary act of both parties who are ad idem as to the agreement / transaction relating to the transfer. This is clear from the requirement of an instrument of transfer to be executed by or on behalf of the transferor and by or on behalf of the transferee. Presumably a transferor or a transferee would execute an instrument of transfer only voluntarily.
24. On the other hand, the expression in the second proviso “transmitted by operation of law” indicates an act which is not necessarily based on or pursuant to the transferor and transferee being ad idem as to the agreement / transaction relating to the transfer. A transmission may well have the effect of transferring the share to the transferee but would still fall under the second proviso. Even in the case of a will, the bequest by the testator and the acceptance thereof by the beneficiary may be voluntary acts but they are not pursuant to the parties being ad item as to any transaction. The beneficiary would be entitled to the inheritance irrespective of his volition. That he may relinquish the bequest is another matter altogether. This would also be so in the case of inheritance on account of intestacy. In fact in the case of inheritance on account of intestacy, the beneficiary would clearly be entitled to the inheritance by operation of law.
25. This view is fortified by the provisions of section 111(11) which reads as under:-
“111. Power to refuse registration and appeal against refusal. –
(11). In the case of a private company which is not a subsidiary of a public company where the right to any shares or interest of a member in or debentures of, the company is transmitted by a sale thereof held by a Court or other public authority, the provisions of sub-sections (4) to (7) shall apply as if the company were a public company:
Provided that the [Tribunal] may, in lieu of an order under sub-section (5) pass an order directing the company to register the transmission of the right unless any member or members of the company specified in the order acquire the right aforesaid within such time as may be allowed for the purpose by the order, on payment to the purchaser of the price paid by him thereof or such other sum as the [Tribunal] may determine to be a reasonable compensation for the right in all the circumstances of the case.” (emphasis supplied)
The use of the terms “transmitted” and “transmission” used in the context of a sale held by a court or other public authority indicates the intention of the Legislature to accord to it a different meaning from the term “transfer”. It indicates the terms to apply to involuntary transfers.
26. The award of an arbitrator under the Arbitration and Conciliation Act, 1996 would fall within the ambit of “transmission by operation of law”. The transfer is, in such cases, not based upon the volition of the parties but by operation of law.
27. I hasten to add that the question as to whether even in such cases the restrictions in Articles of Association of a Company would apply or not is another matter altogether. The Board of Directors may well refuse to register the transfer in accordance with the Articles of Association. The second proviso makes it clear that nothing in section 108 would prejudice any power of the company to register as shareholder, any person to whom the right of any share in the company has been transmitted by operation of law. It permits the company to register a transfer falling within its ambit even in the absence of an instrument of transfer required in the main section. The second proviso itself does not mandate the registration as shareholder any person to whom the right of any share in the Company has been transmitted by operation of law. In other words, the second proviso itself does not prejudice the power of the company to refuse to register as shareholder, any person to whom the right to any share in the Company has been transmitted by operation of law.
28. In the facts of the present case, it is not necessary for me to decide whether in such cases the Board of Directors has the right whether in exercise of the powers under the Articles of Association of the Company or otherwise to refuse to register the name of a person who has acquired the shares even by transmission by operation of law in view of the second proviso to section 108. That question pertains to the right of the Board of Directors/the Company.
29. In the present case, the Board of Directors has not exercised the right of refusing to register the transfers but has in fact exercised the right conferred by the second proviso to section 108 by recognizing the transfer.
30. The finding of the learned Member in this regard is set aside. The registration of the transfer of the said shares was not contrary to section 108.
31. It was submitted on behalf of the respondents that the registration of the transfers is also contrary to the Articles of Association of the company.
32. The learned Member of the Company Law Board and the learned counsel for the respondent Nos.2 to 10 referred only to Articles 15 and 16 of the Articles of Association of the Company which are set out earlier. It is however, important to note Article 19 of the Articles of Association of the Company which expressly provides that Articles 15 to 18 shall not apply inter-alia to a transfer to a person who is already a member of the Company. Article 19 reads as under:
19. Articles 15 to 18 hereof shall not apply to transfer to a person who is already a Member of the Company nor to a transfer merely for the purpose of effectuating the appointment of new trustees nor to a transfer by executors or administrators legates under the will of or the heirs or legal representatives of deceased member nor to a transfer to the husband, wife, brother, child, grand-child or next of kin of a Member nor to a transfer by a trustee to a beneficiary nor to a transfer by a shareholder which is a body corporate to its holding subsidiary or associated only corporate provided that it is provided to the satisfaction of the Board that the transfer falls within one of these exceptions.”
The transferees are members of the company. Thus Article 19 is a complete answer to this submission.
33. Further, it is also important to note Article 23 of the Articles of Association of the Company which reads as under:
“Registration of persons entitled to share otherwise then by transfer (The Transmission Articles)
23. Subject to the provisions of these Articles any person becoming entitled to shares in consequence of the death, lunacy, bankruptcy or insolvency of any Member or the marriage of any female Member or by any lawful means other than by a transfer in accordance with these Articles, may with the consent of the Board (which it shall not be under any obligation to give) upon producing such evidence that sustains the character in respect of which it proposes to act under these Articles or of such title as the Board thinks sufficient, either be registered himself as the holder of the shares or elect to have same person nominated by him and approved by the Board registered as such holder, provided nevertheless that if such person shall elect to have his nominees as instrument of transfer in accordance with the provisions herein contained and until he does so he shall not be free from any liability in respect of the shares.”
34. The entitlement to shares pursuant to an award made under the provisions of the Arbitration and Conciliation Act, 1996, is in consequence of lawful means other than by a transfer in accordance with the Articles of Association of the Company. Thus, the acquisition of the said shares by and pursuant to the award falls within the ambit of Article 23. The consent of the board having been accorded to the same, it cannot be said that the registration of the said shares by the board of directors was contrary to the Articles of Association of the Company.
35. The impugned action of the Board of Directors of registering the shares pursuant to the said award is, therefore, neither contrary to section 108 nor to the Articles of Association of the Company.
36. In the circumstances, the appeals are allowed. The impugned order and judgment of the Company Law Board is set aside. There shall however, be no order as to costs.