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shares - transfer and transmission

PREFACE
Share holders are the owners of a company. The issued, subscribed & paid up capital of any company comprises of the
number of shares issued, subscribed & paid up multiplied by the nominal value of each share, respectively. These shares are held by shareholders.

Share can be held either in the name of one or more individuals or in the name of bodies corporate, trusts, H.U.F. (through kartha) etc. In case the shares are held in joint names, there can be maximum 3 joint holders. In such a case, share certificate is issued in the name of the first shareholder i.e. the shareholder whose name appears first. The first shareholder is entitled to all the rights i.e. voting, bonus, rights entitlement, dividend etc.

Details of shareholders are recorded in the Register of Members maintained by the company. Each company is required to maintain a Register of Members and a Register of Share Transfer.

Of late it is found that a number of frauds are taking place in the allotment / transfer and transmission of shares as reported in various newspapers.
The subject transfer and transmission of shares has assumed a great significance in recent times because of various corporate scandals that are coming to light with the passage of everyday. The need for harmonization of Indian laws with those of advance countries, on the one hand and corporate scandals and scams, on the other, have made further additions and amendments to the country’s corporate law inevitable.

The Law thus becomes bulkier with the passage of time. White local business captains and foreign investors seek liberalization, deregulization and simplification of laws to facilitate more efficient conduct of business, the other affected segments of society for greater protection through their law, removal of loopholes and stringent punishment for the wrong doers. The Government has to practice the art of tight rope walking between these two poles. The Companies (Amendment) Bill, 2oo3 recently introduces in the Raja Sabha follows the same pattern and purposes new stops, along with a few slaps too, for company shareholders.

The practice of large parent companies forming of subsidiary (shell) companies has been a common feature of the Indian corporate scene all these years. It was found that this process helped camouflage inter-relationships and indulge in legal jugglery. Under the amendments, as subsidiary will no longer be allowed to create another subsidiary in future.
Accordingly, an attempt has been made in the thesis to explore the possibilities to simplify the law relating to transfer and transmission of shares.

The following important matters among others have been dealt with in the thesis.

1) All members are shareholders but all shareholders may not be members of the company,

2) Transfer of shares,
3) Contents of Share Transfer Form,
4) Validity of Share Transfer Form
5) Stamp-Duty and its Cancellation,
6) Power of Attorney,
7) Additional Documents in case transferee is limited company,

8) FAQs
9) Where does one send the share certificates for registration of transfer?

10) What is the evidence which one should keep for record?
11) Can the company refuse to transfer share with out giving any reason?

12) Whether share transfer form necessary in case of death of any joint shareholder?

13) Whether execution of share transfer form is necessary in case the joint holder wants to put his name ass the first share-holder?

14) Can one do transposition for part of m holdings?
15) When a person holds shares in two or more folios, can be amalgamate the shares in one folio?

16) Whether execution of share transfer form is necessary in case any more name are required to be added as joint- holder.

17) What should be done if the shares are held in single name and the share-holders dies?

18) Do we have to execute Share Transfer Form in case of transmission of shares?

19) How will one come to know whether shares are transferred in his name?

20) If there are bulk Transfers, is it necessary to sign all transfer forms?

21) By what time is company required to transfer shares?

22) Can a company send shares through ordinary post?

23) In case of the shares of a listed company, can a person purchase shares more than 5% of the share capital of a company?

24) If a person is holding 15% of the shares in a listed company. Can he purchases further shares?

25) If a person has physical shares of a company which has compulsorily made its securities tradable under D-mat Form, does he have to execute a Share Transfer Form?

26) If a person wants to purchase shares in D-mat Form, does he have to execute any Share Transfer Form?

27) Does he have to pay any stamp duty in such cases?


All these are in addition to other important and relevant questions which often arise in a person’s mind and a sincere attempt to answer all of them, in is made, in the summary of this thesis.
CHAPTER - 1
INTRODUCTION

Tracing the vanishing Tribe:
Promoters of new companies will henceforth find it difficult to vanish after cheating the investors. While incorporating new companies, recent photos of the subscriber to the incorporation documents as well as those of witnesses along with proof of identity will be obtained and kept on record with the registrar of Companies. Each such photo shall also be signed by the subscriber and the witness. The stringent provisions relating to issue of prospectus and allotment shall apply to all securities and not merely to shares and debentures. Prospectus will also have to be field with the Securities and Exchange board of Indians (SEBI) for review. Where any prospectus is published in news paper advertisement or in any other manner, it should confirm to the requirements of the abridged prospectus furnishing all prescribed details. Criminal liability or misstatement in prospectus will initial punishment with imprisonment up to 2 years and with fine up to Rs. One Lakh (Enhanced from Rs.50,000/-). This offence can not be compounded by mere a payment of fine as is allowed now.


The promoters and intermediaries, who fraudulently make false, deceptive or misleading statement, promises or pore casts or dishonestly conceal material facts and thereby induce persons to invest money in the securities of their company, will be completed to compensate the loss of the investors. This will be in addition to their being punished with imprisonment for not less than SIX months and Fine up to Rs. One Lakh.

Compensation to Cheated investors:

The proposed Company Law Tribunal will be empowered to impose and recover double the amount as penalty from those who had collected money for securities through such fraudulent methods… From this penalty amount the Tribunal will refund and make good the loss of such gullible investors. This is a far reaching provision and perhaps the best in this bill.

Application money to be collected on securities is enhanced from 5% of the face value to 25%. This will be expedite collection of fund for projects and their timely expeditions.

Directors and their relatives or associates are prohibited from revoking their applications for issue of securities made in pursuance of a prospectus. In other words, the will not be allowed to escape from their declared commitments. Punishment for impersonation white applying for securities and obtaining allotment or transfer in fictitious names has been enhanced. It will now consist of imprisonment for not less than SIX months and not exceeding 5 years and fine up of Rs. 50,000/- This penalty and minimum period of imprisonment are new.
If allotment of securities is made before listing is finally accepted by the recognized stock exchange and as a result monies have to be refunded, such refunds should be made with a higher rate of interest than those prescribed earlier in that Act and default will be visited with longer periods of imprisonments. No commission should be paid to intermediaries on securities not offered to the public for subscription.
Direct and indirect buying of its securities by a company will initial severe punishment with fine amounting to 3 times the aggregate price or face value of the securities which ever is higher and the guilty officers will be imprisoned for not less than 3 months and up to 2 years.
Fixing of Share Premium:

Where the company wants to allot further shares to existing members or others, after 2 years from the date of its formation, to increased its subscribed capital and desire to after them at a premium, the amount of such premium shall be approved b the company in the general meeting by a special resolution. In case, the resolution for allotting further shares to existing share holders or others is passed only as an ordinary resolution, it will be deemed to be valid if the proposed Company Law Tribunal, on an application made be the Company, is satisfied that the proposal is beneficial to the company. At present, this power is exercised by the central Government.
As regards issue of shares on a preferential basis, the person in whose favour to be so allotted shall not be allowed to participate in the voting. In other words, the approval has to be accorded b other members in the form of special resolution.

Section 81, henceforth will apply also to private companies and for the valuation for stock options offered to employees. It is to be noted that white the deemed for simplifying the provisions for private companies is getting strident, Section 81 is now made applicable to private companies too. Event the provisions for the commencement of business will make earlier only to public companies are now extended to private companies also. As regards to Share Transfers so far, the Board of Directors was empowered to approve this in all companies but henceforth the approval of the general meeting will be necessary before the Board of Private Company implements it.

The practice of obtaining date stamp on transfer deeds from a Stock Exchange or the Registrar of Companies is to be abolished.

The earlier policy of ensuring time bound registration for a transfer deed will cease, allowing undated transfer deeds to float around, until the transferee decides to enter his name and forward it to the company concerned for registration.

Procedural provisions on the issue of share certificates will now apply to all securities, derivatives, options and shares with differential rights and all securities will be deemed to be movable property. Fraudulent issue of duplicate or renewal certificates by companies will attract higher punishment henceforth. Stiff punishments are proposed against the trustees of debenture holders for failure of their contractual duties.

A.G.M.s on Sundays:
Annual general meetings will be allowed to be held on Sundays also, enabling large attendance and participation. Members will have to be content with snacks and beverages, if any, served at these meetings as the (as well as proxy holders) are prohibited by law from demanding gifts. Both giving and demanding gifts have been made punishable offences.

This prohibition will not however extend to discount coupons given to members for promoting sale of the company products. Heavy penalty will be imposed on companies, which fait to credit are Investors Education and Protection Fund under Section 2o5-C. These credits are meant to be used for promoting investors awareness and protection of their interests.

Segment reporting will have to be made in directors’ reports, in regard to each business segment or division which accounts for 1o percent or more of the company’s turnover. This information will be useful analysis of the company’s operational strength and weakness.

As suggested by the Joint Parliamentary Committee which examined the recent stock scam, the Central Government will prescribe, for share broking companies or an intermediary, limits up to which such companies or intermediary reconcile In the corporate loans or inter corporate deposits or investments. The offences under Section 372-A relating to inter corporate loans and investments are punishable with both imprisonment and fine; They are not compoundable merely by payment of fine.

The central Government is empowered to attach, for a period of one month with the approval of a judicial magistrate, bank accounts of any intermediary or person associated with the securities market if he is involved in violation of provisions of the Companies Act. Companies have to reconcile their securities balance with the depository, within the prescribed time limit.

A number of provisions relating to auditors and directors have been added or amended with a view to ensuring better corporate governance and reliability of the disclosure documents.

It can not be rose all the way. The bill seems to prove to this dictum by proposing certain measures which will not be palatable to the shareholders. Some of them are indicted here. Each member can issue only one proxy form and if more than one issue will be invalid.

Accepting and demanding a gift is declared a penal offence and penalty up to TEN times the value can be imposed. Voting rights of preference shareholders in some cases can be restricted b the Central Government subject to conditions to be prescribed. Shareholders proposing to remove existing auditors or directors or appointing others will have to deposit Rs.10,000/- which will be forfeited in the case of lack from minimum votes supporting them. These may be regarded at worst as friendly slaps, but change regarding dividend is a real punch.

Dividends to become Scarcer:
As of now if a company that had made losses and has also not provided depreciation in the past years wants to distributes dividends from it current year’s profit or accumulated past ear profits, it should recon and provide either for depreciation of all the previous years for which provision was not made or for the losses of previous years, which ever is less, and only then it can declare a dividend.
In other words, provision is to be made either for the loss or depreciation, whichever is less, before declaring a dividend. In the absence of the profit for the current year dividend can be distributed from accumulated profits only, with the consent of all directors and prior approval of financial institutions concerned if any. Share holders should have approved this with a special resolution.
The current policy for maintaining dividend over the years will receive a set back from this measure. These changes will have a negative connotation for shareholders whose investments rarely bring dividends.

The proposed changes will make the chances rarer. One statutory provision now proposed, is that interim dividend declare by a Board of Directors can not be revoked or modified after splashing the news to the media and making short term gains in the market. The amount of interim dividend shall be deposited in a separate bank account within 5 days from the date of declaration of interim dividend. In The final analysis it has to be conceded that the changes proposed are intended spruce up the Indian Corporate Scenario and hence are to be welcomed. But the question is how soon and in what shape the bill will be cleared b Parliament in the midst of the pre-occupations and pressures of the forthcoming elections.

The following report published in Hindu, December 3, 2002 also shows the importance of the topic: Parliament to day passed the Securities and Exchange Board of India (Amendment Bill, 2002) giving more teeth to SEBI to punish market offenders with assurance from the Finance minister, Jaswanth Singh that the Govt. would soon take legislative measures for establishing a Serious Fraud Office (SFO) to prevent frauds in transfer and transmission of shares.
Mr. Singh assured that Rajya Sabha, which passed the bill that the Govt would soon bring another bill for the formation of the SFO for handing out severe punishments to commercial offenders.

The Bill, entrusting wide powers to the SEBI, including seizure of books and accounts had already been passed by the Lok Sabha. The equator would now have powers to impose heavy fine up to Rs.25 crores on in sided trading. It would be entrusted with powers to slap penalty of Rs.1 Lakh a day and up to Rs. 1 crore in cases where the small investor was cheated.

Mr. Singh also informed the house that the Government was closed implementing the Kanya Committee Report Paving way for the corporatization off Stock Exchange.

Under the new demutualization dispensation the Governors of the Stock Exchanges would not be allowed to engage themselves in trading. The SEBI is being given powers to suspend the Governors of the Stock Exchange. It is also being empowered to impound the proceeds of Exchanges.

Expressing confidence that the increased powers would make SEBI more effective, the Finance Minister said that he always believed in the concept of “Freer the market, Stronger the Regulator”.

However, SEBI would not act as a police man. He made it clear that the market regulator would remain accountable to finance minister, which the in turn would be answerable to the parliament. He was responding to the member’s anxiety about the accountability of the regulator itself.

The Finance Minister made it clear that the SEBI's governing board itself would have powers to appoint the investigating agency, as provided in the law. He said SEBI had taken various steps in the past for protection of small investors. These included debarring 92 vanishing companies and launching 17 prosecutions against insider trading. Earlier, moving the statutory resolution opposing the Securities and Exchange Board of India (Amendment) Ordinance promulgated by the President on October 29, Prithiviraj Chauhan (Cong), criticized the Government for bringing as many as SIX ordinances on important financial mattes just before the winter session of Parliament.


While welcoming the Bill as a step in the right direction, Mr.Chauhan said it should have been brought long ago so that many recent scams in the capital market could have been prevented. Instead of initiating adhoc measures, the Government should initiate comprehensive sanction to revive and regulate the capital market, he 'said, however, he later withdrew his resolution - UNI.

It is also submitted that since Directors are mostly responsible for allotment, transfer and transmission of shares, It is necessary to strengthen the provisions in the Companies Act in regard to their share qualification, appointment, continuance in office etc. Gone are the days when company directorship was considered to be a cushy job carrying prestige, power and perks with few responsibilities. Following corporate scandals in India and abroad in recent times, the law governing directors has been made more stringent through a series of amendments to the Company Law in India. The Companies (Amendment) Bill 2003 introduced in the Rajya Sabha on May 7 is bound to give them more worry as it contains dozens of amendments casting new responsibilities on company directors. In the past, directors were appointed on a company board either on the strength of their shareholding in the company of at the behest of the promoters.

Except in the case of government appointed directors or nominees of financial institutions, they needed the goodwill of the promoters. They could hardly be expected to function with real independence.
In contrast to this, the new Bill proposes to make it mandatory for every Public Company, with the paid up capital and free reserves of Rs. 5 crore or a turnover of R s. 50 Crores and above, to have a "minimum of seven directors (The present limit is three), the majority of whom be independent directors. It is also contemplated to make it mandatory to have women directors in public companies.
Even if the independent director s are appointed with the promoters' votes, they will have to exercise their independence and best judgment white evaluating and reviewing the functioning of their companies They should not be afraid to blow the whistle when Justified. The adult committee shall have only independent directors. Public companies with less than 50 shareholders and not having any debt or funding from the public, banks or financial institutions are, however, exempt from the requirement for having a minimum seven directors with a majority of independent directors. The Bill lays down many qualifications of independent directors. They should have had no pecuniary in blood relationship with the company management. This is to ensure real independence, free from interest conflicts. It will be no easy job identifying persons with business orientation along with these qualifications.
Considering the onerous nature of their new role, they would expect to be rewarded well from such "independent" functioning. However, even the existing provisions regarding payment of sitting fee to directors and separate professional fees for their series otherwise than as directors, is proposed for deletion. This would mean that they have to be remunerated for the services only as directors and that too only if there is profit. There is a far reaching proposal (not found in any other country) which requires that a candidate to be appointed a san independent director should have taken training from an institute recognized by the Center within two years before his appointment. However, it he is appointed an independent director, he should complete the training within 18 months. It is not known as to why this training is not compulsory for non–Independent directors, and as to what is the moral and statutory responsibility of the independent directors with regard to the decision taken with their participation even before they complete their training. Besides, the boards will have different classes of directors, management directors and independent directors and trained and untrained directors.

The Bill seeks to discourage outsiders frivolously trying to get elected to the Boards of public companies and private companies that are subsidiaries of public companies. It is stipulated that the outsider should enjoy the consent of at least a hundred shareholders or one percent of the voting power in the company and also deposit a sum of Rs. 10,000 to qualify as a valid candidate for the election.

If he fails to get the votes of at least one percent of the total number of vote's cast on the resolution, he will forfeit the deposit. Such a loser cannot also be appointed as additional director till the next annual general meeting is concluded.

Removal of a director from office and appointing another person in the vacancy by outsiders has also been made difficult.

New disqualifications Section 274(1) of the act - Already lists out many disqualifications for directors. Two more disqualifications have been stipulated and these arise from non payment of Interest on debentures and confiscation for defaults punishable with imprisonment. If a director continues to act despite his disqualifications, he can be fined which may extend to Rs 5,000 per day of such continuance and also imprisoned upto three years.
The Bill seeks to place the maximum age limit at 75 for persons holding office of director in a public company and a private .company which is subsidiary of a Public Company. This assumes that the directors would be physically fit and mentally alert up to 75 years. The numbers of pan time directorships that can be held by a working director is reduced so that they can devote more time and do justice for their whole time jobs.
It is now proposed to make it mandatory to have Board meetings at intervals not exceeding three months. Board meetings can be held even through teleconferencing and video conferencing, but the minutes thereof shall be laid only if all the directors of the said meeting approved and signed the minutes subsequently.

This will help reduce absence of directors at board meetings (particularly those in outstations or in other countries and facilitate consideration of the views of all the directors on important matters.

In many public companies, where financial participation by banks and. institutions is absent, the need for giving written notice to directors is not taken seriously. The present bill proposes that directors shall be notified in writing about the board meetings a1ong with the agenda, seven days before the meeting. However in emergency situations, the notice period can be curtailed with the consent of the directors. In the case of public companies with paid up capital and reserves exceeding Rs. 10 crores, such emergency meetings shall he valid only if the majority of independent directors attend.

More deliberations encouraged
The provisions regarding delegation of powers for circular resolutions have been tightened. Circular resolution need to be ratified at a subsequent meeting of the Board or the Board committee and made a part of the minutes of such meeting. Henceforth the directors will be required to personally meet, discuss and approve (and not through, circular resolutions) balance sheet, profit and loss account and directors report, diversification of business, amalgamation, merger and reconstruction of companies, contribution to charitable and other funds, takeover / acquisition of substantial interest in other companies and granting of loans, giving guarantees and provision of security for loans.

Disposal of a company's undertakings will not be as easy as before. Financial limits per annum for such disposal are being imposed. These changes will fasten more responsibility on the directors for greater deliberation before approval.

These provisions may be dubbed as anti-liberalization and restrictive in the current times• when the demand is for giving more to the Board and the members to restructure their powers business for facing the competition. The Companies Act was recently amended fixing a minimum paid up share capital for private and public companies. The Bill stipulates that if the companies fail to enhance the capital to the prescribed limit and on the striking off of such company's name from the register of companies, each director and shareholder will bear unlimited liability.

(A) Vanishing act discouraged -
To put a stop to the phenomenon of vanishing companies, special measures at the time of incorporating new companies are proposed. This would include obtaining two copies of photos of all subscribers (promoters) of the company and their witnesses with proof of identity and other precautions. Companies will be allowed to hold general meetings on Sundays, which will enable more shareholders to attend and obtain clarifications, fro m the Directors. Investors who are in employment have always had a feeling that by holding the meetings on working days, managements were preventing Investors' attendance and this complaint is now removed.

To Sum up, the rope is being tightened around the neck of indifferent corporate governance. If the directors desire to be on the right side of the law and perform their role well, they will have to be more vigilant and aware of the new legal provisions and with regard to their duty to all the stakeholders in their company. The Bill seeks to achieve better accountability and credibility on the part of the directors in order to improve the climate for stricter compliance and hopefully, draw the common investors back into the capital market.

In view of the present day importance of the topic it has been selected as the subject-mater of the dissertation.

(B) Hypothesis -
The Hypothesis for the thesis is drawn from the. Following important jural postulates…

• Shares are firstly allotted to the applicants and the term allotment is neither more nor less than the acceptance by the company .of the offer to take shares.

• No transfer of share s is valid unless the initial a1lotment is in compliance with the requirements of the Act and principles of the law of contract relating to acceptance of offers.

• A share certificate is issued on a valid allotment under the common seal of the company, duly specifying the number of shares held by any member which shall be prima facie evidence of the Title of the member to such shares which gives the shareholder the facility of dealing and transferring the shares mare easily in the market.

• The share certificate provides for estoppels as to the title and estoppels as to the payment so as to remove disputes as and when the shares are negotiated and transferred for consideration.

• The main object behind the establishment of Joint Stock Companies was that the shares shall be capable of begin easily transferred. The shares are movable transferred in accordance articles of the company.




• The Power of declining a transfer is vested in the Board of Directors for the purpose of protecting the interest of the company and any malafide refusal to register a transfer is not sustainable.

• The transfer of shares is completed by registration with the company and until this process is completed, the transferor remains legal owner of the shares.

On the basis of foregoing jural postulates, the 'Hypothesis may be framed as under:
“The Companies Act envisages easy transfer and transmission or shares and in the process strict provisions are necessary so as to avoid the abuse and misuse of the simple system devised for the purpose."

