IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision : 12.08.2010 Company Appeal No.20 of 2007 IN THE MATTER OF KLG Systel Ltd. …Appellant Versus Prakash Mal Jain and others …Respondents CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA Present : Mr. Sumeet Mahajan, Senior Advocate with Mr. Sham Lal Bhalla, Advocate, for the appellant. M/s A.C.Jain and Alok Jain, Advocates, for the respondents. HEMANT GUPTA, J. The present appeal under Section 10-F of the Companies Act, 1956 (for short ‘the Act’) is directed against the judgment and order dated 19.02.2007 passed by the Company Law Board (for short ‘the Board’), allowing the petition filed by the respondents under Section 111-A of the Act for rectification of Register of Members of appellant Company. The appellant is a Company registered under Act. It published an initial public issue of 10,48,400 Equity Shares of Rs.10/- each at a premium of Rs.15/- per share. The application money was Rs.7.50 per share. The allotments were made on or about 8.11.1995. The allottees were required to pay Rs.17.50 per Equity share on allotment. The last date of payment was 20.12.1995. The said letters of allotment have been attached Company Appeal No.20 of 2007 with the present appeal. Along with the allotment letters, the Equity Share Certificates were enclosed. Respondent No.1 allegedly purchased 8100 shares of the appellant-Company on payment of consideration from Respondents No. 2 to 7. The details of shares purchased indicating the distinctive number, folio number, the name of the original holders of 8100 shares were attached with the petition filed before the Company Law Board (for short ‘the Board’). It is the case of the respondent that he informed the appellant-Company on 15.01.1996 that he has purchased these shares and the Company was advised to make correspondence with him by registered post. He has sent a sum of Rs.1000/- through postage stamps to facilitate communication with him. As per respondent No.1, he has lost the original shares and transfer deeds for which he lodged a report with the Police on 15.9.1997. He has informed the appellant-Company earlier on 30.08.1997 about the misplacement of shares. The appellant-Company informed respondent No 1 vide letters dated July 20,1998 and January 16,1999 that these shares have been forfeited by the Company in its Board meeting held on 05.12.1997 and cannot be transferred in his name. The stand of the appellant-company was that transfer of shares is permissible only on compliance of the provisions of Section 108 of the Act. It was denied that the respondent is a share-holder and that the petition filed is false and frivolous. The Board found that the provisions of Section 108 of the Act could not be complied with by the respondent on account of misplacement of shares certificates and transfer deeds for which he has lodged police complaint. There is no dispute regarding purchase of shares from the transferor to respondent No.1 nor there is any dispute regarding non- 2 Company Appeal No.20 of 2007 payment of consideration on the part of the said respondent to the transferors. All the transferors are party to the proceedings before the Board but none contested the proceedings. It was found by Board that forfeiture of shares purchased by respondent No.1 is wrong and against the principles of natural justice. Consequently, respondent No.1 was permitted to deposit the call money along with simple interest of 15% since 1995. The appellant-Company was directed to enter the name of respondent No.1 in the Register of Members within 30 days from the date of receipt of the amounts and pay all dividend and bonus for all 8100 shares from the date of purchase of shares by him. Learned counsel for the appellant-Company has vehemently argued that earlier respondent No.1 has invoked the jurisdiction of the Board in respect of 1700 shares and the said petition was dismissed. Therefore, the present petition for rectification of Register of Members is not maintainable. It is also argued that the respondent cannot seek transfer of shares without submitting transfer deeds. It is contended that the communication dated 15.01.1996 alleged made by respondent No.1 informing the transfer of shares cannot be deemed to be an information for transfer of shares, as such communication on the plain paper is of no legal value. It is more so, when the respondent is a share broker and is conversant with the procedure of transfer of shares. It is also argued that the notices were sent to original share-holders calling upon them to pay the balance allotment money, but since the amount was not paid after notices, therefore, in terms of allotment advice, their names were rightly struck off from the Register of Members and that the respondents cannot seek transfer of shares, which stand forfeited. 