1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION COMPANY APPEAL NO. 11 OF 2000 IN CLB PETITION NO. 30 OF 1999 In the matter of Companies Act, 1956. Shree Shanti Textile Mills Pvt. Ltd., .. Appellant. vs. Siddharth N. Shah. .. Respondent. Mr. Shyam Divan i/by Dhru & Co. for the appellants. Ms. Rajani Iyer with Ms. Panchmotia i/by Gagrat Co. for Respondent. .. CORAM : S.U. KAMDAR, J. DATE : 10TH MARCH, 2005. ORAL JUDGMENT : 1. The present appeal is filed under section 10-F of the Companies Act, 1956 challenging the 2 order and judgment passed by the Company Law Board. Though various questions are framed in the appeal, the learned counsel for the appellant has pressed the following three questions of law for my consideration:- (i) Whether in the event of there being a conflict between the statutory records maintained by the Company and the returns filed before the Registrar of Companies, the entries in the statutory registers maintained by the Company would prevail over the conflicting returns filed with the Registrar of Companies; (ii) Whether there could not have been a valid gift in the eyes of law of 1,290 equity shares or any other shares by the owner thereof, merely by signing a transfer deed in respect thereof without actually handing over the relevant share certificates in respect of the gifted shares; (iii) Whether the first joint shareholder, in the case of joint shareholding, could not transfer the said joint 3 shares by gifting away the same without the consent or concurrence of the second joint shareholder. 2. Some of the brief facts which are relevant for the purpose of determination of the issues raised in the present case can be summarised as under :- 3. The appellant, namely, Shree Shanti Textile Mills Private Limited is a private limited company and is closely held by the family members of one Nyalchand R. Shah (since deceased). The company is incorporated and registered in the year 1959. Originally there were three share holders of the company holding 25 shares each. Sometime thereafter 450 further shares were issued to the said original three share holders in proportion of 150 shares each. On 8.6.1972, 10 shares were transferred to Mrs. Kamla Shah, 10 shares were transferred to Mr. Ramesh Shah and five shares were transferred to Mr. Siddharth Shah. This transfer of 25 shares was from the shares which were held originally by Nyalchand Shah. On 8.6.1972 Mrs. Kamla Shah and Mr. Ramesh Shah were appointed Directors of the said company. On 10.6.1972, 175 shares were transferred to Mrs. Kamla Shah from the share holding of one Mr. Pramod Shah. On 29.12.1972, 475 new shares were allotted 4 to Mrs. Kamla Shah and Return of Allotment was filed with the Registrar of Companies. The said return has been duly signed by the then Director Mr. Nyalchand Shah (since deceased). On 12.1.1973, Form No. 2 was filed with the Registrar of Companies in respect of the 475 shares which were transferred in favour of Mrs. Kamla Shah. On 7.7.1976, 150 shares were transferred to Mr. Siddharth Shah from the account of his father Nyalchand Shah, (since deceased). Further, 1000 new shares were allotted to Mrs. Kamla Shah on 10.1.1978 and necessary return of allotment as required under the provisions of the Companies Act, 1956 was filed with the Registrar of Companies. The said return of allotment filed in 1978 has been duly signed by Mr. Ramesh Shah. Some time in or about 1993 further 75 shares were sold by Mrs. Kamla Shah to Ojas Shah, 25 shares to Manali Shah and further 25 shares to Shradha Shah. On 12.4.94, 155 shares were sold by Mrs. Kamla Shah to Mrs. Priti Shah. On 6.8.1994, one Mr. Ojas Shah, son of Ramesh Shah, was appointed director of the said company. From 1994 to 1998, various annual returns were filed with the Registrar of Companies duly signed by Ramesh Shah, Sidharth Shah and Ojas Shah. Thus, as on March 1999 the share holding in the appellant company was as under :- Sr. Name No. of shares. 5 1. Kamla Shah & Ramesh Shah 1380 2. Ramesh Shah & Neela Shah 135 3. Neela Shah & Ramesh Shah 50 4. Ojas Shah & Manali Shah 75 5. Manali Shah & Ojas Shah 25 6. Shrida Shah & Ojas Shah 25 7. Siddharth Shah 155 8. Priti Shah & Siddharth Shah 155 4. On 15.2.1999, Mrs. Kamla Shah (since deceased) addressed a Regd. A.D. letter to the company asking for copies of the original share certificates which were yet not delivered by the company to Mrs. Kamla Shah. In the alternative she demanded the issuance of duplicate share certificates to her in respect of her holding in the said appellant company. It is not in dispute that the said letter was duly received by the company on 18.2.1999 and that the company gave no reply to the said letter. 5. On 18-2-1999 Kamla Shah gifted her 1290 shares to Sidharth Shah. She executed the necessary transfer deed which is witnessed by family doctor and attested by Notary. On 24.2.1999 Kamla Shah signed a letter recording the gift of 1290 shares in favour of Sidharth Shah. On 3.3.1999, Kamla Shah sent a registered A.D. letter along with transfer deed with an affidavit and covering letter stating 6 that she has gifted 1290 shares in favour of Mr. Sidharth Shah. Along with the said letter she also lodged the necessary transfer deed duly executed with the company on 5.3.1999. The company received the said letter dated 3.3.1999 but sent no reply. On 14.3.1999, Kamla Shah expired. It is the case of the appellant company that the said transfer lodged by Kamla Shah during her life time were rejected by the appellant company due to defects therein and such rejection was orally communicated by the company to the respondent no. 1 herein who was a director