(C) Chapterization¬

(1) Introduction

(2) Origin and Development of Company Law

3) Meaning and Kinds of Shares

(4) Transfer and Transmission of shares

(5) Judicial trends on «Transfer and Transmission" with reference to ‘Reconstruction and Amalgamation’

(6) Conclusion
(d) Methodology Followed

AS is well-known at the present day, a Research Scholar cannot depend upon anyone particular method for preparation of a thesis. A combination of different methods is required to achieve the best possible results. Thus a Historical - cum-¬Analytical method has been applied mainly in the preparation of the present work. Where-ever necessary, comparative and critical methods are also employed to have a detailed study of the subject under consideration


(e) Sources of Information
The required materials for the Thesis have been collected mainly by applying the Doctrinal Approach. This Approach deals with formal sources of law like Legislation. Case Law, Text Books, articles etc. It is basically textual in approach as contrasted to Non-Doctrinal Approach which is primarily contextual in nature. In the preparation of this Thesis by adopting the above mentioned technique, Data have been collected from various enactments, cases decided by the courts, Authoritative text Books etc.,

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CHATPER- II

ORIGIN AND DEVELOPMENT
OF COMPANY LAW









CHAPTER - II
ORIGIN AND DEVELOPMENT OF COMPANY LAW

(A) Origin of Company Law:
The word "company" has no strictly technical or legal meaning.1 In the terms of the Companies Act, (No 1 of 1956 or under any of the preceding acts), a "company means a company formed and registered under" the Companies Act { Section 3(1) }. In common law a company is a "legal person" or "legal entity" separate form, and capable of surviving beyond the lives of its members. 2

"Like any juristic person, a company is legally an entity apart form its members, capable of rights and duties of its own, and endowed with the potential of perpetual succession. 3
But the "company" is not merely a legal institution. It is rather a legal divide for the attainment of any social or economic end and to a large extent publicly and sociality responsible. It is, therefore, a combined political, social, economic and legal institution. 4
Thus the term has been variously described. It is a means of cooperation in the conduct of an enterprise. 5

Corporate device is one form of associated enterprise.6


1. BUCKLEY J in Stanley, Re, (1906) 1 Ch 131, 134.
2. Salomon v. Salomon & Co., (1897) AC 22.
3. Hahlo's CASEBOOK ON COMPANY LAW, 42 (2nd edn, by Hahlo and Terebilock)
4. (A. A. Berle, Jr. in Foreword to THE CORPORATION PAGLtd.3 IN MODERN SOCIETY, (1959) edited by Mason.
5. Woodrow Wilson, THE NEW freedom, 26 (1968) Jaico.
6. FRANKFURTER J in Nierbo v Bethle Ram Shipping Corpn, (308) under Ss. 165, 169.
It is "an intricate, centralized, economic administrative structure run by professional managers who hire capital from the investor.7 In a practical way, a company means a company of certain persons registered under the Companies Act. Two or more persons, who are desirous of carrying on, Join business enterprises; have the choice of either forming a company or a partnership.
Partnership is a suitable divide for a small scale business which can be financed and managed by a small group of partners who take personal interest and there is mutual trust and confidence among them. But where the enterprise requires a rather greater mobilization of capital which the resources of partners cannot provide, the formation of a company is the only choice. Even for a small sca1e business Company form of organization offers the privilege of limiting personal liability for business debts. Accordingly, the company has become the most dominant form of business debts and organization.8

One of the best assessments with reference to them, in the context of the modern economies is enshrined in the following words:
Companies abound in the national economy. Ranging from the small family or partnership concern to the face less Multi National Corporation IT, they provide the structural framework of the modern industrial society.


7. Manning, reviewing Livingston's THE AMERICAN 23 STOCKHOLDER, (1958) 67 Yale LJ 1476, 1589.
8. Lee Loevinger, THE LA OF FREE ENTERPRISE, 59 (1949).
Evolution
The corporations are not novelties. They are institutions of very ancient date.9.

But the large partnership forms from which the modern business company evolved, appeared on the English scene during the commercial revolution.

A body corporate during the seventeenth and eighteenth centuries could be brought into existence either by a Royal Charter or by a special Act of Parliament. Both these methods were very expensive and dilatory. Consequently, to meet the growing commercial needs of a nation, large unincorporated partnerships came into existence, trading, however, in corporate form.

The membership each, such concern being very large, the management of the business affairs was left to a few trustees. This resulted in separation of ownership from the management. Trustees had other opportunities of trading with other people's money. Rules of Law applicable to such companies were not yet developed.

Consequently, fraudulent promoters had a unique opportunity of exploiting public money. Many spurious companies were created which would appear only to disappear, resulting in loss to the investing public.

9. MARSHALL J in Bank of US v. Dandridge, 12 Wheat (25 US 64,92).
The English Parliament, therefore, passed an Act, known as the Bubbles Act of 172010 which, Instead of prohibiting the formation of fraudulent companies, made the very business of promoting companies illegal.

This proved to be a great setback to the expanding trade and commerce. Yet the Act remained on the statute book for over a century. It was repealed in 1825.11 But It was only in 1844 12 that registration and incorporation of large partnerships was made compulsory.

The Joint Stock Companies Act of 1844 was the first legislative measure which facilitated registration, although the concerns registered under it were still known as partnerships and the principle was granted in 1885 13 and a year later in 1856 the whole law relating to such companies was consolidated. 14

Since then, the Companies Acts have been considerably amended, enlarged and improved upon until we get to the English Acts of 1948 and 1985 and of 1989 (The Companies Act, 1948).

10. Royal exchange & London Insurance Corporation Act (6 Geo 1 C 18).

11. By the bubble Companies, etc., Act, (6 Geo 4, C 91).

12. Joint Stock Companies Act, 1856, (19 & 20 Vict C 47).

13. By the Limited Liability Act of that years, (18 Vict C 133).26

14 Joint Stock Companies Ct, 1856, (19 & 20 Vict. C 47).

The history of Indian company Law began with the Joint stock Companies Act of 1850. Since then the cumulative process of amendment and consolidation has brought us to the1 comprehensive and complicated piece of legislation the Companies Act, 1956.

But even it not exhaustive of all the modes of incorporating business concerns. Organizations for business or commercial purposes can still be incorporated by special Acts of Parliament. The Life Insurance Corporation of India, for example, has been incorporated for business in life Insurance under the Life Insurance Corporation Ct of 1956.

Institutions so created are better known as "Corporations". Business firms or other institutions incorporated under the Companies Act are known as “Companies”. The Companies Act is also not exhaustive of the whole of company law. It only amends and consolidates certain portions of company law.

Common law has still a lot of role to play in this field. The duties of the corporate directors and their social responsibilities, which at present are one of the most developing aspects of company law and still largely governed by the principles of common law".



15. This basic difference between a company and a partnership has been explained by GHlH-AM HASAN J in Bacha F.Guzdar v CIT, Bombay, (1955) 1 SCR 876, &83:AIR 1955 SC 74: (1955) 25 Comp Cas 1. s. 4 of the Partnership Act, 1932, which says that collectively the partners are known as a partnership firm.
(b) Importance of the Registration of the Company
Incorporation offers certain advantages to the business community as compared with all other kinds of business organization.

Independent corporate existence {Section: 34}
The outstanding feature of a company is its independent corporate existence. A partnership has no existence apart from its members. It is nothing but a collection of the partners.15
A company, on the other hand, is in the eye of law a person. It is a distinct legal personality existing, independent of its members. By incorporation under the ACl, the company is vested with a corporate personality which is distinct form that of the members who compose it.
One of the effects of incorporation is stated in Section 34 (2) of the act. It says that upon the issue of the certificate of Incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate.16
For an explanation, the term 'body-corporate' in the Act Includes a company incorporated outside India but does not Include a corporation sole' (such as King, or President) or a cooperative society. The Government may by notification exclude the wider meaning of the term 'Company' though every company registered under the Act is a body corporate.
16. The decision of the Supreme Court in Ashoka Marketing Ltd v. PNB, [1990] 4 SCC 406, 423.
This expression would include all corporations created under special Acts of Parliament. An incorporated body but company is a corporate incorporation under the Companies Act is not the only method of creating a body corporate. 17
A registered society under the Societies Registration act, 186o has been held to be not a body corporate. Board of Trustees of both Ayurvedic and Unani 18 are capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and common seal.
Thus the company becomes a body corporate thereby immediately becoming capable of functioning as an incorporated individual. The enterprise acquires its own entity, it becomes impersonalized. No one can say that he is the owner of the company. The business now belongs to an institution. The entity of the enterprise becomes institutionalized.

In the words of Palmer…"The benefits following this form of incorporation can hardly be exaggerated. It is because of incorporation that the owner of the business ceases to trade in his own person. The company carries un the business, the liabilities are the company’s liabilities and the former owner is under no liability for anything the company dues, although, as principal share holder, he is able to take full advantage of profits which the company makes”.19



17. Madras Central Urban Bank v. Corpn. Of Mad, (1932) 2 Comp Case 328.
18. Tibia College v. State of Delhi, AIR 1962 SC 4'58
19. Palmer's PRIVATE COMPANIES, 13 (42nd edn, 1961).
A well known illustration of this principle is the decision of the House of Lords 20 in which the facts were' that one Salomon was about and shoe manufacturer. His business was in so unconditional and their was a substantial surplus of assets over liabilities, He incorporated a company named, Salomon & Co Ltd, for the purpose of taking over and carrying on his business, The seven subscribers to the memorandum were Salomon, his wife, his daughter and four sons and they remained the only members of the company.

Salomon, and two of his sons, constituted the board of directors of the company. The business was transferred to the company for 40,000 pounds. In payment, Salomon took 20,000 shares of 1 pound each and debentures worth 10,000 pounds. These debentures certified that the company owed Salomon 10,000 pounds and created a charge on the company's assets. One share was given to each remaining member of his family. The company went in to Liquidation with in a year (Sa1omon was not to biome for it was due to general trade depression).

On winding up, the state of affairs was broadly something like this: Assets - 6,000 pounds; Liabilities - Salomon as debenture holder (Salomon had transferred his debentures to another who had a receiver appointed and started the winding Up 21 10,000 pounds and unsecured creditors: 7,000 pounds.

20. Salomon v Salomon & C o. (1897] AC 22).
21. Broderip v. Salomon, [1895] Ch 323 C ,reversed, sub nom. Salomon v Salomon & Co. [1895-99] All ER Rep 33: 66 LJ Ch 35: 75 LT 426:13 TLR 46
Thus after paying off the denture-holder nothing would be left for the unsecured creditors). The unsecured creditors, therefore, contended that, though incorporated under the Act, the company never had an independent existence; it was in fact Salomon under another name; he was the managing director, the other directors being his son and under his control his vast preponderance of shares made him absolute master.
The business was sole1y his, conducted solely for and by him and the company was a mere sham and fraud, in effect entirely contrary to the intent and meaning of the Companies Act. But it was held that Salomon & Co. Ltd was a real company fulfilling all the legal requirements. It must be treated as a company, as an entity consisting of certain cooperators, but a distinct and Independent corporation. Their Lordships of the House of Lords observed (Condensed form speeches of their Lordships) "When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable forthwith of exercising all the functions of incorporated company. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulk or its capital to one person. The company is according to law a different person altogether form the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in the eye of law their agent or trustee. The statute enacts nothing as to the extent or degree or interest which may be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the share holders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of the company.22
The principle had been recognized in India even before the Salomon case. The decisions of the Calcutta High Court 23, seems to be the first on the subject whose facts are that certain persons were transferred to tea estate to a company and they claimed exceptional from and valorem duty on the ground that they themselves were the shareholders in the company and, therefore, it was nothing but a transfer from among themselves under another name.
Rejecting this, the Court observed: "The Company was a separate person; a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.24

22. For a criticism of this deCISIon O. Kahn Freund. Some Reflections on Company Law Reforms, (1944) 7 Mod LR 54; Liralfv. some Unforeseen Consequences 0f Private; Incorporation, (1949) 65 LQR 231.
23. Kondoli Tea Co Ltd, Re «(1886) ILR 13 Cal 43. For a detailed account of Indian Cases on the subject, r. P.Singh, Corporate Personality in India [1968] 1 Comp LJ 9.
24. Ram Kanai Singh. Mathewson, AIR 1915 PC 27: 42 IA 97; 1. H Pattinson v Bindhya Debi, AIR 1933 Pat 196; Tata Engineering & Locomotive Co v. State of Bihar, [1964] 6 SCR 885: AIR 1965 SC 40. (1964) 34 Comp Cas 458)
In reference to one man companies of the Sa1omon type, the Bombay High Court observed 25: "Under the law, an incorporated company is a distinct entity, and although all the shares may be practically controlled by one person, in law a company is a distinct entity and it is not permissible or relevant to enquire whether the directors belonged to the same family or whether it Is, as compendiously described a “One-Man Company”26.

Thus one-man companies exist with the encouragement of the Legislature and "the great majority of them are as bona fide and genuine as in a business sense they are convenient and suitable media for provisions and application of capital to Industry.27

In Dhulia-Amalner Motor Transport Ltd v. R.R.Dharamsi 28, the facts of the case were that, a partnership firm was carrying on the business of playing buses. Having worked for some time, some of the partners formed a private limited company, which they permitted under the law even white the partnership continued to be a running concern. Some of the partners, who formed the company, sold their own buses to the Company which was earlier being used by the firm.





26. Praga tools Corpn v. Imanu~J, [1969] 1 sec 585: AIR 1969 SC 1306: (l969) 39 Comp Cas 889 .

27. YOUNGER LJ in Commr of Inland Revenue v. Sansom, (1921] 2 QB 492. Also British Thompson & Houston Co v. Stelong Accessories Ltd. [1924] 2 Ch 33: [1924] All ER ,Rep 294; Warner Fuller, the Incorporated Individual: A study of One-man Companies, (1938) 51 Harv LR 1373.

28. AIR 1952 Born 337: ILR 1952 Born 795.
The other set of partners who constituted the minority sued the section forming the Company for accounts and their share of profits on the ground that in reality the company was not different entities from that of the firm and that the business carried on by it was the same as that of the firm.

It was held that the plaintiffs had no legal right to sue for accounts of the business done by the company which was altogether a third person. Buses which the company was plying were the property not of its shareholders, but the property of the company itself. The company was a corporate body whose entity was entirely different from the entities of its shareholder. Motive for becoming shareholders is not a field of enquiry. The law recognizes the existence of the company irrespective of the motives, intentions, schemes, or conduct of the individual shareholders.

In yet another case 29, the plaintiff sued for his wages and also for the wages of the chaprasi employed by him on behalf of the defendant company and in doing so, he impleaded the Secretary and managing director or the company as defendants and also impleaded the company itself.



29. Abdul Haq v Das Mal, (1910) 19 1C 595
It was held that a suit to recover salary which was due from a company lies against the company and not against the directors or members of the company In Fittcroft's case 30, the members of a company attempted to dissolve it by distributing between themselves the title deeds of the company's assets.31

Limited Liability:
"The privilege of Limiting Inability for business debts is one of the principal advantages of doing business under the corporate form of organization. 32

The company, being a separate person, is the owner or its assets and bound by its liabilities. Members, even as a whole, are neither the owners of the company's undertaking, nor 1iabIe for its debts. Where the subscriber exercise their choice of registering the company with limited liability, member’s liability becomes Limited or restricted to the nominal value of the shares taken by them or the amount guaranteed by them. No member is bound to contribute anything more than the nominal value of the shares held by him.33 Member states which crated an international company were held not liable to pay its debts.



30. (1882) 21 Ch D 519: Restraithblain Estates Ltd. (1948) Ch D 228.

31. Lee v. K .Carter Ltd. [1949] 1 KB 85 CA and Pegler v. craven, [1952] 1 All ER 685: [1952] 2 QB 69 CA:Tunstall v Steigman, [1962] 2 All ER 417 CA: B.Errabui, Problem of juristic Personality of a corporation, (1965) JILl 158.

32. Cadman, TEHCORPORATION IN NEW JERSEY, ,327 (1949).

33. J.h.Rayner (Mincing Lane) Ltd v. Dept. of Trade and Industry,(19879) 3 WLR 969 HL.
Lord OLIVER observed:
"Once, given the existence of the international Tin Counsel as a separate legal person and given that it was the contacting partying the transactions up on which the appellants claims there is no room for any further inquiry as to what type of legal person the contracting party is". The person who can enforce contracts and the person against whom they can be enforced in English Law are the parties to the contract and in identifying the parties to the contract there are no gradations of Legal personality.

In a partnership, on the otherhand, the liability of the partners for the debts of the business is unlimited. They are bound to meet, without any limit, all the business obligations of the firm. The whole fortune of a partner is at stake, as the creditor, can levy execution even on his private property.
While speaking of the advantage of trading with limited liability BUCKLEY. J. observed: 34

The statutes relating to limited liability have probably done more than any legislation for the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as to the public, allowed and, encouraged aggregation of small sums in to large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country.

34. London & Globe Finance Corpn., RE, (1903) 1 Ch 728, 731.

3. Perpetual Succession
An incorporated company never dies. It is an entity with perpetual succession. For example, A, B and C are the only members of a company, holding all its shares. Their shares may be transferred to, or inherited by X, Y and Z, who may, therefore, become the new members and managers of the company. But the company will remain in the same entity. In spite of the total change in membership «the company will be the same entity, with same privileges and immunities, estates and possessions.35
Perpetual succession, therefore, means that the membership of a company may keep changing form time to time, but that does null affect the company's continuity, in the like manner as the river Thames is still the same river, though the parts which composite it are changing every instant” 36

The death or insolvency of individual members does not, In any way, affect the corporate existence of the company: 37

"During the war all the members of one private company, white in general meeting, were killed by a bomb. But the company survived; not even a hydrogen bomb could have destroyed it."





35. Canfield & Wormer, cases ON PROVATE CORPORATIONS, (2nd end) I. ch 1 on the Legal Conception of a corporation.

36. Blackstone, quoted by COMMENTARIES, quoted F.PoIlock. JURISPRUDENCE AND LEGAL ESSAYS: THE FICTION THEORY OF CORPORATIONS, 219 (1961)

37. Gower cited this illustration in a footnote in his book PRICNIPLES 0F MODERN COMPANY LAW, 76
(3rd edn 1969).
In another case,38 where the whole undertaking of a company was taken over under an Act which purported to extinguish all rights of action against the company, the court held that neither the company was there- by extinguished or anybody's claim against it.

In yet another instance,39 it was pointed out that the bankruptcy of a member of a private company is no ground for winding up o l' the company). Members may come and go but the company can go on forever".40

Separate Property:
A company, being a legal person, is capable of owning, enjoying and disposing off the properly in its own name. The company becomes the owner of its capital and assets. The shareholders are not the several or joint owners of he company's property. "The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed of". 41 A member does not even have an insurable interest in the property of the company.

A person was the holder of nearly all the shares, except one, of a timber company and was also a substantial creditor.

38. Gopur Tea Co.Ltd V. Penhok Tea Co Ltd, (1982) 52 comp Cas238 Cal.

39. W.Jethro Brown, The Personality of the Corporation and the Slate, (J905) 21 LQR 365, 366 and K/9Meat Supplies (Guildford) Ltd .. Re, (1967) 1 comp LJ 37: [1966] 3 All ER 320 (eh Div).
40. Gower, 75-76, note 40 above.

41. Bacha F. Guzdar v CIT, Bombay, (1955) 1 SCR 876: AIR 195525 Camp Cas 1.

He insured the company's timber in his own name. The timber having been destroyed by fire, the insurance company was held not liable to him.42

It has been held in a Canadian decision that a sole shareholder has Insurable interest in the company’s property.43

"No shareholder has any right of any item of property owned by the Company, for he has no legal or equitable interest therein. 44

The property of the company is not the property of the shareholders, it is the property of thee' company.45

Thus, incorporation helps the property of the company to be clearly distinguished from that of its members. The property is vested In the company as a body corporate, and no changes of Individual membership affect the title. The properly, no matter how many shareholders may come and go, remains vested in the company, and the company can convey, assign, mortgage, or otherwise deal With It Irrespective of these mutattons.46

In a partnership, on the other hand, the distinction between the joint property or the firm and the private property of the partners is often not clear.


42 Macaura v. Northern Assurance Co. Ltd. [1925] AC 619 HL.

43 Kosmopolous v Constitution Ins Co. (1984) 149 DLR (3d) 77)

44. Lord BUCKMASTER in Macoura v. Northern Assurance Co Ltd. Pickering, The Company as a Separate Legal Entity, (1968) 31 Mod LR 49.

45. Gramophone & Typewriter Co v Stanely, (1906] 2 KB 856, 869: Hyderabad Sind Electric Supply Co v Union of India, AIR 1959 PunJ 199.

46. Palmer's RPVIATE COMPANIES, 19(42od edn. 1961).
Transferable shares
When joint stock companies were established the great object was that their shares should be capable of being easily transterred.47

Accordingly the Companies Act in Section 82 declares:
“The shares other interest of any member in a company shall be move abide property, transferable in the manner provided by the articles of the company”. Thus incorporation enables a member to sell his shares in the open market and to get back his investment with you t having to withdraw the money for m the company. This provides liquidity to the investor and stability to the company.48

In a partnership, on the other hand, a partner cannot transfer his share in the capital of the firm except with the unanimous consent of all the partners. If a transfer is made against the will for the partners, the transferee does not become partner, although he has some rights in the dissolution of their firm.49

Capacity to sue and be sued
A company, being a body corporate, can sue and be sued in its own name.50
Managing Director is not a necessary party to corporate proceedings.51




47 Lord BUCKMASTER in Bahia & San Francisco Ry co. Re, (1868) LR 3 QB 584-

48. Barle and Emans, THE MODERN CORPOATION AND PRIVATE PROPERTY, 82 (1932).

49. S, 29 of the Indian Partnershjp Act, 1932.
50. (It h as been reco gn i zed th at a .com p any can be all owed to sue In forma pauper is under Order 33, Rule 3 of the Civil Procedure Code. Union bank of India v Khaders International Constrictions Ltd. {993) Comp LJ89 Ker.