3 Company Appeal No.20 of 2007 On the other hand, learned counsel for the respondents has pointed out that the procedure prescribed under Section 108 of the Act could not be resorted to by the respondent as he has lost the transfer deeds and the share certificates, for which report was lodged with the Police Authorities. It is contended that the procedure for transfer of shares under Section 108 of the Act is to protect the Company from fraudulent and unwarranted transfers; therefore, the procedure of recording transfer on production of original share certificates with transfer deeds is contemplated. But, where there is no dispute about the purchase of the property in the shares by the respondent, then the Company is bound to recognize transfer of shares in favour of the transferee such as the respondent. It is also pointed out that though the earlier petition in respect of 1700 shares was dismissed, but it was dismissed for the reason that the respondent has not made the transferors as parties to the proceedings. Since the transferors are parties in the present proceedings in respect of 8100 shares, therefore, the order passed by the learned Board on 13.03.2001 dismissing the petition in respect of 1700 shares does not oust the jurisdiction of the Board to grant the relief sought for by the respondents. A perusal of the order passed by the Company Law Board on 13.03.2001 (Annexure P-15) shows that the Board was apprised of the dispute in respect of shares allegedly purchased from Shri N.C.Ranka. It was found that the original share-holder is claiming consideration for the said shares. It was also noticed that the petitioner has not made the transferors as parties in the present proceedings. The relevant extract of the order dated 13.03.2001 reads as under : “….Though the petitioner has not furnished the details of Suit filed by Shri N.C.Ranka but it appears from the copy of the statement that Suit has been filed for recovery of the sale 4 Company Appeal No.20 of 2007 consideration. In other words, original shareholder is claiming the consideration for the said shares. If the consideration has not been paid by the petitioner the contract in question prima facie would not be valid. We are no expressing any opinion on the said case, as the same is pending in other Court. The petitioner has not made the transferors as parties in the present proceedings. The petitioner has failed to make out any case for grant of relief from the company.” In the present case, the transferors have been made parties to the proceedings. None has contested the proceedings either before the Board or before this Court, even though they were served by publication in this Court. The documents on record show purchase of 8100 shares by respondent No.1 from other respondents, who were impleaded as respondents before the Board as well. In view of the finding recorded and the fact that the transferors are party to the present proceedings, therefore, the previous order of the Board will not operate as binding on the respondent in respect of other shares as well. There is no dispute raised by any of the transferors that such shares were not sold to the respondents. Since the transfer of property in the shares is not disputed, the question which is required to be examined is whether on account of non-payment of the balance application money, the shares can be forfeited or whether the respondent has a right to deposit the balance application money at this stage, as directed by the Board. As per Section 82 of the Act, the shares are movable property, transferable in the manner provided by the articles of the company. Section 2 (46) of the Act defines ‘share’ to mean share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied. Section 2 (7) of the Sale of Goods Act, 5 Company Appeal No.20 of 2007 1930, defines ‘goods’ to mean every kind of movable property other than actionable claims and money; and includes stock and shares. Section 19 of the Sale of Goods Act, 1930 provides that where there is a contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. Thus, the shares being movable property are transferable in the manner provided by the articles of company. Where a company has no article of its own, the regulations in Table ‘A’ of Ist Schedule will apply. The Articles No.40 to 42 of the Company are as under : “40. If a member fails to pay any call or installment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or installment remains unpaid, serve a notice on him requiring payment of so much of the call or installment as is unpaid together with any interest which may have accrued and all expenses that may have been incurred by the Company by reason of such non-payment. 41. The notice aforesaid shall :- (a) name a further day (not earlier than the expiry of 30 (thirty days) from the date of service of notice) on or before which the payment required by the notice is to be made; and (b) state that, in the event of non-payment on or before the day so named. The shares in respect of which the call was made, will be liable to be forfeited. 42. