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Rangpur Tea Association Ltd v Makkanlal Samaddar

[1973] 43 CompCas 58 (Cal)

PRN- 17010223001
PRN- 17010223047

Symbiosis Law School, Noida


Mr Rajnish Jindal
Ms Sonakshi Kumar
In the present case, the respondent purchased a lot of 2,256 fully paid-up equity shares in the capital of the
appellant, the value of each share being Rs. 50. Thereafter, the respondent applied for registration of the shares
in his name. Upon application by the respondent for registration of the transfer of the shares, the appellant
company wrote to one of the transferors, enquiring about the genuineness of the transfer of the shares in favour
of the respondent, and also whether full consideration for the transfer was paid. One of the transferors by his
letter dated July 5, 1969, informed the appellant that he had sold the shares to the respondent on payment of
full consideration, and also that he had no objection to registration of the shares in the name of the respondent.
A similar letter was written by another transferor. By three letters dated June 2, 1969, June 18, 1969, and July
5, 1969, the appellant informed the respondent that, as the transfer of the shares seemed to be questionable,
the mutation applied for could not be allowed in the facts and circumstances of the case. On his refusal to
register the transfer of the shares, the respondent made an application for rectification of the share register
under Section 155 of the Companies Act, 1956. On this application the trial court made the order which
appealed against by the appellant in the present case.

1. What is the extent and scope of the powers of the company in the matter of registration of transfer of
2. When can a company refuse to register the transfer of shares?

The question involved in this appeal is whether the appellant's refusal to register the transfer in favour of the
respondent was lawful. For answering the question of law, it is necessary to refer the articles of association of
the appellant’s company. Article 29 of the appellant’s company’s Articles of Association was referred in this
case. The Article 29 is as follows-:
“29. (1) The board may, subject to the right to appeal conferred by Section 111, decline to register :
(a) The transfer of a share, not being fully paid up share to a person whom they do not approve; or
(b) Any transfer of shares, on which the company has a lien.
(2) The board may also decline to recognise any instrument of transfer unless :
(a) A fee of Rs. 2 is paid to the company in respect thereof ;
(b) The instrument of transfer is accompanied by the certificate of shares to which it is related and such other
evidence as the board may reasonably require to show the right of the transferor to make the transfer ;
(c) The instrument of transfer is in respect of only one class of Shares”
The appellant's power to decline registration of the transfer must be derived from one or other of the clauses
mentioned above. It is not in dispute in this case that the shares are fully paid up, nor is it in dispute that the
company has no lien on the shares which the respondent had acquired. Further Section 108, 110 and Sub-
section 1 and 2 of Section 111 of Companies Act, 1956.
Section 108 of Companies Act, 1956 is as follows-:
“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 or 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 in 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.
(2) In the case of a company having no share capital, sub-section (i) shall apply as if the references therein to
shares were references instead to the interest of the member in the company.
Section 110 of Companies Act, 1956 is as follows-:
“Application for transfer.—(1) An application for the registration of a transfer of the shares or other interest
of a member in a company may be made either by the transferor or by the transferee.
(2) Where the application is made by the transferor and relates to partly paid shares, the transfer shall not be
registered, unless the company gives notice of the application to the transferee and the transferee makes no
objection to the transfer within two weeks from the receipt of the notice.
(3) For the purposes of sub-section (2), notice to the transferee shall be deemed to have been duly given if it
is despatched by prepaid registered post to the transferee at the address given in the instrument of transfer,
and shall be deemed to have been duly delivered at the time at which it would have been delivered in the
ordinary course, of post.”
Section 111 of Companies Act, 1956 is as follows-:
“Power to refuse registration and appeal against refusal- (1) Nothing in sections 108, 109 and 110 shall
prejudice any power of the company under its articles to refuse to register the transfer of, or the transmission
by operation of law of the right to, any shares or interest of a member in, or debentures of, the company.
(2) If a company refuses, whether in pursuance of any power under its articles or otherwise, to register any
such transfer or transmission of right, it shall, within 2 months from the date on which the instrument of
transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice
of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as
the case may be.
If default is made in complying with this sub-section, the company, and every officer of the company who is in
default, shall be punishable with fine which may extend to fifty rupees for every day during which the default