51. Bank of Maharashtra v Racman Auto P Ltd, (1992) 74 Comp Cas 752 Delhi).
Professional Management
The corporate sector is capable of attracting the growing cadre of professional managers. Young management graduates willingly join companies because of the feeling that they would thereby belong to a managerial class.

Their independent functioning as managers is assured because of the fact that there is no human employer and the shareholders exercise only a formative control and that also for name-sake only. Such an atmosphere of independence gives them an opportunity to develop extraordinary managerial capabitities. With the financial backing that companies are able to provide, they are able to develop the business to a considerable extent Palmer held that "Prudent and other concerns may be acquired”. Thus, before very long, a great business may, be built up which is worthy and capable of absorbing the attention of such competent manager, sited by other directors, Working in harmony with him? Men of this caliber are not to be found everyday, but, when found and supported by capital; they are capable of achieving the very highest success in commercial undertakings.52


Finances:
The company is the only medium of organizing business which is given the privilege of raising capital by public subscriptions either by way of shares or debentures. Further, public financial institutions lend their resources more willingly to companies rather than, to other forms of business organization.

52. Palmer's PRIVATE COMPANIES, 25-26 (42 edn, '1961).
The facility of borrowing and giving security by way of a floating charge is also an exclusive privilege of Companies. "'Capital In many cases is the life-blood of a concern, and it is always a great misfortune where the development of a business is arrested or restricted by want of capital. 53

It may be added that a company, though a legal person, is not a citizen either under the Constitution of India or under the Citizenship Act. This has been the conclusion of a special bench of the Supreme Court in State Trading Corporation of India Ltd. Vs. CTO.54

The Stale Trading Corporation of India is incorporated as a private company under the Companies Act. All the shares are held by the President of India and Law Secretaries in their official capacities. The question was whether the corporation was a citizen.

One of the contentions put forth on behalf of the corporation was that "if the corporate veil is pierced… one sees those persons who are admittedly the citizens of India" and, therefore, the corporation should also be regarded as a citizen.
But it was held that "neither the provisions of the Constitution, Part II, nor of the Citizenship Act, either confer the right of citizenship on, or recognize as citizen, any person other than a natural person".

53. Gallaghar v Germania Brewing Co, (1893) 53 Minn. 214, 54 NW 1115, per ITCHEL LJ cited in Canfield & Wormser, CASES ON RPIVATE CORPORATIONJS, 7 (2nd dn).

54. AIR 1963 SC 1811: [1964J 4 SCR 99: (1963) 33 Comp Cas 1057.
In the striking words of HIDAYA TULLAH.Y.J (afterwards CJ)
“. . . if all of them (the members) are citizens of India the company does not become a citizen of India anymore than, if all married the company would be a married person." A company is, however, a person in he eyes of law and it can claim the protection of such fundamental rights as are guaranteed to all persons whether citizens are not. A Company can not claim the protection of such fundamental rights as are expressly guaranteed the citizens only. But even so there is no cause for anxiety about corporations in general and companies in which states hold all are the majority of the shares in particulars. They are amply-protected under our constitution. There can be no discrimination, no taxation without authority of Law, no curbs involving freedom of trade, commerce or intercourse and no compulsory acquisition of the property. There is sufficient guarantee there and if more is needed then a member (if citizen) is free to invoke article 19(1)(f), (g) and there is no doubt that the corporation in most cases will share the benefit. We need not be apprehensive that corporations are at the mercy of State Governments. The hardship caused by this pronouncement has, however being subsequently modified, (though not b conceding in so many words that a company may be a citizen for certain purposes) by holding that a citizen share holders ma petition proceeding on behalf of the company. Against the violation of his company’s fundamental rights.55


55. State of Gujarat v Shri Ambica Mills Ltd. [1974] 4 SCC 656; Neptune Assurance Co v Union of India, [1973] I SCC 310, 335; (1973) 43 Comp Cas 469, and the Bank Nationalization cas, f 1970] I sec 248; (1970) 40 Comp Cas 325.
Nationality, Domicile and Residence:
A company does however have a nationality domicile and residence.

Speaking of this MACNAGHTEN.J laid down 56
“It was suggested that a body corporate has no domicile. It is quite true that a body corporate cannot be a domicile in the same sense as an individual, and more than it can have a residence in the same sense as an individual. But by analogy with a natural person, the attributes of residence, domicile and nationality can be given to a body corporate. "
A company incorporated in a particular country has the nationality of that county, though, unlike a natural person, it cannot change its nationality 57. The same principles apply to the determination of the residence of a company. Lord LOREBURN stated in a case before the House of Lords 58 that in applying the concept of residence to a company we ought to proceed as nearly as we can upon the analogy of an individual.

“A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of a foreign nationality and yet reside in the United Kingdom, so may a company.


56. Gasque v Commissioners of Inland Revenue, [1940J 2 KB 80.
57. Kuenigl v Donnersmarkc, [1955] lAB 515,535: [1955] I All ER 46.
58. De Beers Consolidated Mines v Howe, [1906] AC 455.
Otherwise it might have its chief seat of management and its center or trading in England under the protection of English Laws, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends aboard. A company resides for purposes of income tax where its real business is carried on. The real business is carried on where the central management and control actually resides".59

(c) Lifting of Corporate veil under the Company Law-
The chief advantage of incorporation from which all others follow is the separate legal entity of the company. In reality, however, the business of the legal person is always carried on by, and for the benefit of, some individuals. In the ultimate analysis, some human beings are the real beneficiaries of the corporate advantages, "'for white, by fiction of law, a corporation is distinct entity, yet in reality it is an association of persons who are in fact the beneficial owners of all the corporate properly. And what the Salomon case decides is that "in questions of property by capacity, of acts done and rights acquired or, liabilities assumed thereby .....their personalities of the natural persons who are the company's cooperators is to be ignored.60




59. For further study Vaughan Williams and M. Crusachi, The Nationality of Corporations, (1933) 49 LQR 334 and E. H. Young, The Nationality of a Juristic Person, (I 90 8) 22 H a r v L RIO.

60. Lord PARKER in Daimler Co v Continental Tyre & Rubber Co., (1916) 2 AC 307: [1916-1917] All ER Rep 191, cited by CA Masten, One-man companies and their controlling Shareholder, (1936) 14 Can BR 663.
This theory of corporate entity is indeed the basic principle on which the whole law of corporations is based, instances are not few in which the courts have successfully resisted the temptation to break through the corporate veil.

A Land 1ady’s bid to regain tenanted premises for self-business could not succeed as the business was in the name of her company.61

The Supreme Court did not allow a shareholder to sue for the violation of the fundamental rights of his company.62

The Supreme Court in Rc-cooper v Union of India, 63 also known as the Bank Nationalization case held that a shareholder, a depositor or a director is not entitled to move a petition for infringement of the rights of the company, unless by the State action impugned by him, his rights are also infringed. The test is in determining whether the shareholders right is impaired not formal, it is essentially qualitative, if the state action impairs the right of he shareholders as well of the company, the court will not, concentrating merely up on the technical operation of the action, deny to itself jurisdiction to grant relief. In applying this proposition, the court in Bennett, Cokeman & Co v Union of India,64 extended the rule by stating: "It is now clear that the fundamental rights of citizens are not
61. Tunstall v Steigman, [1962] 2 WLR 1045: [1962] 2 QB 593.
62. Chiranjit Lal v Union of india, 1950SCR 869: AIR 1951 SC 41, 52.
63. [1970] 1 SCC 248: [1970] 3 SCR 530: (1970) 40 Camp Cas 325
64. [1972] 2 SCC 788,806.
When their fundamental rights as shareholders are impaired by State action their rights as shareholders are protected. The reason is that the shareholders rights are equally and necessarily affected if the rights of the company are affected”. So the company acquires a standing by impleading a shareholder with itself in the action. 65

Where a company acquires a majority of the shares and also the assets of another company that does not extinguish the debt of one to the other.66

The share holders and creditors of a dissolved company cannot maintain an action for the recovery of its left over assets.67


A managing director cannot be compelled in his personal capacity to produce books of which he has custody in official capacity.68

In Lee v Lee's Air Farming Ltd, 69 reversing the New Zealand Court of Appeal, an employee cannot bring an action for an unfair dismissal against the majority shareholder of a company which selected him.



65. Godhra electricity Co v State of Guajrat, [1975]1 SCC 199,211-212)

66. Spencer & Co v Commr of Wealth Tax, AIR 1969 Mad 359: (1969) 39 Comp Cas 212.

67. P. Leslie & Cov V. O. Wapshare, AIR 1969 3 SCR 203; 39 Comp Cas 08.

68. S.A.K. Chinnathambiv Murgugar, (l 9 6 8] 2 Comp LJ 2-6 0.

69. [1961] AC 12: [1960] 3 All ER 420, Pc.

Schouls v Canadian meal Processing Corporation70, Lee incorporated a company or which he was the managing director. In that capacity he appointed himself as a pilot of the company. While on the business of the company he was lost in a flying accident his widow recovered compensation under the Workmen's Compensation Act. "In effect the magic of corporate personality enabled him to be master and servant at the same tIme.71


Where the total number of Directors and shareholders consent to the misuse of the company's money, they can be prosecuted for theft because the consent of the whole number may not be the consent of the company.72

A director's personal telephone was not allowed to be disconnected for the company's default in payment, 73 the theory cannot be pushed to unnatural limits. Circumstances must occur which compel the courts to identify a company with its members. “There are situations where the courts will lift the veil of the incorporation in order to examine the realities which lay behind. Sometimes this is expressly authorized by statute...and sometimes the court will lift of its own volition. 74


70. [1984) 147 DLR (3d) 81).

71. Gower, PRINCIPLES OF MODERN COMP ANY LA W, 202(3rd edn. 1969).
72. Attorney-general's Reference of 1984 (No 2 of 1983) (1984) 2 QB 456; AG's Ref, (1984) QB 624;
R v Phillipou,

73. Kailash Prasad Modi v G M Orissa Telecommunications, AIR 1994 0 r i 98).

74. John P. Lowry, Lifting the Corporate Veil (1993) JBL 41:
A company cannot, for example, be convicted of conspiring with its sloe director. In the circumstances, the court said “Where the sole responsible person in a company is the defendant himself, it would not be right to say that there were two persons or two minds”.75

A company has, however, been held liable for conspiring with its directors where there are at least two of them.76

A company cannot be prosecuted for the violation of an Act which provides for compulsory ImprIsonment.77

A company cannot be prosecuted for cheating and conspiracy because such offences require mens-rea.78

A company cannot be imprisoned for evasion of taxes or any other crime. But penalties can be imposed.79

The corporate veil is said to be lined when the court ignores the company and concerns itself directly with the members or mangers.80

It is impossible to ascertain the factors which operate to break down the corporate Insulation”. 81



75 Ruthern, Lifting the Veil of Incorporation in Scotland, (1969) Juridical Review 1.

76 R. v McDonnel, [1966] 1 All ER 193: [1966] 1 QB 233. 47 Rex v I CR Haulage Ltd, [1944] KB 551: [1944] I II ER 691.

77. Modi Industries Ltd v. B. C. Goel, (1983) 54 Comp Cas 835 All; State of Maharashtra v Jugmandar Lal, AIR 1966 SC 940 and Nanak Chand v State of UP. 1971 All LJ 1229. P V Pai v A L Rinawma, (1993) 77 C.Cas 179 Kant.

78 Akkhosla v T. S. Venketasan (1994) 80 Comp Cas 81 Cal. 47

79. Oswal Vanaspati and Allied Industries v. State of UP, (1992) 75 Comp Cas 770. All: Maniam Transports v S. Krishna Moorthy, (1993) I Comp LJ 153 Mad.

80. veil of Corporate Personality, 91962) 78 LQ~ 315.

81. Warner Fuller, The Incorporated Individual: A study of One-man Company, (1938) 51 Harv LR 1373, 1377.




The matter is largely in the discretion of the courts and will depend upon "the underlying social, economic and moral factors as they operate in and through the corporation"82

All that can be said is "that adherence to the Salomon principle will not be dogged followed where this would cause and unjust result"83. But the following grounds have become well established (Such cases have been summed up by Professor Wormser, Piercing the Veil of Corporate Entity,84 and by Murray A, Pickering Company as a separate Legal Person,85 Lifting the Corporate Veil in Canada86.

(a) Determination of character -
Occasionally it becomes necessary to determine the character for accompany, for example, to see whether it is "enemy". In such a case, the courts may in their discretion examine the character or persons in real control of the corporate affairs.
Daimler Co Ltd v Continental Tyre & Rubber Co.87 considered by James Edward Hogg, the Personal Character of a corporation 88 is illustrative:
A company was incorporated in England for the purpose of selling types manufactured in Germany by German company.
82. Ibid at 1379. Tata Engineering Locomotive Co v State of Bihar, (1964) 6 SCR 885: AIR 1965 SC 40: (1964) 34 Comp Cas 458.

83. John P. Lowry, Lifting the Corporate Veil {l993) JBL
84. (1912) 12Col.LR496. 85. (1968) 31 Mod LR 481: Mervyn Woods.
86. (1957) 23 Can B R 1176). 87. ([I 9 I 6] 2 A C 307: [1916 - 17] All E R 191
88. (19117)33LQR76).
The German company held the bulk of the shares in the English company. The holders of the remaining shares {except one} and all the directors were Germans, resident in Germany. Thus the real control of the English company was in German hands.

During the First World War the English company commenced an action to recover a trade debt. And the question was whether the company had become an enemy company and should, therefore, be barred form maintaining the action.

The House of Lords laid down that a company incorporated In the United Kingdom is a legal entity, a creation of law with the status and capacity which the law confers. It is not a natural person with mind or conscience. It can be neither loyal nor disloyal. It can be neither a friend nor enemy. But it may assume an enemy character when person in defacto-control of it so far as are residents in any enemy country or, wherever resident, are acting under the control of enemies. Accordingly the company was not allowed to proceed with the action. If the action had been allowed, the company would have been used as machinery by which the purpose of giving money to the enemy would be accomplished. That would be monstrous and against public policy.89



89. Sovfracht V'IO v Van Udens ~cheepvaat, {l943] AC 203.

But where there is no such danger to public interest, the courts may refuse Lo tear open the corporate veil. The American case, People's Pleasyre Park Co v Rohleder, 90 is an instructive i1lustration. Certain lands were transferred by one person to another perpetually enjoining the transfer from selling the said property to colored persons. He transferred the property to a company composed exclusively of Negroes. An action was commended for annulment of this conveyance on the ground that all the members of the company being Negroes, the property had in breach of the restriction, passed to the hands of colored persons.

The court, however, rejected this argument and held that members individually or collectively are not the corporation, which "has a distinct existence -an existence separate form that of its shareholders. It leads its own life …it stands apart as a separate subject and, in contemplation of law, as a stranger to its own members".91
(b) For benefit of revenue –
"The court has the power to disregard corporate entity if it is used for tax evasion or to circumvent tax obligatlon.92 A clear illustration is Dinshaw Maneckjee Petit, Re 93:

90. (1908) 109 va. 439:61 SE 794.
91. Sunil Kumar v Mining & Allied Mach Corporation, [1968] 1 Comp LJ 214, and Hyderabad Sind Electric Supply Co v Union of India, AIR 1959 Punj 199 where the court held that the fact that a majority of the shareholders of a company and migrated to India did not and could not change the nationality of the ompany).
92. Juggila! v Cit, [1969] 2 sec 376: AIR 1970 SC 529: [1970] SCR720.
93. AIR 1922 Born 371.
The assessed was a wealthy man enjoying huge dividend and interest income. He formed four private companies and agreed with each to hold a block of investment as an agent for it. Income received was credited in the accounts of the company but the company handed back the amount to him as a pretended loan. This way he divided his income into four parts in a bid to reduce his tax liability.

But it was held that, "the company was formed by the assessee purely and simply as a means of avoiding super tax and the company was nothing more than the assessee himself. It did no business, but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans."
The leading English authority is Apthorpe V Peter Schoenhofen brewing Co.94 Aliens were not allowed to hold land in New York. An English company acquired the business and assets of a New York company. But the American Company was kept on roll in order to hold the land: The business was financed and run by the English company.

It was held that the American company had become the agent of the English company and therefore, the whole of its profits were liable to be taxed as the income of the English company.95 Members themselves, however, are not allowed to claim that they should be regarded as economically identical with the company, particularly when this is not in the interest of revenue.

94 (1899) 4 TC 41: 80 LT 395 CA.

95. Subsequently, however, the courts have been more cautious. Kodal v Clark, [1903] 1 KB 505 CA; CrT v Sri Meenakshi Mills Ltd,[1967] 1 SCR 934, 941; AIR 1967 SC 819: 63 ITR 609: Firestone Tyre & Rubber Co v Llewellin, (1957] 1 wlr 464: (1958) 33 ITR 741.
In Bacha F. Guzdar v CIT, Bombay96: Under the Income tax Act, then in force agricultural income was exempt from tax. The Income of a tea company was exempt up to 60% as agricultural income and 40% was taxed as income form manufacture and sale of tea. The plaintiff was a member of a tea company. She received a certain amount as dividend in respect of shares held by her in the company and Claimed that her dividend income should be regarded as agricultural income up to 60%. But it was held that although the income in the hands of the company was partly agricultural, yet the same income when received by the shareholders as dividends could not be regarded as agricultural income.

Another attempt by the members of a company to treat themselves at par with the company was frustrated by the Calcutta High Court in CIT v Associated Clothiers Ltd. 97

The assesses, associated Clothiers, formed a company holding all its shares. They sold certain premises to the new company. The difference between the selling price and the cost of the property in the hands of assesses was assessed as their Income.

They contended that if this could not be done as there was no commercial sale, but only a transfer from self to self.



96. [1955] 1 SCR 876: ARI 1955 SC 74: (1955) 25 Comp Cas 1.
97. AIR 1963 CaI 629.
The court rejected this and held that it was sale from one entity to another and not a trading with one self.

From this point of view, incorporation sometimes becomes too dearer. Shareholders are virtually compelled to pay the price for the advantages of incorporation. Those shareholders who become directors have then to owe duties of fiduciary nature to their own company and they cannot use the assets of the company as if they were their own. In a way they become strangers to their own enterprise. 98

This is one of those situations which go to prove the truth in Professor Kahn-Feund's statement that "sometimes corporate entity works like a boomerang and hits the man who was trying to use It” 99

(c) Fraud or improper conduct - The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separate existence of the company where it is formed to defeat or circumvent law, to defraud creditors or to avoid legal obligations. One clear illustration is Gitford Motor Co v Horne.100





98. George Newman & Co., Re, [1895] 1 Ch 674: [1895-9] All ER Rep Ext 2161; E. B. M. co Ltd v Dominion Bank, (1937] 3 All ER 555 Pc.

99. (1944) 7 Mod 54,56.

100. {1933] 1 Ch 935.
Another illustration is Conners Bros v Conners, 101 Horne was appointed as a managing director of the plaintiff Company on the condition that ‘he shall not at any time while he is holding the office of a managing director or afterwards, solicit or entice away the customers of the company.

His employment was determined under an agreement. Shortly afterwards he opened a business in the name of a company which solicited the plaintiff'’s customers.

A new company is created, wholly, owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends from shares transferred to it by the principal company and serving no purpose whatsoever except to reduce the gross profits of the principal company. These facts speak for themselves. There cannot be direct evidence that the second company was formed as a device to reduce the gross profits of the principal company for whatever purpose. An obvious purpose which stares on the face is to reduce the amount to be paid by way of bonus to workmen. This finding was further supported by the fact that the subsidiary was subsequently wound up and amalgamated into the following company.
101. [1974] 4 All ER 179 Pc.

A person who had incurred a disqualification, for example, black-listing as a contractor, was not allowed to hide his disqualification by forming a company and tendering in its name. 102

(d) Government companies - A company may sometimes be regarded as an agent or trustee of is members or of another company and may, therefore, be deemed to have lost its individuality in favour of its principal. In India this question has frequently arisen in connection with Government companies. A large number of private companies for commercial purposes have been registered under the companies Act with the President and a few other officers as the shareholders.103

The obvious advantage of forming a Government company is that it gives the activities of the State "a little of the freedom which was enjoyed by private corporations and the Government escaped the rules and principles which hampered action when it was done by a Government department instead of a Government corporation. In other words, it gave the Government some of the robes of the individual. 104 And in order to assure this freedom, the Supreme Court has reiterated in a number of cases that a Government company is not a department or an extension of state.105




102. New Horizons Ltd v Union of India, AIR 1994 Delhi 126.
103. Shardha Kumari, Government Companies in India, (1957) Indian Law Journal 143
104. ThurmanW. Arnold, THE .FOLKLORE OF CAPALISM. 193 (1956).
105. State Trading Corporation of India v CTO, AIR 1963 SC 1811: [1964] 4 SCR 99. (1963) 33 Comp Cas .1057.
In this respect, distinction has been made by the Supreme Court in Sukdev Singh v Bhagatram,106 in so far as statutory corporations, such as LIC, ONGC, etc., formed by Acts of Parliament are concerned.

It is not an agent of the State. Accordingly its employees are not civil servants107 and prerogative writs can not be issued against it. 108

In one of these cases, the court remarked: The company being a non-statutory body and a one incorporated under the Companies Act there was neither a statutory nor a public duty imposed on it by a statute in respect of which enforcement could be sought by means of a mandamus 109, where the court refused to issue a writ in favour of an employee whose pay had been reduced by the company, and advised the petitioner to pursue his ordinary remedy in the law of contract.

Liability of directors and members: Statutory provisions of the Act also impose personal liability on the directors or members of a company in certain cases. Independent existence of the company is maintained and the company may also be liable. But, apart from the liability of the company, those cloaked behind it are also made liable. Following are some such provisions of the Act.