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time, thereafter before the payment required by the notice has been made, be forfeited by a resolution of the Board to the effect. Such forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the date of forfeiture, which shall 6 Company Appeal No.20 of 2007 be the date on which the resolution of the Board is passed forfeiting the shares.” The statutory provisions of transfer of shares and debentures are contained in Section 108 of the Act, and the manner in which it is required to be registered by the Companies. By virtue of Companies (Amendment) Act, 1988, Section 155 was omitted which conferred power on the Court to rectify Register of Members and substituted Section 111 providing registration of shares by the Company and its refusal an appeal before the Company Law Board. It was in exercise of such powers conferred under Section 111 of the said Act, the respondent have approached the Company Law Board for rectification of the Members of the Register. Sections 108 and 111 of the Act read 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 or debentures, or if no such certificate is in existence, alongwith 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.” “111. Power to refuse registration and appeal against refusal – (1) If a company refuses, whether in pursuance of any 7 Company Appeal No.20 of 2007 power of the company under its articles or otherwise, 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, it shall, within two 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, giving reasons for such refusal. (2) The transferor or transferee, or the person who gave intimation of the transmission by operation of law, as the case may be, may appeal to the Tribunal against any refusal of the company to register the transfer or transmission, or against any failure on its part within the period referred to in sub-section (1), either to register the transfer or transmission or to send notice of its refusal to register the same. (3) An appeal under sub-section (2) shall be made within two months of the receipt of the notice of such refusal or, where no notice has been sent by the company, within four months from the date on which the instrument of transfer, or the intimation of transmission, as the case may be, was delivered to the company.” Hon’ble Supreme Court in a case reported as Vasudev Ramchandra Shelat Vs. Pranlal Jayanand Thaker AR 1974 SC 1728, was considering the issues arising out of gift of certain shares by a registered gift deed accompanied by blank transfer deeds, i.e. deed signed but material particulars not filled in. It was observed that a distinction ought to be made between the title to get on the register of the members and the full property in the shares in a company. The court recognized that a transferee acquires the title in the shares in the normal mercantile from by delivery accompanied by a blank transfer form and vests in him an enforceable right 8 Company Appeal No.20 of 2007 therein so long as there is nothing in the articles of association which prevent such transactions. The Court held to the following effect : “8. Thus, we find that, in Barucha’s case (supra) a distinction was made between “the title to get on the register”, and “the full property in the shares in a Company”. The first was held to have been acquired by mere delivery, with the required intention, of the share certificate and a blank form signed by the transferor. The second is only obtained when the transferee, in exercise of his right to become a shareholder, gets his name on the register in place of the transferor. This antecedent right in the person to whom the share certificate is given with a signed blank transfer form under a transaction meant to confer a right or title upon him to become a shareholder, is enforceable so long as no obstacle to it is shown to exist in any of the articles of association of a company or a person with a superior right or title, legal or equitable, does not appear to be there. We think that Section 6 of the Transfer of Property Act justifies such a splitting up of rights constituting “property” in shares just as it is well recognised that rights of ownership of a property may be split up into a right to the “corpus” and another to the “usufruct” of the property and then separately dealt with. xxx xxx xxx 11. We think the learned Counsel for the appellant rightly contended that, even in the absence of registration of the gift deed, the delivery of the documents mentioned above to the donee, with the clear intention to donate, would be enough to confer upon the donee a complete and irrevocable right, of the kind indicated above, in what is movable property. He relied upon Kalyanasundaram Pillai Vs. Karuppa Mooppanar, 54 Ind App 89 = (AIR 1927 PC 42); Venkatsuba Shrinivas Hedge Vs. 9 Company Appeal No.20 of 2007 Subba Rama, ILR 52 Bom 313 = (AIR 1928 PC 86): Firm Sawan Mal Gopi Chand Vs. Shiv Charan, AIR 1924 Lah 173. 