The appellant raised two points in support of this appeal. The first point urged by him was that, although the
articles did not confer upon the company the power to refuse registration of fully paid-up shares, such power
could be exercised by virtue of amendment to Sub-section (2) of Section 111 of the Act by addition of the
words "or otherwise". The second point urged by him was that the respondent was intent upon ruining the
company, and for that reason he was a very undesirable person so far as the company was concerned, and
therefore the directors had rightly refused to register the shares in his name.
The appellant submitted that by virtue of the amendment, the Indian law with regard to registration of shares
has become altogether different from the corresponding provision in the English law. He argued that the words
"or otherwise " in Sub-section (2), introduced by the amendment in 1965, clearly indicated that the legislature
contemplated giving to the company a power to refuse registration de hors the provisions in the articles of the
company. In support of this contention reliance was placed on the report of the Companies Act Amendment
Committee in which it is stated at page 48 that provision should be made in Sub-section (2) of Section 111 for
cases where a company refuses to register a transfer, even though its articles do not empower it to do so. He
argued that the power of the directors to refuse registration should be inferred quite independently of the
provisions in the articles of the company. In support of this contention reliance was also placed on a decision
of the Supreme Court in Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala [1961] 2 S.C.R. 384
(S.C.). Reliance was placed on this decision for the proposition that refusal by the directors to register shares
must be on reasonable grounds and that such refusal should not be based on capricious or oppressive grounds
and should not be mala fide. In that case, however, the articles conferred upon the directors the absolute
discretion, without giving any reasons, to refuse to transfer any shares whether such shares were fully paid or
not. It was held that normally the court would presume, where the directors had refused to register transfer of
shares when they were invested with absolute discretion to refuse registration, that the exercise of the power
was bona fide. This judgment was of no merit in the given case because the power to refuse was clearly in the
Articles of association. Further in the Bench decision of the Delhi High Court in Jalpaiguri Cinema Co. Ltd.
v. Pramatha Nath Mukherjee [1971] 41 Comp. Cas. 678 (Delhi) while construing the words "or otherwise",
which were introduced by the Amending Act of 1965 to Sub-section (2) of Section 111 of the Companies Act,
it was held that those words could not have the effect of enlarging the power to refuse registration of transfer
of shares as given by Sub section (1) and that Sub-section (2) could not be construed so as to confer power on
a company to refuse registration of transfer, even though such power is not conferred by the articles of the
The court was thus of the view that the first contention of the appellant is without any merit. The law, on the
question of a right to transfer shares, is well settled, and an application for registration of transfer of shares
cannot be refused, unless the articles empower the board of directors to do so. A member of a company has an
unfettered right to transfer the shares to another person, unless this right is taken away by the articles; and a
transferee under a valid transfer has an absolute right to be registered unless the company has a power to refuse
to register.
The second ground of the appellant was that by reason of a family dispute the elder brother was determined to
bring about the ruin of the company and it was for that purpose that the respondent was made to acquire the
shares of the company, and, thereafter, apply for registration. A reference was made by counsel for the
appellant to certain previous proceedings, namely, an application for winding up of the company by the
respondent in 1966, which was settled by payment of a large sum of money to induce the respondent to sell
his shares. the appellant contended that the respondent was an extremely undesirable person as far as the
company was concerned, and, therefore, the company had rightly refused to register the shares which he had
The court with regards to this second contention was of the view that a purchaser of shares in a company has
uncontrolled right to have the shares registered in his name in the company's share register, unless the articles
of the company give an absolute discretion to the directors of the company to refuse registration and such
power has been exercised bona fide. Even in exercising the power to refuse registration, the ground on which
this exercise of power can be upheld is the interest of the company and the interest of the shareholders as a
whole. Merely because a person has in the past attempted to wind up the company and that more than one
attempt was made for such winding up, it cannot be said that the directors of the company acted lawfully in
refusing to register the shares in the name of the respondent.
Thus, the court held that the Trial court below was entirely right in making the order for rectification of the
share register of the company. The appeal was accordingly dismissed with costs.