106. [1975] 1 SCC 421: (1975) 45 Comp Cas 285.

107. Praga Tools Corpn v Inamue1 , [1 9 6 9 ] 1 S C C 5 8 5: A I R 1 96 9 S C 1306: (1969) 39 Comp Cas 889.

108. Heavy Engineering Mazdoor Union v State of Bihar, [1969] SCC 765.

109. Ram Singh v. Fertilizer Corpn of India Ltd. (1980) 50 Comp Cas 553.
(a) Reduction in membership - Section 45 provides:
If at anytime the number of members of a company is reduced, in the case of a public company, below seven or in the case of a private company, below two and the company carries on busies for more than six months white the number is so reduced, every person who is a member of the company …
And is cognizant of the fact ... Shall be severally liable for the payment of the whole debts of the company contracted during that time...”

The purpose of these provisions is to withdraw the advantages of incorporation when the conditions of incorporation are not maintained.

(b) Mis-description of name - Secondly, where in any act or contract of a company, its name is not fully or properly indicated as required by Section 147 those who have actually done the act or made the contract shall be personally liable for it. Thus the directors were held personally liable on a cheque signed by them in the name of a company stating the company's name as "L.R.Agencies Ltd", the real name being "L & R Agencies Ltd" 110





109. Ram Singh v. Fertilizer Corpn of India Ltd. (1980) 50 Comp Cas 553.

110. Hendon v. Adelman, The Times, June 16, 1973. Noted 1973 New LJ 63.
(c) Fraudulent conduct of business- Thirdly, Section 542 imposes liability for fraudulent conduct of a company's business. According to this section, “if in course of winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons, or for any fraudulent purpose", those who were knowingly parties to such conduct of business may, in the discretion of the court, be made personally liable for all or any of the debts of the company. 111

(d) Holding and subsidiary companies (Section-4) - A company qualifies as a holding company when it has the power to control the composition of the Board of Directors of another Company or holds a majority of its shares. It has been seen that a subsidiary company, even a 100 per cent subsidiary, is a separate legal entity and its creator and controller is not to be held liable for its acts merely because he is the creator and controller. Nor is the subsidiary to be held as an asset of the holding company. The decision of the Delhi High Court in Freewheel (India) Pvt. Ltd. v Dr. Veda Mitra 112 on Liability of insolvent subsidiary. The question whether the parent company should be held liable for the debts of its insolvent subsidiary involves a difficult parole.


111. Willaim C. Leitch Bros Ltd. Rd [1932] 2 Ch 71.
112. AIR 1969 Del 258: [1969] 1 Comp LJ 13. 58
The difficulty has been indicated in a case which exposes the legal inadequacy and which has been thus presented 113

English company law possesses some curious features, which may generate various results. A partner company may spawn a number of subsidiary companies, all controlled directly or indirectly by the shareholders of the partner company. If one of the subsidiary companies turns to be the runt of the litter and declines into insolvency to the dismay of is creditors, the parent company and the other subsidiary companies may prosper to the joy of the shareholder without any liability for the debts of the insolvent subsidiary. It is not surprising that when subsidiary collapses, the unsecured creditors wish the finances of the company and its relationship with other members of the group to be narrowly examined, to ensure that no asset of the subsidiary company has leaked way that no liabilities of the subsidiary company ought to be left at the door of the other members of the group and the no indemnity form or right of action against any other company, or against any individual is by some mischief overlooked.





113. Southard & Co. Ltd. Re [1979] 1 WLR 1198, 1208, TEMPLETON LJ, noted 1908 JBL 160.

Subsidiary establishments - There is also the power in the Central Government as conferred by Section - 8 to declare that any establishment of a company carrying on the same or substantially the same activity as that carried on by the head office of the company, shall not be treated as a branch office of the company for any of the purposes of the Act.

CONCLUSION- Thus it is abundantly clear that incorporation does not cut off personal liability at all times and in all circumstances (Clive M. Schmitthoff, Salomon in the Shadow, 114 where the learned writer says that if I were otherwise Salomon would have been misunderstood). "Honest enterprise, by means of companies is allowed; but the public are protected against kiting and humbuggery.” The sanctity of a separate corporate identity is upheld only in so far as the entity is in consonant with the under lying policies which give it life. Those who enjoy the benefits of the enterprise must not withdraw the corporate assets or mingle their own individual accounts with those of the corporation or represent to third parties that no difference exists between themselves and the company. The courts have at times seized upon these facts as evidence to justify the imposition of liability upon the shareholders.




114. 1976 JBL 305.

CHAPTER – III
MEANING AND KINDS OF SHARES

(i) Definition of shares
According to Section - 2 (46) Share means “share in the Share Capital of a Company and includes stock except where a distinction between Stock and Share is Expressed or implied.”
Dixon, J, in Peer's American Delicacy Co. Ltd. v. HeaIth, defines share in the following words, primarily share in a company’s a piece property conferring right in relation to distribution of income and of Capital. 115

The best definition has been given by Farewell, J, In Borland's trustee v. Steel brothers & Co 116 this has been adopted by the Supreme Court Chandrajit Lal v Union of India. 117

A share is the interest of a shareholder , in the Company measured by a sum of money, for the purpose of liability in the first place, and interest in the second but also consisting of a series of mutual covenants entered into by all the shareholders inter-se.
Thus a share in the Company signifies a definite portion of the Capital of the Company. A share held by a member of a company represents the portion of the Company's assets in which the member, his interest is in the same proportion of the Company's liabilities.

115. (1939) 61 CLR 457 . 116. (1903) 1 Ch. 279. 117. AIR 1951 SC 41.
In more Simple language, the holder of a share has subject to and with the benefit of the regulations of the company, the right to relieve a certain proportion of the profits of the company and also of the capital of the company when it is wound up.

It is to be noted that the holder of a share in company cannot be treated as a part owner of the Company's capital because a Company is something different from the totality of the share holders and shareholders are no part owners of the company. However the holder of a share in a company may be treated as an owner of certain rights and interests in the Company along with it, he is also burdened with certain liabilities. A share is not a sum of money but an interest measure by a sum of money and made by various rights and liabilities. A share is an existing bundle of rights.

The rights and liabilities of a share holder are regulated by the articles of the company. Each share in a Company having a share capital is required to be distinguished by its appropriate number. The share of other interest of any number of a Company is a movable property transferable in the manner provided by the articles of the Company.

The term 'goods' defined under Section 2(7) of the sale of goods Act includes shares also, however it is to be remembered that shares are not ordinary but a peculiar kind of movable property and they cannot pass from one hand to another like ordinary goods. Property in shares belongs to the registered share holders and therefore it cannot be transferred except according to the articles of the company. Thus where a share is transferred to a donee and the transfer is not registered before the death of the donor the donee will acquire no right to the share.

Difference between Share and Stock.

• The term share is employed to refer both paid-up and non-paid-up Share but the term stock indicates a set of fully paid up shares. Thus a stock must be fully paid up but a Share need not necessarily be paid up in full.

• Stock originate-s from fully paid up shares and it cannot be issued in the first instance without going through the intermediate form of issuing the Shares.

• Besides, for the purpose of transfer of stock, unless the articles provide otherwise, may be broken up into any division but a Share cannot be broken up into parts.


Certificate of Shares: S-113: An allottee of shares is entitled to have from the company a document, called Share certificate, certifying that he is the holder of the specified number of shares in the company. Accordingly, every company making an allotment of shares or debentures or debenture-stock is obliged to deliver to the allottee a certificate of shares, etc., within three months after the allotment.118 In the case of a transfer, the certificate has to be delivered within two months. The Company Law Board may grant an extended period of not more than 9 months (The amendments of 1988 has been enforced with effect from 15.6.1988, GSR 559 (E) of 10.6.88. Rule 37-A of the Company Law Board (Bench) Rules, 1975 provides that the application for extension of time should be accompanied by a fee of Rs. 50 and should specify all the material particulars and reason for extension as also the period for which extension is sought. The COMPANY LAW BOARD may order that all the costs would be borne by the company by the officer in default. If a company makes a default in this respect, the allottee or transferee may give a notice to he company reminding it of its obligation and, if the default is not made good within ten days of the notice, the allottee can apply to the Company Law Board for a direction to the company to issue share certificates in accordance with certificates Section-113(3), sub-section (2) imposes penalty for default. The Calcutta High Court had held in Asiatic Oxygen Ltd, Re, 119 that the only obligation of the company was to keep the certificates ready for delivery, but the court could not compel the company to actually deliver them.

118. The Section is not applicable to issue of bonds Mahanagar Telephone Nigam Ltd., Re (1993) 3 Comp LJ 239 COMPANY LAW BOARD The requirement prescribed by the Department for uniform size •certificates has been withdrawn. The prescriptions were under the companies (Issue of shareCertificate) Rules, 1960. 119. (1972) 42 Comp Cas 60.2: AIR 1972 Cal 50..
The decision was contrary to Burdett v Standard Exploration Co. 120 on the basis of which it was observed in Palmer's COMPANY LAW 121 that "the right to a certificate can be enforced by action against the company". The amendment of 1988 has made it a positive duty of the company to deliver. The delivery must be effected in accordance with Section 53 of the Ct (This section requires service by post or by personal delivery).

Object and effect of share certificate :: Section – 84 ::
Section 84 speaks in plain language of the object of a share certificate. "A share certificate under the common seal of the company, specifying any shares held by any member, shall be prima facie evidence of the title of the member to such shares." Thus, the share certificate, being prima facie evidence of title, it gives the share holder the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing at once a marketable title.122

1. Estoppel as to title - A share certificate once issued binds the company in two ways. In the first place, "it is a declaration by the company to the entire world that the person in whose name the confiscate is made out, and to whom it is given, is a shareholder in the company. In other words, the company is estopped from denying his title to the shares. 120. (1899) 16 TLR 112 121. at 307 (20th edn, 1959) 122. Bahia & San Francisco Riy Co. , Re, (1868) LR :; QB 5844
Suppose A, by practicing fraud on a company, obtains a share certificate in his name as the holder or some shares. He then sells them in the market. B, purchasing them in good faith applied to the company to have the shares registered in his name. The company, having discovered the fraud, refuses. The company must compensate B for the loss he has sustained by acting on the faith of the share certificate. The measure of damages would be the market-price of the share at that time. In a case of this kind 123 the plaintiff applied for 300 shares in a company. A clerking the company who owned no shares executed a transfer in favour of the plaintiff. The company without requiring the clerk to produce his certificate registered the transfer and issued a new certificate to the plaintiff. The company was held liable to the plaintiff for damages.

2. Estoppel as to payment - Secondly, if the certificate states that on each of the shares full "mount has been paid, the company is'etopped, as against a bona fide purchase of the shares from alleging that they are not fully paid. Thus in Bloomenthal v Ford.124
Where a person knows that the statements in a certificate are not true, he can not claim an estoppel against the company125... But a bonafide transferee form him can claim an estoppel.126


123. Dixo n v K en n a wa 5', (I 900 J I C h 833 82 L T 527)
124 f1897] AC 156: 76 LT 2o5) I25 it:kmeT case, (1875) 1o Ch App 614: 46 LJ Ch 870
126 Baroow case, (I88o) I 4 ChD 43 2 42 LT 89I
Duplicate certificate :: Section: 84( 2 ) ::
A shareholder is expected to keep his share certificate in safe custody, for he is not entitled to a duplicate unless he shows that the original has been lost or destroyed, or having been defaced or mutilated or torn, is surrendered to the company. The article of the company may further require him to give an indemnity bond. Any other terms and conditions may also be prescribed.

(ii) Kinds of Shares-
Capital must be divided into shares of a fixed amount. All the shares maybe of only one class or may be divided into two different classes. The Act now permits only two kinds of shares to be issued, namely… 127

1. Equity share capital, that is, ordinary shares, and
2. Preference Shares, which constitute the preference share capital.

Ordinary share capital or equity share capital is defined in the Act as meaning all share capital which is not preference share capital under Section – 85 (2).
Preference share capital :: Section - 85 :
Preference Share capital means that part of the share capital of a company which fulfils both the following requirements (Sub-Section[1].



127 86 each share shall be distinguished by its appropriate no. S.83 Private Companies-are exempted and therefore they enjoy the freedom of having any other kinds aIso
It is not necessary to give any priority to the amount of dividend remaining unpaid up to the commencement of Winding up or to any fixed premium or premiums on any fixed scale specified in the memorandum or articles of the company.128

1. During the continuance of any company it must be assured of a preferential dividend. The preferential dividend may consist of a fixed amount (say fifty thousand rupees in one year) payable to preference shareholders before anything is paid to the ordinary shareholders, or the amount payable, a preferential dividend may be calculated at a fixed rate, for example 5 per cent of the nominal value of each share.

2. On the winding up of the company it must carry a preferential right to be paid, that is, the amount paid up on preference shares must be paid back before any thing is paid to the ordinary shareholders. This preference, unless there is an agreement to the contrary, exists only up to amount paid up or deemed to have been paid upon the shares.

Cumulative and Non-Cumulative Preference Shares:
Preference shares may be either cumulative or non-cumulative. If there are no profits in one year and the arrears of dividends are to be carried forward and paid out of the profits of subsequent years, the preference shares are said to be cumulative.
128. Section - 85 (1)(b)(i) and (ii)
If unpaid dividend lapses, the shares are said to be non cumulative preference shares. Whether they are of one class or the other will depend upon the terms of issue and provision in the company's articles. But, in the absence of any clear provisions to the contrary, preference shares are presumed to be cumulative Foster v Coles, Foster & sons Ltd 129 is an authority: A company whose memorandum and articles provided for preference shares carrying a “Cumulative Preferential Dividend” was reconstructed and Clause 95 of the articles was altered by striking out the word "Cumulative" before “Preference" so as to read thus: "The net profits from time to time available for distribution as dividend shall be applied first in payment to holders of preference shares of a preference dividend." Even so it was held that the holders of preference shares were entitled to a cumulative preferential dividend. The word "Cumulative" was dropped obviously with the intention of converting the preference shares in to non-cumulative shares. But unless there were clear provisions in the articles to that effect they were presumed to be cumulative preference shares.

These preference shares are always presumed to be cumulative and the accumulation of dividend can be excluded only by clear provisions in the articles of association. As, for example, in Staples v Eastman Photography materials Co. 130
129 (1906) 22 T L R 555
130. [1896] 2 Ch 303.
The provisions in the articles of association of a company were like this: “The holders of preference shares shall be entitled out or the net provision of each year to a preference dividend at the rate of 10 percent per annum." It was held that according to this provision preference share holders were not entitled to a cumulative dividend of 10 per cent so as to have the deficiency in one year paid out of other profits or a subsequent year. The provisions meant that the profits of each year only were to be paid in that way. Preference shareholders cannot compel the directors to pay dividends, whatever be the amount of accumulation.131

Participating preference shares : There is yet another problem concerning preference shares. After the fixed amount of dividend has been paid to preference shareholders and some amount has by way of dividend been paid to the ordinary shareholders, there may be surplus profits which are proposed to be distributed among the shareholders. The question is, whether the preference shareholders are also entitled to take part in the distribution of the surplus.

Again, in the winding up of a company, if after paying back both the preference and ordinary shareholders, there is a surplus, the question will be whether preference shareholders are also entitled to a share in the distribution of the surplus. If they are so entitled they will be known as participating preference shares { Section - 85( 1) }.

131. Buenos Aires Great Southern Rly CO v Preston, [1947] Ch 384: [1947] I All ER 729 .
The general principle is that preference shares are presumed to be not participating. The holders of such shares are not entitled to any share in the distribution of any such surplus, unless there is a clear provision in the memorandum, or the terms of issue or the articles conferring upon them the right of participation. This appears from consideration of authorities. Reference may be made here to one of them, namely, Will v United Lanket Plantatlons Co Ltd' 132

Preference shareholders were entitled to a cumu1ative preference dividend at the rate of 10 percent per annum and, it was further provided in the company's articles that such preference shares ranked both as regards capital and dividend in priority to other shares. It was held that preference shareholders were not entitled in the distribution of the profits to anything more than 10 percent dividend.
Accordingly, to find out the rights of a special class of shareholders we must look within the four corners of the articles of association of the Company and the terms of the issue.

If the right to participate in the surplus is not specified in the terms of the issue, preference shares are presumed to be not participating. This was affirmed by the House of Lords in Scottish Insurance Co Ltd v Willson & Clyde Coal Co Ltd.133




132 [1912] 2 Ch 571: [1914] C II: 10.7 LT 360..
133 {1949] AC 462.
A Company intended to go into voluntary liquidation. Mean while it proposed to reduce its capital by returning their capital to the holders of the preference stock. Under the articles of the company in the event or winding up, preference stock ranked before the ordinary to the extent of the amount paid thereon. The reduction or capital was opposed by certain preference stockholders on the ground that it deprived them or the right to participate in the liquidation and the division of the company's surplus assets. Thus the question was whether the preference stockholders would be entitled in winding up to a share in the surplus assets or, in other words, to receive more than a return or their paid up capital.

Lord Simonds said:
"It is clear from the authorities that subject to any relevant provisions of the general law, the rights inter-se of the preference and ordinary shareholders was depending on the term of the instrument which contains the bargain that they have made with company and each other”.

It means that their right to participate in the surplus depends upon the terms of the contract they have made with the company and there is no presumption that they have the right to participate unless it is excluded by the articles.

There was nothing in the articles giving them the right to receive anything beyond the amount paid on their shares. Then again the mere fact that under a company's articles preference shareholders are entitled to participate with the ordinary shareholders in the surplus profits does not entitle them in the company's winding-up to participate in the surplus assets also. This was the position taken in Isle of Thanet Electricity supply Co, R e 134 A clause in the articles of association of a company defined the rights of shareholders as follows:
"The issued preference shall confer on the holders the right to a fixed cumulative dividend at the rate of 6% per annum in priority to the ordinary shares and the right to participate Parti passu with the ordinary shares in the surplus profits which in respect of any year it shall be determined to distribute… And the preference share shall confer the right in a winding up of the company to repayment of capital together with arrears if any. "The company mention to voluntary liquidation. Certain arrears of dividend on preference stock were paid and capital on both the preference and ordinary stock was repaid. As regards the surplus, it was held that the bonus lay on the preference stockholders to show that they were entitled to participate therein; the above provision in the articles must be taken as being exhaustive in defining their rights and, therefore, the bonus has not been discharged 135
134. [1949] 2 All ER 1060.: [1950.] Ch 161; W. Foster & Sons Ltd, Re, (1942] I All ER 314.

135. For other cases Chaterley-whitfield Collieries Ltd, Re, [1948] 2 All ER 593 CA and Prudential Assurance Co v Chatterley etc., [1949] Act 512: [1949] I All ER 1094 ..
Issue and redemption of preference shares:
A company has the power under Section 80 to issue what are known as redeemable preference shares. There must however be an authority to issue such shares in the articles of the Company. The option of redemption lies with the company, that is to say, the company may choose to pay back the holders of such shares. Paying back is called redemption. There are following restrictions in regard to the fund out of which shares can be redeemed (S. 80 (1) proviso). Firstly, the shares to be redeemed must be fully paid up. Secondly, shares shall be redeemed only out of profits of the company which would otherwise be available for dividends. The only other method allowed by the Act is to make a fresh issue of shares and utilize the proceeds to carry out the redemption. Again, if any premium is payable on redemption, the amount must have been provide for out of the profits of the company or out of the company's share premium account. Lastly, where redemption is made out of profits, a sum equivalent to the amount paid on redemption shall be transferred to a reserve fund to be called, Capital Redemption Reserve Account.

This amount is to be preserved in the same sanctity as the company's share capital and can be reduced only in the like manner {S. 80 (1) (d)}. Redemption of preference shares is not taken as education of the company’s authorized share capital {S. 80 (3)}
The company may issue new shares up to the nominal amount of the shares redeemed and the capital shall not be deemed to have been increased.
The capital redemption reserve account may be applied, in paying up un-issued shares of the company to be issued to the members as fully paid bonus shares (S. 80 (5). Also sub-section (6) which contain penalty provisions.

Irredeemable preference shares -
The amendment of 1988 abolished the category of irredeemable preference shares. Sub-section (5-A), inserted by the amendment, says that no company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of a period of 10 years from the date of issue (A new section, S. 8 a - A, was inserted to provide about the redemption of existing irredeemable preference shares. They must be redeemed within 5 years from the effective date of the amendment. Shares which are redeemable with in ten years will be redeemed when fall due, but the period should not be more than ten years. If a company is not able to do so, it should make a petition to the Central Government which may permit their renewal under a ten years scheme and then they shall be deemed to have been declared to be beyond the reach of any provision of S. 106 or any scheme under Ss. 391 to 395 or S. 396.
They cannot be varied by any resolution at a class meeting or by the court or the Central Government. Failure to comply with the provision involves a punishment for the company which may extend to Rs 1000 for every day of default and for its officers who are in default an imprisonment extending up to 3 years and also a fine. The amendment has been enforced w.e.r. 15.1.1988. GSR 559 (E) of 10.6.1988. A company which does not carry out redemption as required by the new provisions is restrained from paying dividends up to the time of implementation. In quite a few cases the Central Government permitted renewal along with accumulated dividend amount.

Ordinary shares compared with preference shares:
Firstly, Preference shares, particularly redeemable preference shares, are more like debentures than like shares. They are entitled to a fixed rate of dividend; even a debenture earns a fixed rate of interest. The company may choose to pay them back (S. 80.] This, however, does not mean that the holder of redeemable preference shares can treat himself like a 'creditor if his shares are not redeemed in time on maturity and take the liberty of filing a creditor's petition for an order of Winding Up.136
But ordinary shareholders cannot be paid back except under a scheme involving reduction of capital (S. 100).