at that point of time. However, it is disputed by the respondent no. 1 that any such decision was taken by the company refusing to transfer the said shares. On 5.7.1999, an application was made by Ramesh Shah who is one of the directors of the appellant company for deletion of the name of Kamla Shah in respect of her holding of 1380 equity shares since according to him the said shares were held by Kamla Shah jointly with Ramesh Shah. Thus, according to Mr. Ramesh Shah on expiry of Kamla Shah who was the first holder of the shares, Ramesh Shah has become the sole holder in respect of the said shares and was therefore entitled to apply for deletion of her name. On 12.7.1999, the respondent herein filed a petition before the Company Law Board under Section 111 of the Companies Act, 1956, inter alia, seeking rectification of the Register of Members and seeking 7 that the name of the respondent should be brought as members in respect of the shares held by Kamla Shah being 1290 shares which have been gifted by her to the respondent herein. It is the case of the appellants that on 28.7.1999, a meeting of the Board of Directors was held and a decision was taken to delete the name of Kamla Shah from said 1380 equity shares which were held by Kamla Shah since she had expired. It is also the case of the appellant that since the said shares were held jointly, on deletion of the name of Kamla Shah, Ramesh Shah became the sole holder of the said shares and therefore he is entitled to the said shares. It is the case of the respondent on the other hand, that in respect of the said Board meeting no notice was served on the respondent though admittedly he was a Director at that point of time. It is an admitted position before me that the share certificates were never issued to any of the shareholders of the appellant company all throughout and even today the said share certificates are in the custody of the company themselves. It is also admitted position before me that one of the Directors has signed the said share certificates only on 6.8.1999 though it is the purported case of the respondent that the share certificates were prepared in 1992. 6. In the aforesaid facts of the case, a proceeding was initiated under Section 111 of the 8 Companies Act, 1956on 12.7.1999 and the said proceedings were contested before the Company Law Board by the parties. On 16.8.1999, the Company filed a reply to the said petition preferred by the respondent herein and ultimately by an order and judgment dated 16.6.2000, the Company Law Board has allowed the appeal and directed the company to rectify the Register of Members and declare that the respondent is lawfully entitled to the said 1290 shares which were executed in her favour and the company was bound and liable to transfer the same in favour of the respondent herein. 7. The Company Law Board by the impugned order has held that the company is bound and liable to transfer the said shares as Kamla Shah was the sole holder of said 1290 shares and not joint holder with Ramesh Shah. Secondly, it has been held that there is a valid gift in favour of the respondent from the deceased Kamla Shah and thirdly it has been held that there has been valid application for transfer and the company was bound to transfer the said shares in favour of respondent. Accordingly the Company Law Board has by impugned order directed the company to rectify the Register of Members and transfer 1290 shares belonging to the deceased Mrs. Kamla Shah to the name of the respondent and deliver the same within one month from the date of the said order. 9 8. It is this order which is the subject matter of appeal before me and the learned counsel appearing for the appellant under Section 10F of the Companies Act has raised the aforesaid substantial questions of law which are set out hereinabove. 9. In support of the aforesaid questions of law, the learned counsel for the appellant has raised the following contentions. Firstly, it has been contended that Kamla Shah was never single holder of the said shares and, therefore, the application for transfer by respondent no. 1 on the basis of the document of transfer executed by Kamla Shah alone was not valid and legal. It has been further contended that on the death of Kamla Shah, the shares and the properties in the said shares stood vested in Ramesh Shah as a joint holder and no third party is entitled to the said 1290 shares. It has been contended in support of the aforesaid contention that in view of the joint holding of the shares, the gift in favour of the respondent herein is invalid and without any merit. It has been further contended that in any event, the document of gift not being registered nor accompanied by a delivery of the moveable property in the shares in the present case there is no valid gift in the eyes of law and, therefore, the respondent is not entitled to the said 1290 equity shares. It has 10 been further contended by the learned counsel for the appellant that the document of transfer was not duly stamped in as much as the said stamps which were affixed on the transfer deed were not cancelled and, therefore, there is a breach and infraction of Section 108 of the Companies Act, 1956 and consequently the question of transfer of shares does not arise and, therefore, the provisions of Section 111 are not attracted. It has been contended that for the purpose of attracting the provisions of section 111, valid document of transfer is necessary for the purpose of the company to act thereupon and in the absence of such valid document, the transfer is invalid in law and, therefore, the company was not bound to register the shares. It has been also contended by the learned counsel for the appellants that the Tribunal has clearly erred in law while refusing to rely upon a primary document i.e. Register of Members for establishing whether Kamla Shah was a single holder or a joint holder and the reliance placed by the Company Law Board on the return of allotment is invalid in law and, therefore, the said order is without jurisdiction and clearly erroneous in law and is liable to be quashed and set aside. 