Bajaj Auto Limited v. N.K. Firodia (AIR 1971, S.C. 321)- In this case, similar issue regarding discretion of
directors to refuse the registration of transfer was discussed. The apex court observed, “discretion implies just
and proper consideration of the proposal under the facts and circumstances of the case. In the exercise of that
discretion, the directors will act in the paramount interest of the company and in the general interest of the
shareholders because the directors are in a fiduciary position both towards the company and towards every
shareholder. The directors are, therefore, required to act bona fide and not arbitrarily and not for any collateral
motive”. It was observed further that where the articles permitted the directors to decline to register transfer
of shares without stating reasons, the Court would not draw unfavourable inferences against the directors
because they did not give reasons. The Court would assume that the directors acted reasonably and bona fide
and those who allege to the contrary would have to prove and establish the same by evidence. However, if the
directors gave reasons, the Court would consider whether they were legitimate and whether the directors
proceeded on right or wrong principle. The Court has also laid down three tests to determine the proper
exercise of power by the Board of directors. The tests are:
1. Whether the directors acted in the interest of the company;
2. Whether they acted on a wrong principle; and
3. Whether they acted on oblique motive or for a collateral purpose.
If the directors have uncontrolled and absolute discretion in regard to declining registration of transfer of
shares, the Court would consider whether the reasons were legitimate or the directors acted on a wrong
principle, or from corrupt motive. If the reasons for refusal given by the directors were legitimate, the Court
would not over-rule that decision merely on the ground that the court would not have come to the same
conclusion. The discretion of the directors was to be tested as the opinion of any fair and sensible man in the
interest of the company.


The case of Rangpur Tea Association Ltd v Makkanlal Samaddar is an important case with respect to
drawing an analogy between the Companies Act 1956 and Companies Act 2013. Under the new Companies
Act of 2013 Section 56 deals with the Transfer and Transmission of Securities and Section 58 deals with the
Refusal of Registration and Appeal against refusal. Section 44 provides that the shares or debentures or other
interest of a member in a company shall be moveable property capable of being transferred in the manner
provided by the articles of the company. Under the new act all the relevant sections read together bring out the
interpretation that the regulations of a company may impose fetters upon the right of transfer. But in the
absence of restrictions in the articles the shareholder has by virtue of the statute the right to transfer his shares
without the consent of anybody to any transferee, provided it is a bona fide transaction in the sense that it is
an out and out disposal of the property without retaining any interest in the shares. The Companies Act, 2013
under Section 58 provides for distinction between Private and Public Company with respect to registration of
transfers. In case of Private companies, it is open to a company to restrict the right of its members to transfer
their shares. The articles of a Private company as against those of a public company contain more rigorous
restrictions on the right of its members to transfer. The control of directors over the members is much more
stricter in a private company. The new Act itself under Section 2 (68) (i) requires a private company to impose
some restrictions on the right of transfer. In a number of Companies there are articles which require that on
the insolvency of a member his shares would be transferred at a fair value to a nominee of the directors. The
articles may also require that on the death of a member his shares must be offered to the other members. Also,
there is the concept of Pre-emption clauses as per which the articles provide that shares can be transferred to
outsiders only if no members accept them at face value. Further the articles of a private company may even
contain that the other members will be bound to take shares offered.
While discussing the Transfer of shares and their registration, it is important to discuss the role of Judicial or
Quasi-Judicial interference. The judicial bodies may intervene firstly, in case where it is proved that the
directors have not exercised their power of refusal in good faith or for the benefit of the company. A mala fide
refusal to register a transfer will not be sustained. It has to be decided whether in exercising their power, the
directors are acting oppressively, capriciously or corruptly, or in some way mala fide. Secondly, the practice
with courts before Companies Act, 2013 was not to ask the directors to supply reasons for their refusal to pass
a transfer but if they voluntarily disclosed their reasons, the court had the power to look into them and if they
are not sufficient the court may set aside their decision. Lastly, the court may intervene when refusal is based
on extraneous considerations. The directors must have regard only to those considerations which the articles
on their true construction permit them to take into consideration. In the given case of Rangpur Tea
Association Ltd v Makkanlal Samaddar, with respect to the second contention of the respondent being bad
for company would fall under both the categories, inadequacy of reason as well as the reason was an extraneous
Another important aspect to be critically analysed is the scope of judicial interference where the power of a
company is unfettered and complete. The Tribunal in such cases has to presume good faith on part of the
directors unless the contrary is shown. The Directors have to disclose their reasons. The first decision on the
adequacy of such reasons has to be that of the Tribunal under the section. If subsequently the matter is taken
to the court, it can also decide upon the adequacy of reasons. In the earlier legislation of Companies Act, 1956
before amendment of 1988, disclosure of reasons was not compulsory. However, with the new act it is
important that the reasons are adequate and just.
In conclusion it would not be wrong to say that the given judgment though of the year 1973 is one which is
correct and has imparted justice and even had the essence of the current prevailing laws i.e. the Companies
Act, 2013.