136. Lalchand Surana v. Hyderabad Vanspati Ltd. (1990) 69 Camp Cas 415 AP.
Secondly, an ordinary shareholder is entitled to vote on all mattes affecting the company. But the right of a preference shareholder to vote is restricted to resolutions which directly affect the rights attached to his preference shares, except when dividend has remained unpaid in which case he may vote on any resolution in respect of preference share capital {S. 87(2) clause (b)}.

Thirdly, preference shares offer a profitable and safe source of investment. While the fixed rate of income is guaranteed, the risk involved is much less as compared to the risk undertaken by an ordinary shareholder.


III. Difference between Private Company and Public Company in share holding or issuing of shares:

A private company is a very suitable device for carrying on the business of family and small scale concerns, as the minimum number of members required to form a private company is only two{S. 12).

A Private company is defined in Section 3 (1) (iii). It means a Company which in its articles of association contains the following restrictions:



1. Restriction on Transferability of Shares:
There must be some restriction on the right of its members to transfer their shares in the company. Any restriction which will enable the directors to maintain the maximum limit of fifty members will serve to the purpose of the Act. 137
This restriction is not necessary in the case of a private company not being limited by shares {S. 27 (3)}.

2. Restriction on Membership
The number of its members must be limited to fifty, which shall be exclusive of members who are or were in the employment of the company, Joint holders of shares shall be treated as a single member.

3. Prohibition on Issue of Prospectus:
The company must prohibit any invitation to the public to subscribe for any shares or debentures of the company.
A private company is compulsorily required to have articles of association. They are necessary, if not for anything else, to embody the above restrictions.


137 Palmer's COMPANY LAW, 37 (2oth Edn, 1959)

Advantages of a Private company

1. Subscription:
The formation of a private company requires only a minimum of two subscribers to the memorandum of association (S. 12). This, to a large extent, facilitates the formation and harmonious functioning of a private company and makes the choice of such a company most suitable for family or friendly concerns-


2. Exemption from Prospectus Provisions:

Public participation by issuing a prospectus is prohibited 3 (1) (iii).
Private company is, therefore exempt from all requirements of the Act relating to the prospectus. For example,
It has not to file a statement in lieu of prospectus (S 70 (3)]
• it can proceed to allot shares without having to wait for any such thing as a minimum subscription (This is so because Section-69 which contains prohibition on allotment unless minimum subscription is received applies only to the case of a company which has to feed shares to the public for subscription, something a private company is prohibited from doing.
• It can commence business immediately on incorporation, as it has not to wait to obtain a confiscate for commencement of business {S. 149(7)}

3. Directors:
Regarding the appointment of directors a private company is entitled to certain beneficial exemptions. For example,

• It is required to have only two directors (S.252(2)).
• All its directors can be permanent life directors:
• The requirement of retirement by rotation does not apply {S-255(1)}.

• All the directors can be appointed by a single resolution.

• The special fourteen days notice required by Section 257 (1) for the appointment of a new director in place of a retiring one does not apply in the case of a private company {S.257(2]}.

• Again, a public company cannot increase the number of its directors beyond the permissible maximum under its articles as first registered (S. 259(a) (b)). This restriction does not apply to the case of a private company,

• No director of a public company can act as a director {Section-264(2]}, unless he has within thirty days of his first appointment signed and filed with the Registrar consent in writing to act as such as director. This provision of the Act does not apply to a private company {S. 264 (3]}.

• Similarly the provisions of Section 266 (1) (b) requiring directors of public companies either to sign memorandum for taking qualification shares or to file with the registrar an undertaking to take them does not apply in the case of a private company {Section 266 (5) (b)}

• Restriction as to remuneration also does not apply (S 198).
4. Statutory Meeting:
A Private Company is exempted from the requirement of holding statutory meeting and filing statutory report {Section-165}

5. Further Issue of Capital:
Under Section 81 a public company proposing to increase its subscribed capital by allotment of further shares, must, In certain cases, offer them to the existing members. But that section does not apply to a private company which is therefore, free to allot new issues to outsiders {S. 81(3]}.

6. Company an Undisclosed Principal
According to Section 416 if any agent of the a company makes a contract on behalf of the company but keeping the company as an undisclosed principal, he has to make a memorandum in writing of the terms of the contract and specifying the other party to the contract. He has also to deliver the memorandum to the company and send copies to each of the directors so that it may be laid before the Board at its next meeting. Private companies are exempted from these requirements.

7. Disclosure of Interest
Another important exemption is in Section-300. As has already been seen, this section excludes an interested director from participating in voting at Board's proceedings. But, as a private company is exempted from the operation of this section, an interested director is under no obligation to retire from a meeting of the Board at which the subject matter of his interest is discussed. He may participate in the proceeding and exercise his vote {S. 300 (2)}.

Conversion of Private Company
In to Public Company
1. Conversion by Default
2. Conversion by Operation of Law
3. Conversion by Operation of Law

1. Conversion by Default
These privileges and exemptions can be enjoyed by a private company only also long as it is a company with the requirements of its definition as detailed in Section 3(1) (iii). "When a default is made in complying with any of those provisions, the company shall cease to be entitled to the privileges and exemptions conferred by or under the Act." (S. 43).

The whole of the Act would then apply to the company as if it were not a private company.

However, discretion is given to the court to grant relief to the company from such consequences where the court is satisfied that the failure to comply with the conditions was accidental or due to in advertence or to some other sufficient cause or that on other grounds it is just and equitable to grant relief (Proviso to S. 43). The order of relief is made on the application of the company or any other person interested and on such terms and conditions as seem to the court just and equitable.
2. Conversion by Operation of Law:
The Act provides for three kinds of conversion under its operation.
Firstly, Section 43-A (Added by the Amendment Act of 1960) introduces another important condition for enjoying the benefits of a private company. The new section is intended to ensure that private companies maintain their real private character. One reason why a private company is privi1eged with so many exceptions is that it does not, and, indeed, is not permitted to, employ public money. Now suppose that public company Incorporates a ring of wholly or partly owned private companies, it would thus carry on trade with public money, but through the medium of private companies.
That was at one time a convenient method of escaping the disclosures a public company had to make under the Act. Naturally such private companies as are controlled by public companies do not deserve to be privileged with exemptions.

The Act tries to tackle the problem in two ways.

In the first place, where a private company subsidiary of a public company, it is dealt with public company for almost all the purposes of the Act

Secondly, the new section (namely, Section 43-A) provides that a private company would become a public company when twenty-five percent or more of its paid-up share capital is held by one or more bodies corporate. However, in computing the above percentage, shares held by a banking company shall not be taken into account in the following cases.

1. Where the shares form part of the subject-matter or a trust, and having not been set apart for the benefit of anybody corporate, are held by the banking company as a trustee of that trust.

2. Where the shares form part of the estate of a deceased person and having not been bequeathed by will to any Body Corporate, are held by the banking company either, or on behalf of, the executor or administrator of the deceased person (S. 43-A, proviso 2).

Company of Third Category: It was contended before the Supreme Court in a recent case Section- 43-A (2), Section- 43-A (5) imposes penalty for default. The personal liability of the directors of a private company for over due income tax amount under Section 179 of the Income Tax act would cease in reference to any accumulation after the company becomes a deemed public company.
N.Raja mani v Ammav Dy CIT138, the company can be either a private company or a public company and there cannot be a company of the third category standing between the two. The basis of the argument was that the Act defines a public company to be one which is not a private company and, therefore, they must be regarded a mutually exclusive and correlatively exhaustive. 139

CHANDRACHUD CJ exposed the fallacy of the argument:
But it is not true to say that between them, they exhaust the universe of companies. A private company which has become a public company by reason of Section 43-A may continue to include in its articles mates which are specified in Section 3 (1) (ii) and the number of its members may be reduced to below seven. This provision itself highlights the basic distinction between,
• On the one hand, a company which is incorporated as a public company Of a private company which is converted into a public company under Section 44, and

• On the other hand, a private company which has become a public company by reason of the operation of section 43.

The learned Chief Justice enlisted the Provision of the Act which lend support to the view that a deemed public company is a third category.

• First, such a company is permitted to retain the characteristics or a private company which a public company can not do, and, therefore, the two can not be equated.
139. Needle Industries (India) Ltd v Needle Industries Newey (India) Holding Ltd., [1981] 3 SCC at 416-17; (1981) 51 camp cas 743.
• Second, the membership of a public company cannot go below seven. Where as a deemed public company’s membership may go below seven.

• Third, a Section 43-A company can never be directly incorporated as such. It must start as a private company. Subsequently the Law may operate to convey it on a public company.

• Fourth, the fact that the provisions or Section 43 and 44 are different from those or section 43-A shows that the legislative intent was to create a third category or companies which could retain corporate she II o l' a private company and yet b e subject to the discipline or public companies.

3. Conversion by Choice
Apart from the above provisions or the Act, a private company may of its own choice become a public company. It may at any time pass a special resolution deleting from its articles the requirement or Section 3( 1) (iii) and then, from the date or alteration, it becomes a public company (S. 44{1} within Thirty days a prospectus or a statement in lieu or a prospectus must be filed with the Registrar140 and all other requirements of the Act should be completed with, such as, increasing the number or shareholders and directors to the statutory minimum.

140. S. 44(1) (b). Hindustan Lever v Bombay Soda Factory, AIR 1964 Mys 173.

Conversion of Public Company
In to Private Company
A public company can also be converted into a private company. For this purpose it will be necessary to pass a special resolution by which the articles or the company shall be changed so as to include the requirements of a private company as prescribed in Section 3(1)(iii).
But Section 31(1) provides that “No alteration made in the articles which with the effect of converting a public into a private company shall have effect unless such alteration has been approved by the Central Government". But confirmation or the court is not necessary.141

The conversion of a company from private to public or vice-versa does not change the identity of the company. 142 Where the shares etc., or a private company, which is not subsidiary or a public company, have been transmitted by a court order or by some other public authority the remedies of this section will be available against the company. {S.111 (2)}

In such a case, the Central Government has the alternative power of asking any member of the company to purchase such shares and to order rectification on1y if no member offers himself for that purpose.

141 Radiant Chemical co., Re, AIR 1943 Pat 278.

142. All India Reporter Ltd v Ramchandra, AIR 1961 Born 29: ILR 1961 Born 257. Legal proceedings instituted before conversion can continue, solver Oils and Fertilizes v Bhandari Cross fields, (!978) 48 Camp Cas 260 P&H.
The Board may ask the member to pay the price in vested by the purchaser of these shares or to pay an amount which may look like being a reasonable compensation in the circumstances. 143

The section concludes with sub section (13) by providing that nothing in the section shall prejudice the right or a private company to enforce a restriction under its articles as to a particular transfer. Thus the matter or refusal by a private company can also be agitated, If not for anything else, at let for the purpose or determining whether the result was a bonafide enforcement of a restriction contained in the articles or alternatively the matter can be earned before the ordinary civil courts.

Thus the provisions or the section are applicable to private companies as well. The jurisdiction created by the section is equally applicable for rectification of the resister or private companies. An allotment of shares by a private company which is liable to be set aside can be the subject matter or an application under the section. Where the articles of a private company enable the directors to increase capital and allot it in a manner they thought fit and they arbitrarily choose some of them for the benediction to the exclusion of others, the Central Government held that such powers, even though absolute, have to be exercised in good faith in the interest or the company and its members and that therefore, the allotment was liable to be setaside144


143. Defaults under the section are punishable under sub-section 912). K Subramania Iyer v New Look Rubber P Ltd., (1989) 3 Comp LJ 242 C L B, an order for implementation of Court order for transfer of shares.


144. Jitendra Nath Saha v Shyamal Mandai, (1993) I Camp LJ 76: (1995) 82 Camp Cas 688, also reported as Cetus electronics PLtd, (1995) 82 Camp
CHAPTER -IV
TRANSFER AND TRANSMISSION OF SHARES

(a) Articles of Association Governing Transfer of Shares:
Articles of association is the second document which has, in the case of some companies, to be registered along with the memorandum, Companies which must have Articles of Association are Section 26 states its requirement. Section 27 requires that the articles of an unlimited liability company shall state the number or members with which the company is to be registered and the amount of its share capital, if any. A guaranteed company's articles must Slate the number of members with which it is to be registered. The articles of a private company which is with share capital must state all the three requirements or a private company and, if it is without general administration of the Company schedule to the share capital, the applicable requirement as to number of members):

• Unlimited companies
• Companies limited by guarantee and
• Private companies limited by shares.


*Cas 683 * COMPANY LAW BOARD. The Board added that it can go into facts and order rectification ,'" here the directors did not observe the principles of equity and fair play.
This document contains rules regulations and bye-laws for the companies Act, 1956, contains various model forms of memoranda and articles. The Schedule is divided into several Tables. Each table serves as a model for one kind or company. A company Limited by shares may either frame its own set of articles or may adopt all or any of the regulation contained in Table-A {S. 28(1)}

Section - 24 says that for companies other than those limited by shares, the form of articles shall be such that one of the forms as in the Tables C, D or E). But if it does not register any articles, Table-A applies. If it does have some regulations, for the rest, as far as applicable, Table-A applies, in so far as its regulators are not exclusive (S. 28(2]]. Other companies may adopt Table C, D or E (S. 40). The chief advantage of adopting the appropriate table is that its provisos are legal beyond all doubt.145

Form and signature of Article :: S – 30 ::
If articles are proposed to be registered they must be printed. They should be divided into paragraphs, each consisting generally of one regulation and numbered consecutively. Each subscriber of the memorandum has to sign the document in the presence of at least one attesting witness, both of them adding their addresses and occupations.

145. Lock v Queensland investment and Land Mortgage Co, [1986] Ch 397.
Contents of articles
Articles of association may prescribe such regulations for the company as the subscribers to the memorandum deem expedient. The act gives the subscribers a free hand. Any stipulations as to the relations between the company and its members, and between inter-se may be inserted in the articles. But everything stated therein is subject to the Companies Act. The document must not conflict with the provisions of the Act.146 .
Any clause which is contrary to the provisions of the Act or of any other law for the time being in force, is simply inoperative and void,147 where the provisions of a company’s articles had to give way because they were in conflict with the income and Corporation Taxes Act, 1970 {English}. An article prohibiting members from proceeding against the company would be contrary to public policy and, therefore, void. 148
Section-439 of the Companies Act, for example, confers the light on a shareholder to petition for winding up or the company in certain circumstances. This right cannot be excluded or limited by the articles149.


146. S. 9 gives overriding effect t9 the Act.

147. Nob1e v Laygate Investments Ltd. (l978] 2 Air R 1067.

148. St, Johnson Football Club Ltd v. Scottish Football Assn Ltd.(1965) Scottish Lt 171 OH.

149. peveril Gold Mines Ltd, Re, [1898] J Ch 122.
Similarly, the articles cannot sanction something which is forbidden by the Act. Section 205, for example, declares that no dividend shall be paid by a company except out of profits. The force or this section cannot be undone by any provision in the articles of association.

Articles in relation to memorandum
Articles have always been held to be subordinate to the memorandum. If, therefore, the memorandum and articles are Inconsistent, the articles must give way. In other words Articles must not contain anything the effect of which is to alter a condition contained in the memorandum or which is contrary to its provisions.150 This is so because the object of the memorandum is to state the purposes for which the company has been established, while the articles provide the manner in which the company is proceedings disposed off.151 This to be carried on and its constitutes the principal difference between the two documents.

In the words of Lord CAIRNS, the difference is this:
The memorandum is, as it were, the area beyond which the action of the company cannot go inside that area the shareholders may make such resolutions for their own governance as they think fit. 152

150. Baglan Gall Colliery Co, Re, [1870] 5 Ch App 346.

151. Bryon v Metropolitan Omnibus Co. (1885) 27 LJ Ch 685 at 687.

152. Ashbury Rly Co v Riche, [1874-80] All ER Rep Ext 2219: (1875) LR 7 HL 653, 671.
Binding force of Memorandum and Articles (S. 36):

Section 36 declares: Subject to the provisions of this act, the memorandum articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on it on their part to 'observe all the provisions of the memorandum and 'of the articles (Knowledge of the documents being necessary for this purpose, Section - 39 entities members to get-copies of the memorandum, articles and special resolutions on payment of fee of Rs. 1. The company is bound to comply with the request within 7 days or else there is a running penalty for the default.

In reference to the corresponding provision in the English Act Gower observes: “The exact effect of what is now section 20(1) of the Companies Act has long been one of the most baffling questions in company law.153

The section aims to impart contractual force to the memorandum and articles. It is only to the exact limits of that effect and the person it is intended to cover that are some what uncertain. The law may be stated in terms of the following propositions:




153. The Contractual Effects of articles of association, 21 Mod LR 401. For a view of this baffling problem, [1957] Camb LJ 194: [1958] Camb LJ 93; (1972) 35 Mod LR 362.
1. Binding on members in their relation to the company:
In the first place, the members are bound to the company by the provision of the articles "just as much as if they had all put their seals to them. 754, and had thus contracted to conform to them". In the words of Lord HERSCHELL: “It is quite true that the articles constitute a contract between each member and the company.” 155

In Borland's Trustee v. Steel Brothers & Co Ltd: 156 The articles of association of the defendant company contained clauses to the effect that on the bankruptcy of a member, his shares would be sold to a person and at a price fixed by the directors. For example: B, a shareholder, was adjudicated bankrupt. His trustee in bankruptcy claimed that he was not bound by these provisions and should be at liberty to sell the shares at their true value. But it was held that "contracts contained in the articles of association are one of the original incidents of the shares. Shares having been purchases on those terms and conditions, it is impossible to say that those terms and conditions are not to be observed"157

2. Binding on company in its elation to members:
Secondly, just as members are bound to the company, the company is bound to the members to observe and follow the articles, "Each member is entitled to say that there shall be no breach of the articles and that he is entitled to an injunction to prevent the breach. 158
155. Welton v Sffery, [1897] AC 299, 315: [1895-9J ~11 ER Rep 567. 156. [1901] 1 Ch 279.
157. New London v Brazilian Bank v Brockelbank, (1882) 21ChD 302,308. 158. BYRNE J in Oeveril Gold MinesLtd, Re, [1898]1Ch 122
This is clear from the section itself which says that "The memorandum and articles shall bind the company".

In Wood v Odessa Waterworks Co159: The articles of the waterworks Company provided that 'the directors may, with the sanction of the company at general meeting, declare a dividend to be paid to the members'. Instead of paying the dividend in cash to the shareholders a resolution was passed to them debenture bonds. In an action by a member to restrain the directors from acting on the resolution, STIRLING J held: "The question is whether that which is proposed to be done in the present case is in accordance with the articles of association of the company. Those articles provide that the directors may, with the sanction of a general meeting, declare a dividend to be paid to shareholders. Prima-facie they have to be paid in cash. The debenture bonds proposed to be issued not a payment in cash."
Accordingly the directors were restrained from acting on the resolution.160

3. But not binding in relation to outsiders:
Thus, the articles bind the members to the company and the company to the members. But neither of them is bound to an outsider to give effect to the articles. “No article can constitute a contract between the company and a third person”.

159 (1889) 42 Ch D 636.
160. Oakbank Oil Co v Crum, (1882) 8 AC 65
For example, in Hrowne v La Trinidad 161
The articles of association of a company contained a clause to the effect that B, should be a director and should not be removable till after 1888. He was, however, removed earlier and had brought an action to restrain the company from excluding him. It was held that there was no contact between R and the company. No outsider can enforce articles against the company even if they purport to give him certain rights.

Who is an Outsider? - Who is an outsider for this purpose?
The expression naturally means a person who is not a member. But even a member may be an outsider. Section 36 rates an obligation binding on the company in its dealings with the ‘members’, but the word 'members' in this section means members in their capacity as members that is, excluding any relationship which does not now from the membership itself.

Eley v Positive Government Security Life Assurance Company is a leading authority162 the articles of a company contained a clause that the plaintiff (Eley) should be the solicitor to the company and should not be removed from his office unless here was misconduct. He was a member also. He acted as a solicitor to the company for some time, but timely the company substituted other solicitors for him.
161 (1887) 37 Ch 0 l.
162. (1876) Ex D 881.
He brought an action against the company for breach of the contract in not employing him as a solicitor on the terms of the articles. His action was dismissed. Even a member cannot enforce the provision of articles for his benefit in some other capacity then that of a member. "The purpose of the memorandum and articles is to define the position of the shareholders, shareholder, not to bind him in his capacity as an individual”163. Thus “a third person who purports to have rights against the company would be precluded from relying on the articles as a basis of his claim and must prove a special contract outside the articles.” 164 But sometimes the articles may create an implied contract between the company and a third person.165 Where, for example, on the footing of a clause in the articles a person is employed to serve the company in some capacity, such as a director, and he accepts the office, the terms of the articles are embodied in the form part of the contract between the company and the director.166

"Articles do not themselves from a contract, but from them one gets the terms upon which the director is serving.167

Following these principles the Lahore High court held in a case before it that-


163. Bisgood v Henderson's Transval Estters, (1908) 1 Ch 743, 759. 164 Du'raiswami v UIL Assurance Co., AIR 1956 Mad 316.
165 Isaac's case, (1892) Ch D 158.
166. Wright J in New British Iron Co, Re, [1898] 1 Ch 324.
Where in pursuance of certain articles acted upon by the company, a member was appointed managing director and acted for eleven years in that capacities the articles constitute an implied contract between the member and the company. If the company removes him from office, he would be entitled to damages for the breach"168

How far the Articles are binding between members:
Lastly, how far do the articles bind one member to another? Unfortunately, on this point the law has yet to take a final shape. The Companies Act does not purport to settle the rights or member inter se. It leaves these to be determined by the articles. Hence articles define the rights and liabilities of members. But whether those rights and liabilities can be enforced by one member against another is the moot point. Lord HERSCHELL said in Welton v Saffery169 that: --It is quite a rule that articles of association constitute a contract between each member and the company, and that there is no contract in terms between individual members of the company: but the articles do not regulate their rights inter-se. Such rights can only been forced by or against a member through the company. "Memorandum and articles did not constitute a contract between the member’s inter-se” although they regulated their rights which could be enforced through the company.