10. On the other hand, the learned counsel for the respondent has contended that the act on the part of the directors has been totally malafide. It 11 has been contended that for the purpose of exercise of power by the Company Law Board or for that matter to give direction to transfer the shares, the Company Law Board is required to see whether the refusal of the Board of Directors for transferring of the said shares is bonafide, in the interest of the company or totally malafide. It has been contended by the learned counsel for the respondent company that the acts of the Board of Directors and the conduct of the Board of Directors is totally malafide and thus requires no interference by this Court in the present appeal. It is therefore, contended that in fact there was no Board of Directors meeting held and no notice was served on the respondent herein in respect of a meeting where the application of the respondent was declined and the transfer of the shares in his favour was rejected. It has been further strenuously contended by the learned counsel or the respondent and in my view with substantial merits therein that the company in the present case has been acting in a total malafide manner and is relying upon the documents which by contemporaneous evidence can be established to be not genuine and highly suspicious. It has also been contended that the said documents are created with the sole intention of Ramesh Shah to grab the said shares in his favour and deprive the respondent of his rightful transfer of the shares by virtue of the gifting of the said shares 12 by the deceased Kamla Shah in his favour. It has ben contended that the present company being a private limited company and closely held company by the various shareholders, there is no necessity that strict compliance of the provisions of procedural law as now contended by the respondent should be insisted upon particularly when admittedly company itself is not complying with the various provisions of the Companies Act. Ultimately, it has been contended that the Court is required to do substantial justice in the matter by taking into consideration the overall view of the matter and cannot reject the evidence which is in favour of the respondent by hyper-technical and paediatric consideration of the technical objections which are sought to be raised. 11. Considering the rival submissions of the matter firstly it is necessary for me to consider the objection raised by the learned counsel for the appellant about the Company Law Board refusing to rely upon the Register of Members and has on the other hand relied upon the return of allotment which has been filed by the company during the period 1972-1978 indicating the allotment of shares in favour of Mrs. Kamla Shah as a sole holder. A dispute which has been strongly urged before me is whether Kamla Shah was a sole holder of 1290 shares or was the joint holder with Ramesh Shah of the said 13 shares as contended by the appellant herein. To consider this issue, it is necessary to point out that the transfer of the shares has been taking place in the company from time to time as mentioned hereinabove right from 1972. The allotment in favour of Kamla Shah first time was as far back as on 8.6.1972 and thereafter transfers on 10.6.1972 and 29.12.1972 and thereafter there was allotment on 10.1.1978. There are certain facts which are admitted before me and are required to be mentioned before I consider this issue, namely, (1) Admittedly share certificates are never issued to any of the shareholders of the company and are always kept in the custody of the company. The said share certificates are even today in the custody of the company. (2) There is no transfer recorded either on the reverse of the said certificate or by maintaining separate register of transfer of shares. (3) There is not even a record of the minutes of the Board Meetings from time to time indicating the transfer of the shares and/or allotment of shares from time to time in favour of one party or the other. The learned counsel for the appellant has candidly admitted that there are no records of board meetings and there are no minutes for the 14 contemporaneous period in which the shares allotment and/or transfer is registered in the Register of Members. (4) There is admittedly a return of allotment filed under Section 75 of the Companies Act, 1956 at the relevant period of time in 1972 and 1978 when Mrs. Kamla Shah was allotted shares and the same is in the record of Register of Companies. (5) There is a Register of Members produced before me prepared in 1972 and has been relied upon so as to indicate that the transfer of the shares from time to time has been recorded in such Register of Members. 