BOARD POWERS TO REFUSE THE TRANSFER OF SECURITIES
BOARD POWERS TO REFUSE THE TRANSFER OF SECURITIES
SHUBHAM BUDHIRAJA[1]
Directors cannot arbitrarily refuse the transfer of shares even when
specific power is given by the Articles. The directors stand in fiduciary
position and cannot act contrary to collective Interest of the company. The
tribunal can test the reasons for refusal/ approval of transfers on ground of
arbitrariness.
Reese River Silver Mining Co. Ltd.’ V. ‘Smith’ (1869) LR HL 64.
Section 46 of the Companies Act
provides that the ‘Register of Members’ is the prima facie evidence of any
matters that the Law directs or authorizes to be entered in the Register.
Further, the Companies Act treats the ‘Register of Members’ only as prima facie
evidence and not the conclusive evidence of the entries therein.
It is to be noted that the power to refuse registration of
shares can be exercised by the Directors of the Company if the ‘Articles of
Association’ do contain specific powers for such refusal. However, the rider is the reasons for refusal to register the shares
must be legitimate, notwithstanding the fact that ‘powers of refusal’ are
conferred in the ‘Articles of Association.
If the Directors had assigned reasons for their refusal to
register ‘Transfer of Shares’ then, the
Tribunal is empowered to evaluate / scrutinize as to whether the said reasons
are legitimate and that where
the Directors had committed mistake(s) and in fact, their action(s) can be
displaced / set at naught to avoid serious miscarriage of justice.
The discretionary power to refuse ‘Transfer of Shares’ is not to be
resorted to in a deliberate, arbitrary, fraudulent, ingenious or capricious
fashion. As a matter of fact, the Directors are to exercise their discretion
in good faith and to act in the interest of company. The Directors are to give
due weightage to shareholder’s right to transfer his share
In every transfer of ‘Shares’
there is a change of owner of shares in all relevant records and it is
necessary to complete the formalities relating to ‘Shares Transfer’ without
which transfer is incomplete. In the decision ‘Lyle & Scott Ltd.’ (1960) 30 Company cases 30 (HL) the Court
held that ‘transferring a share involves series of steps (i) an Agreement to
sell (ii) Execution of Deed and transfer and (iii) registration of transfer. ‘Shares’ are ‘Goods’ as defined in ‘Sale
of Goods Act’ and can be transferred like any other movable property subject to
the provisions contained in the ‘Articles of Association’ and the Companies Act.
The word ‘Transfer’ employed in Section 108 of the Companies Act, 1956 Act
refers to a transfer between persons pursuant to a voluntary act. Only when the
‘transferee’s’ name is registered in Company’s register, right to property is
perfected
Kellick Nixon Ltd.’ V. ‘Dhanraj Mills (P) Ltd.’ (1983) 54 Comp cas 432
(Bom).
A company can register the
transfer on such terms as to the ‘Indemnity’ as the Board may consider fit. In
case of undelivered instruments or lost instruments registration is possible if
the ‘Transferee’ agrees to give ‘Indemnity Bond’ or security on such terms as
the Board may decide. By getting his name registered in the ‘Register of
Members’, the ‘Transferee’ only perfects his title to the shares and is
entitled in his own right to claim all the privileges which were previously
claimed by the ‘Transferor’ in his name.
‘Colonial Bank’ V. ‘Hepworth’ (1887) 36 ChD 36 at p54
Wherein it is observed that till
the transfer of shares is actually registered, the transferee’s title to the
share is actually inchoate and the legal
title remains vested in the transferor.
‘Hindustan
Dorr Oliver Ltd.’ V. ‘A.K. Menon’ (1994) 80 Comp cas 384 (Bom)
Wherein it is observed that an
owner of shares can follow the shares even into the hands of a bonafide
purchaser for value. The term ‘transfer’ is used in regard to inter vivos
transfer as per decision ‘Hemendra
Prasad Barooah’ V. ‘Bahdur Tea Co. P. Ltd.’ (1991) 70 Comp cas p 792
(Guwahati).
Copal Varnish Co. Ltd.’ In re reported in (1917) Ch.D 349
Till the stage of execution of
‘transfer’ all that is made is to pass an equitable interest in the shares to
the ‘Transferee’. In reality, there is
no completion of legal assignment. Even when the ‘Board of Directors’ accepts
the transfer and passes it for registration of transfers in records, the
‘transfer’ is not completed. Until the actual entry of transferee’s
name was affected in the company’s register, the ‘transferor’ remains the legal
holder of shares.
This work is a result of skills,
labour and creativity of author. Therefore all rights are duly reserved with
respect to the ownership of this literary work. Further, this work is meant only
for academic purpose and therefore same should by no stretch of imagination be
accepted or construed as a legal opinion.
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