168. Sardar Gulab Singh v Punjab Zamindara Bank Ltd, AIR 1942 Lah 47.
169. [1897] AC 299, 315: [1895-99] All ER Rep 57.

And that they only regulated the rights of the members for the purposes of the company law.170
Thus in case before the Calcutta High Court, a member of a company who had a commercial dispute of private nature with another member could not be compelled to refer the dispute to arbitration in terms of the company’s articles. The Court said: “Articles do not affect or regulate the rights arising out of a commercial contract with which the members have no concern, rights are completely outside the company relationship.171 It follows that the extent to which the articles seek to regulate the rights of shareholders as shareholders; they can be directly enforced b one member against another without joining the company as a party. The case of Rayfields v Hands 172 lends support to this conclusion, the plaintiff was a shareholder in a company. Clause 11 of the Company’s Articles required him to inform the directors of his intention to transfer his shares in the company and which provided that the directors will take the said shares equally between them at a fair value. In accordance with this provision, the plaintiff so notified the directors, who contended that they were not bound to take and pa for the plaintiff’s shares. The articles, the said, could impose no such obligation upon them in their capacity as directors. This argument was brushed aside by the court by treating the directors.
170 Khusiram v Hanutmal, (1948) 53 CWN 505,520.
171 Dale & Plant Ltd, Re, (1889) 61 LT 206\ a secretary working on the terms of articles of association was not allowed to prove a claim of damages for termination of services on account of winding up.

172 [1958] 2 WLR 851: [1960] Ch 1: [1958] 2 All ER 194.
Accordingly, the directors were compelled to take the plaintiff’s shares at a fair value and it was not considered necessary for the plaintiff to succeed in his action, that he should join the company as a part.173

(b) Transfer of Shares and requirements were established under the company law:
“When the Joint Stock companies were established, the main object was that the shares should be capable of being easily transferred”.174 Accordingly, by Section 82 of the Companies Act, it is provided that the shares of a member in a company shall be moveable property capable of being transferred in the manner provided by the articles of the company. The requirements of the articles must be satisfied. Where the articles requires that transfer fee and the share certificates must be deposited in the office, court did not compel that company to register a transfer which did not satisfy the requirements.175 The regulation of the company may impose fetters up on 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, even though he being a man of straw, provided it is a bonafide transaction in the sense that it is an out and out disposal of the property without retaining any interest in the shares.176
173. LCB Gower welcomes the decision in 21 MLR 101. For another critical appreciation Bastin, The Enforcement of a member's Rights. (1977) JBL 17 at 25. 174. Bahia & San Francisco Rly Co, Re, (1868) LR 3 QB 584: 18 ?LT 467.]
175. Chandran v Malabar & Pionbeer Hosiery P Ltd, Re, (1985) 57 Comp Cas Ker; P. V. Chandran v. Malabar & Pioneer Hosiery Mill Ltd, (1990) 69 Comp Cas 164 Ker, followed in Mathrubhumi Ltd \' Vardhaman Publishers Ltd, (1992) 73 Comp Cas 80 Ker.
176. Delvenne v Broadhurst, [1931] 1 Ch 234: 144 LT 342.
A transfer made with the object of escaping liability was held to be valid in Discovers Finance Corporation Ltd. 177
Wherein a holder of partly paid shares, being alarmed at the precarious condition of the company and with a view to escape e liability on the shares, sold his shares, to a purchaser in Germany for nominal price, which he never received. The transfers were duly lodged and passed by the Board of Directors. It was held that, in the absence of any collusion between him and the directors, the transfers were, effective.178

Restrictions on transfer:
It is open to a company to restrict him right of its members to transfer their shares. 179 Articles requiring that on the insolvency of a member his shares would be transferred at a fair value to a nominee of the directors 180 or that on the death of a member, his shares must be offered to the other members, have been held to be valid.181 Articles providing that shares can be transferred to outsiders only if no existing members accept them at face value are called pre-emption clauses,. Such a clause does not authorize the directors to refuse to register a transfer so long as it is made to an existing member only.182

177. Re ([1910] 1 Ch 207.
178 Lindlar's case, [1910] 1 Cll. 312, CA.
179 Luxmi Tea Company Ltd v P K Sarkar, [1989] 3 Comp LJ 285, 288 SC.
180. Borland's trustee v steel Bros. [1 90 1] C h 2 79 .
181. Jarvis Motors (Haroow) Ltd v Carabott, [1964] 1 WLR 1101.
182. Delvenne v Broadhurst, [1931] I Ch234.
Where no existing member accepts the proposal, transfer in favour of an outsider should be allowed.183 Articles may, however, contain a clause that the other members will be bound to take shares so offered. 184 The question is that in what manner the directors shall exercise this power and to what extent the court can interfere in its exercise. Some of the principles were laid own in Smith and Fawcett Ltd, Re.185 In the following circumstances, however, there can be judicial or quasi-judicial in intervention:

1. Mal fide:
Where it is proved that the directors have not exercised their power of refusal in good faith for the benefit of the company. The power of declining a transfer is vested in the Broad of Directors for the purpose of protecting the interests of the company. Hence their refusal must appear to have proceeded out of an honest desire to benefit the company. A malafide refusal to register a transfer will not be sustained. 186

The Central Government at present has to decide whether in exercising their power, the Directors are acting oppressively, capriciously or corruptly, or in some way malafide. 187


183. Ocean Co! Co Ltd v Powell Duffryn Steam Coat Co. [1932] 1 Ch 654
184. Rayfields v Hands, [1960] Ch 1.
185. Harinagar Sugar Mill s v Shy am Sunder Jhunjhunwala, IR 1961 SC 1669: (1961). 31 Comp Cas 387.
186. Gesham Life Assurance Society, Re, [1972] LR 8 Ch App 446, 452: 28 LT ISO.
187. 97
2. Inadequacy of reasons
The practice with the courts was not to ask the Directors to supply reasons for their refusal to pass a transfer. 188 But, if they voluntarily disclosed their reasons, the court had the power to look into them and if they did not seem to be sufficient to justify their decisions, the court might set it aside. 189 Now, by Virtue of the amendment of 1988, it has become compulsory to disclose such reasons. This gives an opportunity to the Central Government at present to examine the relevancy or the reasons and proceed according to the reasons by deciding. Whether they are adequate or inadequate to support the director's decisions.

3. Irrelevant considerations
'"The directors (in refusing a transfer') must have regarded to those considerations and those only, which the articles on their true construction permit them to consider. Refusal based on extraneous considerations will be wrong.190 The directors have to specify the grounds on which they have declined a transfer.
Approval of the transferee means approval of the transferee personally as distinguished from laying down a general rule that no corporate body would be allowed to join the company as a shareholder.191

188. Mathew Michaev Tee kay Rubbers (India) Lt d , (I 9 8 2) Ta x LR 2493 Ker: (1983) 54 Comp Cas 88. 189.
190. Babualal Choukhani v Western India Theatres, (1958) 28 Comp Cas 565: Air 1957 Cal 709.
191. V S Ratnam v Ossar Estates Ltd, [1989] 3 Comp LJ 355, 359 COMPANY LAW BOARD.
Transfers contravening pre emptive clauses:
A company can reject a transfer contravening the provisions of the company's articles, but the company can waive this right and accept a contravening transfer and once it does so, it loses the right to question the validity of the transfer. Hence, a transfer contravening articles is not a nullity.192 A transfer in violation of pre-emptive provision can be set right by subsequent assent of shareholders or by ratification or even by acquiescence. In Hunter v Hunter, shares were mortgaged to a bank. This transaction was viewed as a valid one inspite of the pre emptive provisions. But the bank having gone to the extent or getting its nominee registered as holder of those shares, an order was granted for rectification of the register of members by storing the name of the original shareholder- mortgagor. The bank then transferred the shares to an existing shareholder of the company thus complying with the requirements of the company's articles be transferred to existing members that the shares could only. The original mortgagor's action of the transfer validity failed.

Powers to refuse registration and appeal against refusals:
A company refusing to register a transfer on any ground whatsoever is required by Section 111 (1) to send within two months a notice or the refusal to both the transferor and the transferee or the person claiming transmission.
192. Shortridge v Bosanuet, (1852) 16 Beav 97:51 ER 708), nor void ab-initio (Junder v Hunter, 1936 AC 222 HL, 264.
The company must disclose reasons for such refusal {S.111 (2)}. If it is a public company, the transferor or the transferee can prefer an appeal to the Central Government present against the refusal. The appeal must be lodged within two months of either the notice of refusal or where the company has not given any such notice, within 4 months from the date on which the papers were lodged with the company, as the case maybe. 193 An opportunity must be accorded to the transferee, transferor and the company to make their representations, If the refusal, on a consideration of the whole case, does not seem to be justified, the Central Government at present will issue an order to the company to register the transfer, which must be done within 10 days of the receipt of the order { S. 111(5) }. The nature and scope of the power of the Central Government which were with the Erstwhile Company Law Board and which has now been inherited by the proposed Company Law Tribunal, was explained by the Supreme Court in Harinagar Sugar mills v Shyam Sunder Jhunjhunwala.194

A company having refused to register a transfer, an appeal was preferred before the Central Government. The latter ordered the company to register the transfer but gave no reasons. The company appealed against the Government's order.



193. Narinder Kumar Sehgal v Leader Valves Ltd, (1993) 77 Comp Cas 393 COMPANY LAW BOARD.
194 Al R 1 96 I S C I 6 6 9: [I 9 6 I] 3 J Com p Cas 387 .

It was held that the power of the Central government (now the proposed Company Law Tribunal) is of a judicial nature and must be exercised subject to the limitations of judicial tribunal. "The Central Government has to decide whether in exercising their power the directors are acting oppressively, capriciously, or corruptly, on in some way malafide. The decision has manifestly to stand those objective tests, and has not merely to be founded on the subjective satisfaction of the authority deciding the questions.195 Hence the Central the Government presently and the proposed Tribunal in future has to decide the appeal on the basis of the reasons for refusal as they have been submitted by the company. This was not done in the recent case and, therefore, the matter was referred back.196 The proof of Directors refusal to accept a transfer is exercisable where the transfer is by one member to another from a member to an outside.197

Rectification of register { S. 111(4) } :
If a person's name appears in the register of members, he is presumed to be the shareholder or member, even if, infact, he is not so. Contrarily, if a person's name is absent from the register, apparently he is not a member, although he may have done everything to entitle him to become one.



195. Bafaj Auto Ltd v Firodia, (1970) 2 SCC 550: (1971) 41 Comp Cas I. 100

196. N. P arthsarathy v C ontroller of Capital of Issues, ( I 99 I) 3 S•C C 1 53: Air 1991 S C 1 420.1 0 1

197. Kwality Textiles v Arunchalm chetiar, (1991) I SCR 140 Malaysia. 101
Injustice may, therefore, result if company's register is not maintained according to law. The power to order rectification of the register has, therefore, been conferred on the Central Government at present till the establishment of the proposed Company Law Tribunal. An aggrieved person or any member or the company itself can apply for rectification on any of the following grounds:
• Where a person's name has been entered in the register without sufficient cause, Thus rectification has been ordered on this ground where a person was induced to become a member by misleading prospectus, where allotment was invalid,198 or where a forged transfer had been registered. 199

• Where a person's name being in the register had been without sufficient cause deleted. 200

• Where a person has fulfilled every requirement of law to enable him to become a member, but the company has defaulted or delayed or caused “unnecessary delay" in placing his name in the register.201 (including refusal to register a transfer within the meaning of sub-section (1) and where a person has rightly ceased to be a member but his name has not been removed from the register)

This is obviously, a summary remedy obtained by petition to the Company Law Board202 earlier to 1988 when this power was vested in the court under the now repealed Section 155, the view taken was that

198. Indian States Bank Ltd v Kunwar Sardar Singh• ,AIR 1934 All 855.
199. Society General de Paris & G Gaolladon v Janet Walker, (1886) II AC 20.
200. Navinchndra v Gordhandas, (1967) 1 Comp LJ 82: (1967) 37 Comp Cas 747. 102
201 H. G. Ariff av Suratetee Bara Bazar Co, (1919) 49 IC 288.102 202. Joginder Singh v Basawa Singh, (1985) 58 Comp Cas 843 P & H.
a regular suit for rectification could also be filed and this used to be the only appropriate remedy where complicated questions were involved.203 Although great discretionary powers had been given to the court to decide all questions which it was necessary or expedient to decide in connection with an application for rectification { S. 155(3) }, yet a petition under his section was not viewed with favour in some cases. For example, in Jayshree Shantaram v Rajkamla Kalamandir P. Ltd,204 the Bombay High Court held that: When discovery and inspection are necessary and complicated questions such as forgery and fabricated documents arise, the summary procedure trial under section 155 (now Section 111) should not be allowed.205

On receiving such appeal against refusal or an application for rectification, the then Company Law Board had to hear the parties.206 It may either dismiss the appeal or reject the application, or may, order that the company shall register the transfer or transmission and the company has to comply with the order within 10 days or direct ratification of the register and require the Company to compensate the aggrieved person for any loss sustained by him S.111 (5)}.



203. Balwant Singh v Krishna Bus Service, [1967] Comp LJ 137.

204 AIR 1960 Born 136: (1960) 30 Comp Cas 141.

205. Sadashiva v Gandhi Sewa Samaj, AIR 1958 Born 247: (1958) 28 Comp Cas 137.

206. Malleswara Finance and Investment Co v COMPANY LAW BOARD, (1994) 81 Comp Cas 66: AIR 1994 Mad 341. 103
Earlier, the Board had been empowered to make necessary orders like orders as to costs and incidental and consequential orders regarding payment of dividends or allotment of bonus or rights of shares {S.111(6)}. The Erstwhile Company Law Board had the power of deciding the applicant's title to the shares in question which it is necessary to decide in connection with the application for rectification {S.111(7)}. These provisions are applicable to the rectification of the register of debenture-holders also {Section 111, Sub section (9) provided for penalty for default in complying with the orders of the Board). An appeal against refusal or an application for ratification has to be in the form of a petition in writ and accompanied by such fee as may be prescribed (S. 111 (10)}.

This sub-section does not prescribe any period of limitation. Three year period would, therefore, be available. Petitions under this sub-section would not be crippled by the periods prescribed by sub-sections (2) and (3). Apart from judicial authority, the sub section saves in it clause (b) stating that it would include refusals as under sub-s (1).207



207. City Bank NA v Power Grid Corpn of India, (1995) 17 Corpt LA 25 COMPANY LAW BOARD: (1995) 83 Comp Cas 454.

Procedure of Transfer {S. 108}:
A transfer of shares is completed by registration with the company, or in other words, a transfer is incomplete until registered and the transferor remains legal owner of the shares liable for the unpaid amount, if any.208 Thus where,209 without any fault or unnecessary delay on the part of the company, duly lodged transfers could not be registered before the commencement of winding up, the transferor could not have his name removed from the slot of contributories.210 But where a transfer was omitted by mistake or oversight, rectification was ordered not-withstanding winding Up. 211

The transferee is the proper person to apply for registration of transfer, but the transferor may also apply {S. 110 (1)}. "The transferor is entitled as much as the transferee to enforce registration"(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 he makes no objection to the transfer within two weeks form the receipt of the notice. Section 110 (2) and also sub section (3)).

The following conditions must be fulfilled before a company can lawfully register a transfer.212

208 LIC v escorts Ltd, [1986] 1 SC.C 264 at 327.
209 Indian Specie Bank Ltd, Re, (1915) 17 Born LR 342.
210 Amroati Electric Supply Co v R. S. Chandak, AIR 1954 Nag 293.
211. Sussex Brick Re, {l904] 1 Ch 5.98: [1904-07] All ER Rep co, 673:90 LT 426--104
212. Greene v Greene [1949] ch 333: [1949]'1 all ER 167.

• The instrument of transfer must be executed both by the transferor and the transferee. The instrument must specify the name, address and occupation, if any, of the transferee. It should also comply with the requirements of the company's articles. 213

• The instrument of transfer should be duly stamped. 214

• The instrument should be delivered to the 215 company along with the certificate relating to the shares transferred. 216

• The instrument of transfer should be in the prescribed form and, before it is signed by the transferor, and before any entry is made in it, it should be presented to the prescribed authority (Who should be a person already in the service of the Government. S.108 (1-A) (a))

The prescribed authority will stamp or otherwise endorse on the instrument the date on which it is so presented. It should then be executed by the transferor and completed in all aspects and should be presented to the company for registration. Presentment to the company should be made, in the case of shares quoted on the recognized stock exchange before the company closes the register of members in accordance with the provisions of the Act or within twelve months, whichever is later.

213. P. V. Chandran v Malabar a~d Pioneer Hosiery P Ltd, (1992) 73 Comp Cas 80 Kef.

214. A. S. Manvi v Kritapur Processing and Ginning Factory Ltd, [1989] 3 Comp LJ 217, 220 COMPANY LAVi BOARD.5

215. These requirements are prescribed by s. 108, a proviso to which provides that where the instrument of transfer has been lost, the company may register thetransfer on such terms of indemnity as the boa r d 0 f d ire c tor smaythink fi 1. S. 1 08 (1) Pro viso.

216. Amraoti Electric Supply Co v R. S. Chandak, AIR 1954 Nag 293. 105
In other cases, presentment would be made within two months form the date of presentment to the prescribed authority.217

An instrument of transfer which does not fulfill this requirement shall not be accepted. 218

Transfer contravening: S. 108:
When requirements of Section 108 are complied with, the company registers the transfer. The name of the transferor is struck off the register of members and the name of the transferee is substituted. It has been held by the Calcutta High Court that the requirements of section 108 are directory and not mandatory. 219

The court also followed a decision of the Allahabad High court 220 where it was pointed out that section 108 does not impose any penalty for, nor indicates any consequences of, its non - observance. It is also not exhaustive of all the modes of transfer. It covers only two. It has no application to other modes of transfer. Hence a company can register a transfer without the original scripts being produced. All that it can require protecting itself is an indemnity against untoward consequences. The court accordingly ordered the company to regulate a transfer when the transferee was not able to produce the original scripts.


217. Vishnu Dayal Jhunjhunwala v Union of India, (1989) 66 Comp Cas 684, 693 All.
218. Doypack Systems P Ltd v Union of India, [1988] 2 SCC 299.
219. Jatia Cotton Mills Ltd v Ram Prasad Bajoria, (1975) 45 Comp Cas 686 Cal.-106
220. Maheshwari Khetan Sugar mills v Ishwari Khetan Sugar Mills. (1963) 33 Camp Cas 1142 All.
But the decision of the Allahabad High Court which the Calcutta High Court purported to follow had been reversed by the Supreme Court in Mannalal Khetan v Kedar Nath Khetan,221 RAY CJ laid emphasis upon the words “shall not register" as used in section 108, which leave no doubt that the provision is mandatory: “The mandatory character is strengthened by the negative form of the language. The prohibition against transfer without complying with the provisions of the Act is emphasized by the negative language. Negative language is worded to emphasize the insistence on compliance with the work agreed to be transferred in blocks between members and the company registered the transfer on the basis of the partition deed itself without any transfer form having been executed. The Supreme Court accordingly ordered that this transfer should not have been registered. 222

Certification of Transfer {S. 112]
Ordinarily, the transferor hands over the certificate of shares to the transferee who then lodges it with the company for registration. But where the shares transferred are less than the number of shares included in one certificate, or where they are transferred to different persons, the transferor has to lodge the share certificate with the company. The company then gives him a certificate stating that the shares under transfer have been lodged with the company.
221. (1977) 2 SACC 424: (1977) 47 camp Cas 185.
222 .. Shanta Genevieve Pommeret v Sakal Papers P Ltd, (1990) 69 Camp Cas 65 Born.
This is called “certification of transfer". In effect, it is a representation to any person acting on the faith of the certification that the company has received such documents as go to show a prima facie title of the transferor, but not that the transferor has any title to the shares {S.112 (1)}. This was held in Bishop v Balkis Consolidated Co. 223

Forgery in transfer
Sometimes a forged instrument of transfer may be presented for registration. “The first thing that a company should, therefore, do when a transfer is tendered, is to inquire into its validity.224 It has, therefore, become usual, when a transfer is brought not to register it at once, but as a precaution, to write to the registered address of the share holder, and in form him that such a transfer has been lodged, and that if no objection is made before the day specified, it would be registered.225 and the consequences will be:

Firstly, a forged transfer is a nullity and therefore, the original owner of the shares continues to be the shareholder and the company is bound to restore his name to the register of members.226
Secondly, if the company has issued a share certificate to the transferee and has sold the shares to an innocent purchaser, the company is liable to compensate such a purchaser if it refused to register him as a shareholder.227
223 (1890) 25 QBD 512 CA.
224. Bahia & San Francisco Rly Co, Re,' (1868) LR 3 QB 584 18 LT 467.
225. Societe Generale de Paris v NorthBr Australasian Co Ltd, 7 CBNS 411.
226 Baton v Staffordshire Rly, (1888) 38 Ch D 458:58 LT 549.
227 Balkis Consolidated Co Ltd v Fredrick Tomkinson, [1893] AC 396:69 LT 598.
Thirdly, if the company has been put to loss by reason of the forged transfer, it may recover indemnity from the person who logged it.228

Specific enforcement of agreement to sell shares:
An agreement for dealing in shares is specifically enforceable. A company, having contracted to buy a controlling block of shares, applied for specific enforcement and it was held to be not definite for the other party to say that the company had not yet complied with the requirements of Section 372, to enable it to deal in shares of other companies. 229

Mortgage or pledge of shares:
A share in a company is moveable property. It can, therefore, be delivered as a security for raising a loan. Where a share certificate is delivered to the pledged, it will operate as a pledge. The pledge can only retain possession till his dues are paid. Where not merely possession of share certificates is delivered, but some right to interest is created in favour of the lender, such as, for example, handing over blank transfer forms under the signature of the transferor, it operates as a mortgage.
The mortgagee gets a special interest, for he can have himself registered as a shareholder and the same will be effective against the transferor and his representatives.