12. Thus, it is very clear from the conduct on the part of the company that the company is not carrying on its business and its activities in accordance with the laid down procedural requirements of the Companies Act, 1956. However it insists on strict compliance of the provisions of the law in so far as the respondent company herein is concerned. In my view, I am required to consider that when the company itself is not maintaining the records of the company in accordance with the Companies Act, 1956, can such a company insist upon others to comply with the provisions of law so as to deprive his legitimate right in respect of the said 15 shares. One of the requirements under Section 108 of the Companies Act is that the share certificates must accompany the transfer document. Admittedly, the company is holding the said share certificates and is not issuing the said share certificates in contravention of Section 113 of the Companies Act. In such circumstances, whether it is permissible for the company to refuse to transfer the said shares in favour of the respondent herein on the ground that the non-accompaniment of the share certificate with the transfer documents infracts the provisions of section 108 of the Companies Act, 1956 and consequently the appellant company is not bound to register such a transfer. In my opinion such an approach would in fact mean to perpetrate injustice to the respondents for breach of law committed by the appellant. In the light of the aforesaid circumstances, the learned counsel for the appellant urged before me that Company Law Board ought to have only relied upon the Register of Members for the purpose of determining whether there is a joint holding or a single holding. I am not inclined to accept the said argument for more than one reason. Firstly, I have looked into the records of the company. The record of the Company is highly unreliable. As and by way of an example the company has produced the entire book of share certificates before me. The share certificates produced are from No. 6 to 38. Admittedly the said share certificate 16 has been signed by the second director only on 6.8.1999. However, the said certificate is purported to have been prepared on 12.3.1992 and the first director’s signature i.e. Ramesh Shah is shown as if it is put on 12.3.1992. The second signature of the director is of his son which is of 6.8.1999. Obviously, the son could not sign the document on 12.3.1992 because as on that date he was not the director of the company. He became the director of the company in 1994. Thus, his signature is shown subsequent to the point of time when he became the director. However, closely scrutinising the said share certificate, the learned counsel for the respondent pointed out that certificate no. 27 contains the date ’12.3.99’ in place of ’12.3.1992’. It has been surprising that the certificate nos. 6 to 26 contains the date ’12.3.1992’. Certificate no. 27 contains the date ’12.3.1999’ and once again share certificate no. 28 to 38 contains the date 12.3.1992. It obviously indicates that there has been a slip while preparing the said certificate and the year 1999 has crept in certificate no. 27 which is the year in which the said certificates are prepared for the first time. It is because in the year 1999 the disputes between brothers Ramesh Shah and respondent had started due to gift of the said by mother Mrs. Kamla Shah to the respondent herein. Of course the learned counsel has made light of it saying that this is an 17 error and this error should be ignored. I would have accepted the same but for the fact that the said share certificates are signed by father and son, kept in custody of the company all throughout and obviously to defeat the right of the respondent herein are prepared by adding the name of Ramesh Shah as a second holder along with Kamla Shah. It is obvious because shares are allotted to her in 1972 and 1978 the company has filed return of allotment as required under section 75 of Companies Act, 1956 and in such return of allotment they have disclosed only the name of Kamla Shah as the sole holder of the shares and not disclosed the name of second holder Ramesh Shah. The respondent has produced before the Company Law Board as well as before me the certified copy of the return of allotment which was signed and filed by deceased Nyalchand Shah in the contemporaneous period 1972 and 1978 which shows the name of Kamla Shah as the only holder of the said shares. There is no other contemporaneous evidence produced by the appellant indicating otherwise save and except the Register of Members. Now turning to the Register of Members from the look itself it is clear that almost the whole of the Register of Members is prepared at one go. This register was not produced before the Company Law Board. The Company Law Board has adversely commented on the same in the order impugned herein. Even the inspection of the said 18 register of members as well was not furnished to the respondent herein and when the inspection was sought only three pages of the Register of Members were given by the appellant herein. The entries in the Register of Members are in the same ink and same hand writing in substantial portion thereof. It is unbelievable that a person who has prepared the register from 1972-78 can be the same person even in 1992 and even thereafter. It is equally surprising that all the pages of the Register of Members are prepared by the same person and in the same hand writing and in the same ink. I am therefore of the opinion that the Company Law Board was right and justified in placing reliance on the independent and unchallenged evidence in the form of return of allotment and hold that Kamla Shah was the sold holder in respect of the said shares. 13. The learned counsel for the appellant has, however, contended before me that section 75 does not provide for names of both the holders as allottees should be mentioned and the company has rightly thought it fit that it required to put the name of only one holder who is the first holder and has