12. The requirements of form or mode of transfer are really intended to ensure that the substantial requirements of the transfer have been satisfied. They subserve an object. In the case before us, the requirements of both Section 122 and Section 123 of the Transfer of Property Act were completely met so as to vest the right in the donee to obtain the share certificates in accordance with the provisions of the Company Law. We think that such a right is in itself “property” and separable from the technical legal ownership of the shares. The subsequent or “full right of ownership” of shares would follow as a matter of course by compliance with the provisions of Company Law. In other words, a transfer of “property” rights in shares, recognized by the Transfer of Property Act, may be antecedent to the actual vesting of all or the full rights of ownership of shares and exercise of the rights of shareholders in accordance with the provisions of the Company Law.” 13. The Companies Act of 1913 was meant “to consolidate and amend the law relating to trading companies and other associations”. It is concerned with the Acts and proceedings relating to the formation, running, and extinction of companies, with rights, duties, and liabilities of those who are either members or officers of such companies, and of those who deal with companies in other capacities. Its subject-matter is not transfer of property in general. It deals with transfers of shares only because they give certain rights to the legally recognised shareholders and imposes some obligations upon them with regard to the companies in which they hold shares. A share certificate not merely entitles the shareholder whose name is found on it to interest on the share held but also to participate in certain proceedings relating to the company concerned. It is for this purpose that Section 34 of the Companies Act 1913 enables the making of “an application for the registration of the transfer of shares in a company … either by the transferor or the transferee”. A share certificate is a prima facie evidence, 10 Company Appeal No.20 of 2007 under Section 29 of the Act, of the title to a share. Section 34 of the Act does not really prescribe the mode of transfer but lays down the provisions for “registration” of a transfer. In other words, it presupposes that a transfer has already taken place. The manner of transfer of shares, for the purposes of Company law, has to be provided, as indicated by Section 28, by the articles of the Company, and, in the absence of such specific provisions on the subject, regulations contained in Table ‘A’ of the 1st Schedule of the Companies Act apply. In Canbank Financial Services Ltd. Vs. Custodian and others (2004) 8 Supreme Court Cases 355, though the Court was considering the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, but considering the nature of shares, it held to the following effect : “84. Right, title and interest in a movable property can pass by delivery of possession and upon paying of the considerations in view of the provisions of the Sale of Goods Act. Passing up of a title in favour of the transferee would not be illegal, unless it is forbidden by law. For the said purpose, the transaction must attract the wrath of Section 23 of the Contract Act and not otherwise. Section 3 of the Act does not contemplate extinction of right of a third party. For getting the transaction invalidated in law, only Section 4 of the Act can be taken recourse to.” In the present case, it has been pleaded by the respondent- transfree and not controverted by the transferors that the share certificates were handed over to the transferee along with transfer deeds and that such shares and transfer deeds have been mis-placed. The factum of transfer of the shares by handing over the share certificates and the transfer deeds could be controverted by the transferors alone but none has come forward to 11 Company Appeal No.20 of 2007 deny the sale of the goods i.e. shares, therefore, the property in the shares would be deemed to be transferred in favour of the transferee. The first proviso of Section 108 (1) provides that if the Board of Directors are satisfied 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. The stand of the respondents that the share certificates and the transfer deeds have been lost is supported by a Daily Dairy Report registered with the Police Authorities. None of the transferors have come forward to controvert the assertions of the respondent that such shares were, in fact, transferred. Therefore, between the transferors and the transferee, the transaction of sale is complete. The Company was bound to register the transferees as its members. Learned counsel for the appellant has relied upon Article 29 of Table A of Schedule I of the Act, to contend that if a Member i.e. the shareholder failed to pay any call or installment of a call on the day appointed for payment thereof, the Board is required to serve a show cause notice to the defaulter. In terms of Article 31, if the payment is not made, the shares are deemed to be forfeited. The relevant Articles read as under : “29. If a member fails to pay any call, or instalment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have accrued. 30. The notice aforesaid shall -- (a) name a further day (not being earlier than the expiry of fourteen days from the date of service of the notice) on or before which the payment required by the notice is to be made; and 12 Company Appeal No.20 of 2007 (b) state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be liable to be forfeited.” 31. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect. 32. (1) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board