228. She Hield Corparation v Barclay, [1905] AC 392 : 93 LT 83.
229. Peat v Clayton, [1906] 1 C h 659: 94 LT 465 .
In a case of this kind before the Patna High Court 230 observed that, where the original transferee of blank forms further delivers them in blank to another person, the latter will get the rights from the transferor to transfer the same will not get any better rights. The transfer being in blank, he cannot say that they had received it in good faith. A simple deliver of share certificates un-accompanied by any transfer forms operates only as a simple mortgage, what is called in English law as an equitable mortgage.

Grounds of refusal under Securities Contracts Regulation Act:
Section 22-A of the Act permits a company to refuse to register a transfer on any of the following four grounds:

(a) Bad delivery of transfer document –
A company can refuse to accept a transfer where the instrument of transfer is not properly prepared, not duly stamped or signed, the certificate of shares under transfer has not been delivered to some other applicable formal or legal requirement has not been complied with.
(b) Contravention of Law –
The transfer in question is in contravention of some law, e.g,. that the requirements of permission under the Foreign Exchange Regulation Act, 1974 have not been complied with.231
230 Arjun Prasad v Central Bank of India, AUIR 1956 Pat 32.
231. Bharat Peoleum Corpn Ltd v stock Holding Corpn of India Ltd, (1995) 82 Camp Cas 539 COMPANY LAW BOARD.
(c) Prejudicial to company or public interest –
Where the transfer is of a nature that it is likely to change the composition of the Board of Directors in such a way as would be prejudicial to the interest of the company or public interest. 232

(d) Stay order –
Where the transfer has been stayed by a court order or by any other authority or tribunal.
Where the refusal is on the basis of the last three grounds, namely, Contravention of 1aw, Likelihood of prejudicial changes or stay order, the company should state its reasons and refer the matter to the Central Government till the Company Law Tribunal is functional and inform the parties accordingly. The decisions of the proposed Company Law Tribunal, unless appealed against, prevailed. For example, if the rejection was on the ground of likelihood of a prejudicial change, the Board of Directors should state their reasons for so thinking and the proposed Company Law Tribunal would then decide whether the reasoning of the Company was sound or not. 233

(c) Transmission of shares- On the death of a member his executor or the person who is entitled under the law to succeed to his estate gets the right to have the shares transmitted to his name in the company's register of members.

232. Alaknanda Mfg & Finance Co P Ltd v COMPANY LA W BOARD, (1995) 83 Camp Cas 514 Born.
233. Gammon India Ltd v Hongkong Bank (Agency) P Ltd, (1982) 74 Comp Cas 123. (1992) 1 Camp LH 279 COMPANY LAW BOARD.
Transmission is different from transfer. Section 108 which lays down the formalities of transfer specially provides that nothing in the section shall prejudice the power of the company to register as shareholder any person to whom the right to any shares has been transmitted by operation of law {S. 108(1)}. It follows that an instrument of transfer is not necessary. No formalities like transfer deed, execution, attestation and stamp duty are needed Legal heirs as shown by the succession certificate are aggrieved persons entitled to seek relief against refusal.234 provisions relating to formalities of transmission are generally found in the Company's articles. Clauses 25 to 28 of Table-A contain such provisions. If the Company unduly refuses to accept a transmission, the same remedies are available as in the case of a transfer, namely, an appeal to the Central Government at present. Thus, for example, in a case before the Supreme Court, the State of Orissa became entitled by devolution to the shares of a Maharaja, but the Company refused to register the state's representative as a shareholder. BACHAWAT.J held that the State became entitled to the share by operation of law. It was, therefore, a case of transmission and company was bound to accept the same. 235

The executor or the successor also has the right to transfer the shares. Section 109 specially enables the legal representative to affect a transfer even if he is not a member himself.
234. Kamlabai v Vithal Pd Co Ltd, (1993) 77 camp Cas 231 Kar.
235. Indian Chemical Products Ltd v State of Orissa, AIR 1967 SC 253: (1966) 36 Comp. Cas 592.
Thus he has an option. But he must decide within a reasonable time. The Directors may require him by notice to make up his mind within 90 days and if the notice is not complied with, payment due on the shares may be withheld, until the notice is complied with { Clause 20 (proviso), Table A, Schedule-1 }.

In the above three cases, a person does not become a member unless his name is entered in the company's register of members (Section 116 provides penalty for impersonation of shareholder).














CHAPTER -V
JUDICIAL TRENDS ON TRANSFER AND TRANSMISSION WITH REFERENCE TO RECONSTRUCTION AND AMALGAMATION

Reconstruction and amalgamation {S. 394}
Reconstruction - "There is 'reconstruction' of a Company when that Company's business and undertaking are transferred to another Company formed for that purpose, so that as regards to the new Company, substantially the same busies is carried on and the same person s are entrusted with its affairs as in the case of the old company 236

A reconstruction may become necessary for several purposes.
A court may not, for example, sanction a radical change of objects. New objects can then be adopted only by the process of reconstruction. 237 A reconstruction may also become necessary to cause material alterations of the rights of a class of share holders or creditors. 238

Amalgamation - "Amalgamation occurs when two or more companies are joined to form a third entity or one is absorbed into or blended with another.239 The effect is to wipe out the merging Companies and to fuse them all into the new recreated Company.



236. J.A.Hornby~ AN INTRODUCTION TO COMPANY LAW, 174 (1957)
237. North of Eng1and Protection & Indemnity Assn,re ,(1 929) 45 TLR 296.
238. Bank of India v Ahmedabad Mfg & Calico Printing Co, (1972) 42 Comp Cas 211 Born.
239. Somayajula v Hoep Prudhornme & Co Ltd [19631 2. Coill PLJ61.
The new Company comes into existence having all the property, rights and power as and subject to all the duties and obligations of both the constitution companies. Explaining the object of an amalgamation and the scheme of the statutory provisions, the Madras High Court observed in W.A.Beardsetl & Co.P.Ltd,Re 240: The word ‘Amalgamation' has not been defined in the Act. The ordinary dictionary meaning of the expression is 'combination'. Judging from the context and form of the marginal note of Section 394 which appears in Chapter V relating to arbitration, compromises, arrangements and reconstructions, the primary object of amalgamation of one Company with another is to facilitate reconstruction of the amalgamating Companies and this is a matter which is entirely left to the body of shareholders, (and) essentially an affair relating to the internal administration of the transferor Company. The decision of the body of the shareholders ought not to be interfered with.

Power of amalgamation:
There should be authorization and specific provision in the company's memorandum to amalgamate. If it is not there it should be acquired by altering the memorandum.241 It is not necessary that the Company adopting a scheme should be in financial difficulties or that it should not be an affluent Company.

240. (1968) 38 comp Cas 197,204 Mad
241. Hari Krishna Lohia v Hoolungooree Tea Co. (1970) 40 Comp Cas 458,463 Cal.-
The expression "any company liable to be owned up under this Act" does not mean a Company which is insolvent, but any Company registered under the act, and every such Company being subject to the winding up provisions of Act.242

Forms of reconstruction and amalgamation:
A reconstruction and amalgamation may take any of the following forms:
• By sale of shares.243

• By sale of undertaking.

• By sale and dissolution (This is considered in connection with voluntary winding up).

• By a scheme of arrangement (This has already been considered).

Sale of shares is the simplest process of amalgamation or takeover. Shares are sold and registered in the name of the purchasing Company. The selling share holders received either compensation or shares in the acquiring Company. If Nine-Tenths of the holders of a class have approved the terms, s hares of the rest can be acquired under Section 395.



242. Khandelwal Udyog Ltd and ACME Mfg Co Ltd, Re, (1977) 47 Comp Cas 503 Born.

243. Hindu.stan Lever Ltd Re Re; Tata Oil Mills Co Ltd Re (1994) 81 Comp Cas 754 Bom.
The second method involves a sale of the whole of the undertaking of the transferor .company as a going concern. Section 394 applies to every scheme which involves transfer of the whole or any part to the undertaking or liability of a Company to another Company (S. 394(1) (a) & (b).

Section 391, therefore, applies and an application may be made to the Court by any person entitled to move the Court under that section. The Court may sanction the scheme and make necessary order. 244 Such an order may make provision for any matters (S. 394(1) (a) & (b), Grierson Oldham & Adams Ltd, Re, 245

• Transfer of the undertaking, property, liabilities of one Company to the other;

• The allotment or appropriation by the transferee Company of any shares, debentures, or other like interests which has to be allotted or appropriated under the contract.

• The continuation by or against the transferee Company of any legal proceeding pending by or against the transferor Company.

• The dissolution, without winding up, of the transferor Company.

• The provision to be made for any person who dissents from the scheme.



244. Piccadilly Radio pIc, Re, 1989 BCLC 683 Ch D.

245. [1967] 1 WLR 385: [1968] Ch 17: [1967] 1 All ER 192.
• Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out (S-394(1).

• Every Company in relation to which the order is made has to file within thirty days a copy of the order with the registrar for registration (S. 394(3)). The sub section imposes penalty for default).


Official Reports -
An amendment introduced in 1965 provides that a compromise or arrangement in connection with the amalgamation of a Company in winding up with any other Company or Companies shall not be sanctioned unless the Court has received a report from the Central Government or registrar that the affairs of the Company have not been conducted in a manner prejudicial to the interest of the members or to public interest. Similarly, an order for the dissolution of the transferor Company shall not be made unless the official liquidator makes a report that its affairs have not been conducted in a manner prejudicial to the interest of members or to public interest (S, 395(1)) assed by the Companies Amendment Act, 1965). The Gujarat High Court found in a case 246 that the only purpose for which the transferor Company was created was to facilitate the transfer of a building to the transferee Company without attracting the capital gains tax and the dissolution of the transferor Company was sought without winding up.

246. Wood Polymer P Ltd, Re, (1993) 78 Comp Cas 597.
The Court refused to sanction the scheme. In another case where a scimitar report was submitted by the official liquidator, the court sanctioned the scheme but issued directions which formed part of the scheme which were
• That instruments of conveyance with payment of stamp duty must be executed,
• That un-assignable right should not be available to the assignee company,
• That the sanction would not excuse payment of overdue taxes and
• That the Directors would not be absolved from their liability for violations of law, if any 247

The power of the Court is discretionary and the Court has been expressly authorized to pay full attention to public interest. The expression "public interest", the court said, "takes its color from the context in which it is used and will depend upon the object which the legislation wants to promote or the mischief which it seeks to suppress."248

The philosophy behind taxes being to promote public interests, it can not be said that a scheme which is designed to avoid taxes is not prejudicial to public interest.249


247. Kirti Plastics P Ltd, Re, (1993) 78 Comp Cas 138 MP.

248. State of Bihar v Maharajadhiraja, (1952)SCR 889, 994: AIR 1952 SC 252.

249. Shankar Narayana Hotels P Ltd v Official Liquidator, (1992) 74 Comp Cas 290 Kar.
The report of the official liquidator is necessary only when the Court has to pass an order of dissolution. Amalgamation does not necessarily involve dissolution of the transferor Company.250 In other cases a report of the Company Law Board or Registrar is sufficient. 251

Notice to Central Government {S. 394}
The Court has also to give notice of every application to the Central Government and has to take into account the representation, if any, made by the Government before sanctioning the scheme. 252
The extent to which the Central Government can intervene has been explained by the Calcutta High court in Associated Hotels of India Ltd. Re 253: A merger of three hotels was approved by overwhelming majority of creditors and shareholders of all the Companies and, it was accordingly sanctioned by the Court. But the Central Government raised the objection that the mode of valuation of assets was not fair and prayed for appointment of independent valuers. The Court held that it will not interfere in the valuation made by experts unless there has been a mistake which defeats justice. For example, if the Court finds that the appreciated value of the landed property of one of the' companies or loans made by it to its Directors have not been taken into account, it will be reluctant to grant its sanction.
250. Mathew Philip v. Malayalam Plantation (India) Ltd, (1994) 81 Comp Cas 38 Ker FB.
251 Marybong and Kyel Tea Estate. Ltd, Re, (1977) 47 Comp Cas 802 (C al)
252. S. 394-A. jindal India Ltd., Re, (1993) 76 Comp Cas 443 Delhi.
253 Mafatlal Industries Ltd Re (1995) 17 •corp LA 249 Guj.
In Cotton Agents v Vijay Laxmi Trading Co, 254 the court held that the Central Government cannot interfere in the matter of valuation unless there is allegation of fraud or undue influence or that the books of account are unreliable or that different or discriminatory methods of valuation have been adopted.

In another case255, the Central Government raised the objection that the shareholders of the transferor Company were to get two shares in the transferee Company for every five shares and that this was not reasonable and fair to the shareholders of the transferor Company. The Court overruled this objection. Two respectable firms of chartered accountants had stated that they had examined the accounts, annual reports; working and financial position of the two Companies and also considered the net intrinsic value and came to the conclusion that the ratio of 5 : 2 was fair and reasonable. The Court drew further support from the fact that the scheme of amalgamation had been widely advertised and unanimously approved by the meetings of the shareholders of the two Companies and no objection at' an had been raised by any of the shareholder or
creditors.256




254. Shahibag Entrepreneurs P Ltd, Re, (1976) 46 Comp Cas 642

255. M.G. Investment & Industrial Co Ltd v New Shor'rock Spinning & Mfg Co Ltd, (!912) 42 Camp Cas 145.

256. Khandelwal Udyog Ltd & ACME Mfg Co Ltd., Re, (1977) 47 Camp Cas 503 Born.

For instance:
Where at a meeting called by the Court a scheme of amalgamation was approved by 648 shareholders holding 84,753 shares as against the shareholder’s holding only 48 shares and the dissenting shareholders did not at all appear at the hearing to present their objections, if any, the Court accordingly observed 257: If the opposition was legitimate and founded on some material ground, the Court would have examined the scheme critically. After examining the scheme from the point of the petitioner, that is, the transferee Company, it must be said, without the least fear of being contradicted, that the scheme of amalgamation, by which a huge sum of Rs.14.70 crores with its accumulated interest would be available to the petitioner both for its expansion as well as for its liquid finances, would undoubtedly be a scheme which is such as demand of business applying his commercial judgment, from his own narrow personal angle would approve.
In another case 258 arising out of the same facts, the Bombay High Court restated the distinction between "Compromise" and "Arrangement". The Court came to the conclusion that if a scheme of amalgamation involves variation of members' rights that amounts to reorganization of capital making the sanction of the Court necessary and where shares of a different nature such as bonds convertible into
shares are opposed to be issued that is definitely reorganization.

257. Ahmedabad Mfg & Calico Printing Co v Bank of India, (1972) 42 Camp Cas 211 Bom.
258. Bak of India v Ahmedabad Mfg & Calico Printing Co, (1972) 42 Camp Cas 211 Bom.
Where a scheme of amalgamation was approved by all the members of the transferee Company but no formal meeting was held, the Court said that all that was necessary was that the sanction should be put off till a meeting was held and the act reported to the court.259

Reduction of Capital in Amalgamation-
Where a scheme of amalgamation involves the merger of two Companies in a new Company, and the merging Companies are to be dissolved without winding up, the fact that the merging Companies are to be dissolved without winding up and the fact that the preference shareholders of the merging Companies are to be paid back under the scheme does not amount to reduction of capital. This had been so held by the Madras High Court in T Durai rajan v Water Fall Estates Ltd.260 The Court pointed out "that the scheme of Sections 101 and 102 of the Companies Act clearly envisages reduction capital In the context of and existing or continuing Company, whereas In the present case, both Companies had to go out of existence. The Court further pointed out that the object of requiring sanction of the Court for reduction of capital is to safeguard the interest of the creditors of the Company. In the present case the new Company had undertaken to pay all the debts of the merging Companies and, therefore, the procedure for reduction of capital as laid down in sections 100, 101 and 102 was not applicable.
259. Union Services P Ltd, Re, (1975) 45 Camp Cas 146 Mad.
260. (1972) 42 Camp Cas 563 Mad.
Change of name-
There is no automatic change of name of the Company involved in an amalgamation. Proceedings for change of name would have to be followed. A term in the scheme for providing for change of name on the sanction of amalgamation was ordered to be deleted.261

Take over and acquisition of Minority Interest {S. 395)
If any of the above schemes involves acquisition of the shares of one Company by another Company, it may do so by making an offer to the transferor Company, so that the scheme or contract may be placed before the shareholders of the Company (S. 395 [1]). The shareholders have the option to approve the offer within four months.

Approval must be accorded by at least nine tenths in values of the shares whose transfer is involved. This number must be exclusive of any share already held by the transferee Company or by its nominees or by its subsidiary.

Once the approval by nine-tenth majority is accorded, the transferee Company gets the right to acquire the shares of the dissenting shareholders, if any.

Within two months, after the expiry to the above four months, the transferee Company should give a notice to such shareholders that it desires to acquire their shares.

Within one month from the date of the notice, the dissenting shareholders may apply to each other.
But if no application is made to the Court, the transferee Company gets the final right and also becomes bound to acquire those shares on the term of which the shares of one shareholder are to be transferred.

261. Gavind Rubber Ltd, Re, (1995) 83 Camp Cas 556.
Take-over offer to be from single company:
It has been held by the Privy Council in Blue Metal Industries Ltd v Dilley 262 that the power of acquisition can be exercised only when the offer of take-over is made by a single Company Lord MORRIS said:
The significance of the 90% figure is, on this view, that once a Company has become so nearly a total power of parent of another Company as a shareholding of 90% would represent, it should not be prevented from converting the other Company into a wholly owned subsidiary by so small a dissenting minority as 10% or less, but should be entitled to acquire the holding of that minority. Their Lordships considered important to bear in mind that the statutory procedure is one that involves the acquisition by a private interest of the property of another an exceptional interference with the rights of individual ownership. It leads almost inevitably to the consequence that the powers of the section can only be invoked by a single Company, for the objective is to allow a 90% owned subsidiary to be converted into a 100% subsidiary, which pre-supposes a single parent.

Adequacy of information :
Inadequacy of in formation may be another ground for the Court to with hold its sanction. In one of the cases, however, the Court refused to he1p a minority shareholder although it believed within that the information given to him was too merge.263
262. [1970] AC 827: [1969] 3 All ER 437. 263. Evertite Lacknuts, Re, [1945] Ch 220.
Now the Central Government has the power to prescribe the information that ought to be given in an offer of take over (S. 395 (4-A), which has been added by the amendment act, 1965).

Offering semesters to those whose shares are to be acquired:
Where the class of shares which are to be transferred are already held by the transferee Company to a value greater than One-Tenth of the aggregate of the values of all the shares in the Company of such class, the transferee Company will not get the right to acquire the shares of the dissenting shareho1ders unless the same terms are offered to all holders of the shares of the class and the holders who approve the scheme should be Nine-Tenths in value of the shares to be transferred (excluding those already held) and should also be Three-Fourths in number of the holders of those shares.
Notice of Acqusition:
When, in pursuance of any scheme of contract of this kind, share or shares of a class in a company, have been transferred to another company or its nominee and those shares together with other shares or any other shares of the same class already held of the transferee company or its nominee company or its subsidiary to the extent of Nine-Tenths in value of the shares or the shares of that class the transferee Company is required to give a notice of the fact to the holders of the remaining shares who have not assented the scheme.
The notice must be given within one month from the date of the transfer, except when a notice has been given in pursuance of the scheme. Any such holder may, within three months from the giving of the notice to him, require the transferee Company to acquire the shares in question. The transferee Company then becomes entitled as well as bound to acquire those shares on the same terms on which the shares of approving share holders were transferred or on such terms as the Court may, on the application of the shareholder or transferee Company, think fit to order.

Amalgamation in National Interest (S. 396]
Where the Central Government is satisfied that an amalgamation of two or more Companies is essential in the public interest, then the Government may, by order notified in the Official Gazette provide for the amalgamation of those companies into a single Company. The amalgamated company shall have such constitution, property, powers, rights, interests, authorities and privileges and shall be with such liabilities, duties and obligations as maybe specified in the Government's order. The order may also contain consequential, incidental and supplementary provisions. Every member or creditors of the Companies before the amalgamation shall have, as nearly as may be, the same rights and interest in the amalgamated Company as he earlier had in the Company of which he was originally the shareholder, and then he shall be entitled for compensation.
The Government may prescribe some authority for the assessment of compensation and it will be paid by the Company resulting from the amalgamation. Before making any order of amalgamation, the Central Government is required to send a copy of the proposed order in draft to each of the Companies concerned. This is necessary to enable such Companies to file their objections and suggestions. The period for filing objections shall be fixed by the Government, but should not be less than two months. The Government may modify the draft order in the light of any suggestions so received.

Copies of each such order have to be laid before both Houses of Parliament at the earliest convenience.

Preservation of Books and Papers of amalgamated Company {Sc 396-A}
Where a company has been amalgamated with another company under any of the above provisions of the act, or whose shares have been acquired by another Company, the books and papers of such a Company shall not be disposed off without the prior permission of the Central Government. Before granting such permission, the Government may appoint a person to examine the books and papers for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation of or the management of the affairs of the Company.
Summary:
Finally, we can summarize that the Shareholders are the owners of a company. The issued, subscribed & paid-up capital of any company comprises of the number of shares issued, subscribe & paid-up multiplied by the nominal value of each share, respectively. These shares are held by shareholders.

Shares can be held either in the name of one or more individuals or in the name of bodies corporate, trusts, H.U.F. (through Karta) etc. In case the shares are held in joint names, there can be maximum 3 joint holders. In such a case, share certificate is issued in the name of the first shareholder i.e. the shareholder whose name appears first. The first shareholder is entitled to all the rights i.e. voting, bonus, rights entitlement, dividend etc. Detaits of shareholders are recorded in the Register of Members maintained by the company. Each company is required to maintain a Register of Members and a Register of Share Transfer.
All members are shareholders but all shareholders may not be members of the company. Members are those shareholders whose name appears in the register of members maintained by the company. A person who acquires shares, either through a member or through a broker, becomes the shareholder of a company but unless these shares are transferred in his name and his name is appeared in the register of members, he does not become a member.
Transfer of shares:
Members can sell their shares to any person, either directly or indirectly. This can be done through a duty executed share transfer deed.
Pursuant to the provisions of Section 108 of the Companies Act, 1956, a company shall not register any share certificates received for transfer unless a proper instrument of transfer duly stamped is executed. There is a common share transfer form prescribed { Form No:. 7B as per rule 5A of The Companies (Central Governments) General Rules & Forms, 1956 } for transfer of securities. This form has to be duly filled in by transferor (the person who intends to sell the shares) and transferee (the person who intends to purchase the shares and get the shares transferred in his name)

The shares of the listed companies are traded on stock exchanges on which they are listed. The transactions are done through brokers /sub-brokers, who buy/sell the securities on behalf of their clients. On receipt of the share certificates (along with the share transfer form), the purchaser has an option either to resell the securities through a broker in the stock market or to send the same to the company for registration of transfer. If he opts to send the share certificates to the company for registration of transfer, he has to sign the share transfer form and fill in such other particulars as prescribed under the form.
Though the trend of the market is towards dematerialization i.e. electronic transfer of securities, there is still a long way to go. To end physical transfer of securities, all companies must go in for compulsory dematerialization of its securities.

Contents 91 Share Transfer Form:
The prescribed share transfer form has to be attached with the share certificates of transfer of securities. The contents of the said form are as follows-
• Name of the Company

• Name of the Stock Exchange dealt with, if any Number of Shares (in figures & in words)

• Description of Shares
• Consideration (in figures & in words)
• Distinctive Nos. & * Certificate Nos.
• Folio Number of the Registered Member
• Name of the seller (i.e. transferor )
• Signature of the transferor
• Name & Address of the Witness
• Name of the Transferee 1
• Signature of the Transferee
• Occupation, address, father's/husbands name of transferee
• Registered folio of transferee if any,
• Date of execution, Place of execution,
• Value of stamps affixed & Name of the Broker
Validity of Share Transfer Form:
Before executing the share transfer forms, it is necessary that the form is to be presented before the Registrar of Companies ( ROC). The ROC puts his signature and date (normally done through rubber stamps) on the form. This is done at the top of the share transfer form. The date so mentioned is called as the date of presentation. The validity of the form depends upon this date. The shares have to be presented to the company for transfer within the expiry of one year from the date of presentation.

In case the date expires, the transferee should approach the ROC to renew the share transfer form (without delivering the share certificates to the ROC) by paying a nominal fee of Rs.50/-. After renewal, the transferee can approach the company for registration of the transfer of shares.

In case of a listed company, care has to be taken while purchasing the shares. Only those shares are traded on the stock market which are valid up to one year from the date of presentation or the date of book closure, whichever is earlier. The purchaser can not sell such shares in the market after the book closure date. In such cases, he has to approach the company for transfer of shares.


Stamp Duty & its cancellation:
The share transfer stamp has to be affixed on the share transfer form depending upon the consideration at which the shares were purchased. Presently, the stamp duty is O.5 % of the total consideration.

It should also be noted that once the share transfer stamp is affixed on the share transfer form, the same should be cancelled by putting two cross lines on the stamps so affixed or to write the word 'cancelled' on the stamp fees.

In case where there are more stamps to be affixed and there is no space to affix stamps, then a separate page has to be attached on which stamps should be affixed & then cancelled. The page so affixed should be attached to the share transfer form.

Power of Attorney:
If, the transferee intends to transfer the shares by giving power of attorney to the authorized person, then the power of attorney should be attached along with the share transfer deed & share confiscates.



Additional Documents in case transferee is a limited company:

Along with the share transfer form & share certificates, the following additional documents are required to be submitted to the company in case the transferee is a limited company :-
• Memorandum & Articles of Association
• Board Resolution for authorizing any person to sign on behalf of the company
• Power of Attorney, if applicable.
• FAQs

Where does one send the share certificates for registration of transfer?

The share certificates along with duly executed share transfer form and other documents, if any, have to be sent to the share department of the company. If the company has appointed any share transfer agent, the shares have to be sent to such agents.

If the sender is not aware as to where the share department or share transfer agent is located, it is always advisable to send the share certificates to the registered office of the company (as mentioned on the share certificates)

What is the evidence which one should keep for record?

Unless the share certificates duly endorsed with your name have been received, it is always advisable to keep the following documents as evidence:-
• Brokers/sub-brokers contract notes for purchase of shares.

• Bill received from broker/sub-broker for purchase of Shares

• Copy of share certificates & share transfer form

• Proof of dispatching share certificate for transfer to company/share transfer agent.










Some questions which ordinarily arise in one's mind relating to the transfer and transmition of shares are answered below:

Can the company refuse to transfer shares without giving any reason?

The company cannot refuse to transfer shares without giving any valid reason. It is very important for the company to give the grounds on which shares received are rejected for transfer.

Whether share transfer form necessary in case of death of any joint shareholder?

In case there is a death of any Joint shareholder, no share transfer form is necessary. An application has to be made to the company along with a certified copy of the Death Certificate. The company shall on receipt of the death certificate, register the same in the registration documents and shall delete the name of the deceased shareholder from the joint names.

Whether execution of share transfer form is necessary in case the joint holder wants to put his name as the first shareholder?

If the order of the joint holders is to be changed, it is called Transposition of shares. There is no need to execute any share transfer form. A simple application duly signed by all the shareholders along with the share certificate is to be delivered to the company for transposition.
Can one do transposition for part of his holdings?
No. The transposition is for the full holdings in case transposition is to be done for part of the holdings, and then share transfer form is required to be executed.

If a person holds shares in two or more folios. Can he amalgamate his shares in one folio?

You may amalgamate the shares in one folio provided the order of names (in case of joint holdings) is identical in all the folios. No share transfer form is required to he executed in such cases.

Whether execution of share transfer form is necessary In case any more name are required to be added as joint holder?

Addition of any name means transfer of shares. In such cases share transfer form is necessary to be executed.

What should be done if the shares are held in single name and the shareholder dies?

This is Transmission of Shares. To avoid such circumstances, it is always advisable to hold shares in more than one name. In such a situation it is very difficult to prove the ownership of estate of the deceased member.



Following documents need to be given to the company for transferring the shares:-

• Copy of the Will, if applicable

• Copy of the Court Order, if applicable

• Copy of the Probate obtained from the court, if applicable

• Letter of Administration from court, if applicable

• Succession Certificate, if applicable

• Indemnity Bond

• Affidavit

• Title Claim

• No Objection from the other legal heirs, If any

• Copy of advertisement if the value of shares is high and the company insists on placing advertisement


Dose one has to execute share transfer from the cause of transmission of shares?
The execution of share transfer from, stamp duty, attestation etc… is not required in case of transmissions of shares as there is no transfer of shares.
How will a person comes to know whether shares are transferred in his name or not?

On the backside of the share certificates, details of transfers are endorsed. You have to check whether the name has been properly recorded. The detail will include therein the transfer no., date of transfer, folio no., name of transferee (including names of joint holders if any) and signature of the authorized person.

If there are bulk transfers, is it necessary to send all transfer forms?
When the transfer forms are in bulk and the transferee is single, it is administratively difficult to sign all the share transfer forms. In such cases only one share transfer form can be signed along with the annexure for giving details of certificate nos and distinctive nos. The other transfer forms may only be stamped giving particulars of transferee; also, stamp duty can be paid only on the covering share transfer form.


By what time is the company required to transfer the shares?
In case of an unlisted company, the transfer has to be done within 2 months from the date of receipt of shares.

In case of a listed company, it is mandatory for such companies to transfer shares within a period of 1 month from the date of receipt of shares.
Can a company send shares through ordinary post?
Company is required to send duly transferred share certificates through registered post.
In case of the shares of a listed company, can a person purchase shares more than 5% of the share capital of a company?

One can purchase shares more than 5% (but not exceeding 15%) of the shares provided details is separately given to the company with regard to holding of more than 5% shares

If a person is holding 15°/o of the shares in a listed company, then can he purchase further shares?
In such cases, SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 1997 has to be complied.

If a person has physical shares of a company which has compulsorily made its securities tradable under demat mode? What shall he do to sell these shares?
The future stock market will wholly be carried out in demat mode. If you have physical shares, please check whether you are a registered member. If not, kindly send the shares for transfer in your name. Once the shares are in your name, approach your DP (Depository Participant) who maintains an account similar to your bank account. Make application with DP to dematerialize the securities. After a period of around 15 days, you will receive intimation from the DP that the shares are dematerialized. You can thereafter approach the broker for selling the shares.
If one wants to purchase shares in demat form, does he have to execute any share transfer form?

In case you want to purchase shares in demat form, no execution of share transfer form is necessary. In such cases similar to a bank account, your demat account will get directly credited.

Does one have to pay any stamp duty in such cases?
No. You do not have to pay any stamp duty for purchasing the shares in demat form.












CHAPTER – VI
CONCLUSION
A brief summary of following points are brought out in this chapter.
Shareholder has an unfettered right to transfer his shares, the limitations to which his right is subject---

• A shareholder does not possess an unfettered right to transfer his shares. His right to transfer shares is subject to the following limitations-

• Section 3(1) (iii) requires a private Company to restrict the right of a member to transfer his shares.

• Under Section 42, (i) except In certain cases, a Company cannot be a member of it's holding Company, and any transfer of shares in a Company to its subsidiary is void.

• Section 77 (1) prohibits a Company limited by shares and a Company limited by guarantee and having a share capital, from buying its own shares_ This means that a member of a Company cannot transfer his shares to the Company.

• Under Section 250, in certain circumstances, the Central Government has the power to ban the transfer of certain shares for a period not exceeding three years.
• Section 372 prohibits a Company form purchasing shares in another company belonging to the same group except in certain Circumstances.

• Section 395 prohibits that under certain circumstances the majority members of a Company shall have the right to insist that the minority shall transfer their shares to the persons to whom they have transferred their own shares.

• Under section 84 of the Estate Duty Act, where a Company has knowledge of the death of any member, it cannot register a transfer of his shares (except where the transferee acquired such shares for valuable consideration) without the production of a certificate form the Controller of Estate Duty to the effect that the duty in respect of the value of such shares has been paid or will be paid or that no duty is due.

• Under the Foreign Exchange Regulation act, a transfer of shares to a non-resident is not allowed with out the permission of the Reserve Bank.

• The articles invariably empower the Directors of a Company to decline to register any transfer of share to a person to whom they do not approve.

If the Board of Directors refuse to register the transfer of fully or partly paid shares of a Company - The Directors have a statutory or discretionary power to reject an application for the registration or transfer of shares without assigning any reasons for their refusal.

Rights of the applicant in the event of the Company's refusal or failure to register the transfer-

Subject to any restrictions that may be contained in the articles, every shareholder has a right to transfer his shares. Even if a transfer is made to a Pauper or a "Man of Straw" with the object of avoiding a liability for uncalled amount of shares, the Directors have no power, beyond any which may be derived form the articles, to refuse the transfer.

It is therefore usual to provide in the articles that the Directors have discretion to refuse to register transfers in certain circumstances. Table-A provides that the Board of Directors may decline to register the transfer of a share in the following circumstances-

• Where a partly-paid share is to be transferred to a person of whom they do not approve; and

• Where a share (partly or fully paid up), on which the company has a lien, is to be transferred.

Where the Directors have discretionary (but not statutory) power to decline to register a transfer without assigning a reason therefore, they need not give their reasons for refusing registration; and if they refuse registration without giving any reasons, their refusal cannot be questioned in a Court of law unless there is evidence that they have not acted in good faith.

The mutual rights of the transferor and transferee of shares-
The instrument of transfer is the authority for the Company to alter its register of members, and the effect of the registration is that the transferor transfers all his rights and liabilities as a member from the date of transfer.

When a member agrees to sell his shares, his obligation is to give to the purchaser a valid transfer and to do all that is required to enable the purchase to be registered as a member in respect of the shares. His duty is not only to give agent in a transfer but also a transfer which is signed by a seller willing that the transfer shall be registered.

When a Company refuses to register a transfer of shares, in pursuance of a power in the articles, the purchase cannot recover the price from the seller unless he bought the shares “with registration guaranteed".
In such a case, the seller is the trustee of the shares for the purchaser, the rights and liabilities depend on the terms of the contract. If the shares are purchased cum-dividend and cum-rights, the purchaser has a right to claim from the seller any dividends or other benefits declared after the date of the contract and received by the seller and the purchaser must indemnify the seller against calls made after that date.
Obligation of shareholder to sell his shares-
If Company having a right to do so, refused to register a transfer of shares, what are the rights of the shareholder regarding-

• The purchase money and
• any dividend subsequently declared?
When a shareholder agrees to sell his shares his obligation is to give to the purchaser a valid transfer and do all that is required thereby enabling the purchaser to be registered as a member in respect of the shares. His duty is not only to give a genuine transfer but also one which is signed by a transferor indicating his willingness that the transfer shall be registered. When a Company refused to register a transfer of shares, the purchaser did not recover the price form the vendor unless he bought the shares “with registration guaranteed". In such a case, the vendor is the trustee of the shares for the purchaser, and must comply with all reasonable directions, that the purchaser may give including those for voting.
Until the transfer is registered, the vendor will continue to receive the dividends or other benefits declared on the shares. As between the vendor and the purchaser, the rights depend on the terms of the contract. If the shares are bought cum dividend and cum rights, the purchaser has a right to claim the dividend from the seller.

Blank Transfer - The evils associated with the system of blank transfers, and provisions for law aim at curbing such evils.

A blank transfer is an instrument of transfer in which the transferor fills in his name and only signs and in which the transferee's name and signature and other particular are not filled in. The advantage of giving such a blank transfer is that the transferee will be at liberty to sell the shares to a subsequent buyer without disclosing his own identity and without paying for the transfer stamps.

The following evils are associated with the system of blank transfers-
• Concealment of the identity of the real beneficial owners behind their nominees.

• Evasion of tax by suppression of secret profits invested in holdings on blank transfers.

• Facilitating window-dressing of balance sheets of Companies by reshuffling of shares held on blank transfers between associated Companies with the object of replacing inter Company loans by investments at the time of the closing of accounts.
• Bringing into existence fictitious or ante dated transactions in the books of Companies in order to create fictitious losses in investments for the purpose of reducing the taxable profits.

In order to curb the abuse which is inherent in the system of blank transfers, section 108 has imposed the following restrictions on the period of currency of blank transfers -
• Every instrument of transfer of share shall be in the prescribed form and presented to the prescribed authority (being a Government employee) before it is signed by the transferor and before any entry is made therein, and the prescribed authority shall stamp thereon the date on which it is so presented.

• The said instrument with the date of such presentation stamped thereon shall, after it is executed by the transferor and transferee and completed in all other respects, shall be delivered to the Company for registration within the period stated below-

• In the case of listed shares, at any time before the date on which the register of members is closed for the first time after the date of the presentation of the presided form to the prescribed authority or within two months from the date of such presentation, whichever, is later and

• In any other case, with in two months form the date of such presentation.
Exceptions -
The above provisions do not apply to the transfer of the following shares-
*** Any share
(i) which is held by a Company in the name of a Director or nominee or

(ii) which is held in trust and in respect of which a declaration has been made to the Public Trustee, if the following conditions are fulfilled.

• The Company stamps on the form of transfer on the date on which it decides that such share shall not be held in the name of the Director or nominee, or the Public Trustee and stamps on the transfer form under its seal and affixes the date on which the form is presented to it; and
• The instrument of transfer, duly completed in all respects, is delivered to the Company for registration within two months from the date so stamped.
*** Any share deposited by any person with
(i) The State Bank of India,
(ii) Any scheduled bank,
(iii) Any other banking company or institution approved by
Government, or
(iv) The Government or a Government Company, by a way of
security, if the following conditions are fulfilled-

• The deposited stamps on the form of transfer, the date on which such share is returned to the depositor, or, in case of default on the part of the depositor, the date on which such share is released for sale or, where the depositee intends to get such share registered in his own name, the date on which the instrument of transfer relating to it is executed by him and

• The instrument of transfer in such form, duly completed in all respects, is delivered to the Company for registration within two months form the date so stamped.

*** Any share which is held by the Central or a State Government in the name of its nominee.

Blank Transfer, Forged Transfer,
Transmission of shares & Certification of transfer.

Blank transfer - It is a transfer whereby the transferor hands over to the transferee the share certificate along with transfer form completely blank, except for the signature of the transfer or upon sale or mortgage of shares, the transferor commonly signs and hands over to the buyer or mortgagee, what is called as a blank transfer, the intention being that the purchaser or mortgagee will be at liberty later-on to fill up the blank and to have the transfer registered.
The advantage of this method is that the buyer is saved from the trouble of signing two forms in case he desires to sell the shares again in the near future.

Forged Transfer - An instrument of transfer in which the signature of the transferor is forged is known as a forged transfer. A forged transfer is absolutely void as against the registered holder of the shares, who can compel the Company to replace his name on the register of members in respect of all the shares mentioned in such transfer, it has been acted upon by the Company. A Company is also liable for damages to any person who has acted in good faith on a certificate issued by the Company on the strength of a forged transfer.

Transmission of Shares – Where a person dies, becomes lunatic or is declared an insolent, his legal representative in the case of death; the Committee in the case of lunacy or the Official Receiver in the case of insolvency, become entitled to deal with the shares. Where the right to deal with the shares is acquired by operation of law, it is known as transmission of shares.

A transfer of shares takes place by the voluntary act of the parties whereas a transmission is the result of the operation of law.

Certification of transfer - If a shareholder wants to sell a part of his holding, e.g., 20 out of 100 shares held by him, then he will be unable to deliver his share certificate to the buyer. The usual procedure in such a case is for the transferor to execute the transfer and sent it with the relevant share certificate to the Company. The Company through an authorized official then endorses on the instrument of transfer with the words “Certificate Lodged" and returns the transfer form so certificated to the transferor. This is known as certification of transfer.

A certification of transfer amounts to a representation by the Company that the transferor has produced to the Company, the share certificate which shows the prima-facie title of the transferor to transfer the shares therein mentioned, even though the certification does not warrant the title of the transferor.

The transferor hands over the certificates of transfer to the transferee against payment of the price, and the transferee executes it and forwards the same to the Company for registration.





Transmission of shares by the operation of Law¬
Transmission of share is the process by which shares pass to persons other than the registered holders, by operation of law and without the execution of any instrument of transfer. When a person dies, becomes lunatic or insolvent, his legal representative in the case of death, the committee in the case of lunacy and the official receiver in the case of insolvency, become entitled to deal with his shares. A company cannot register the transaction of a transfer of shares unless proper instrument of transfer to get her with the required share certificate is lodged with the company, but Section-180 provides that this requirement shall not prevent a company from registering as a shareholder any person to whom the right of any shares had been transmitted by operation of law. Again Section-109 provides that a transfer of the share or any other interest of a deceased member of a Company made by his legal representative shall, although the legal representative is not himself a member, be as valid as if he had been a member at the time of the execution of the instrument of transfer. On the death of a member, therefore, the right to transfer the shares registered in his name is conferred by the law on his legal representative. Similarity, by operation of Law, the right of transfer vests in the duly appointed Committee of a lunatic's property, or the Official Reviver of an insolvent's property.

A transfer of shares takes place by the voluntary act of the person, but a transmission is the result of operation of law.

The rights and liabilities of the legal representative of a deceased shareholder in respect of …

• shares registered solely in the name of the deceased, or

• Shares registered in the name of the deceased and a surviving joint holder.

• Where a shareholder dies and the shares are registered in his name, his legal representative becomes entitled to the shares by operation of law, and the deceased’s estate is liable for calls if the sharers are not fully paid.


The Company must recognize the legal representative's title on production of proof (e.g., a succession certificate, probate or letters of administration) and he is entitled to be registered as the holder of the shares. Section 108 provides. that the requirement of delivery of an instrument of transfer shall not prejudice the power of the Company to register the name of any person to whom the right to any shares has been transmitted by operation of law. Section 109 enables the legal representative to transfer the shares without himself becoming registered.


The legal representative does not become a member automatically on transmission nor is the Company entitled to register him as a member without his consent. He does not incur any personal liability on the shares unless he is so registered.

The articles usually make provision for the situation wherein a legal representative is not registered Regulation 28 of Table-A provides that he shall be entitled to the same dividends and other advantages as if he were registered, except that he is not entitled to any rights at the meetings of the Company. The Directors may also serve notice requiring him to select either to be registered or to transfer the shares and the Directors may also with hold the dividends until the notice is complied with.

• Where the shares are registered jointly in the name of the deceased and a surviving joint-holder, the title to the shares will be with the survivor, and the legal representative will acquire no rights therein. However, the estate of the deceased joint-holder is not released from any liability in respect of the shares and hence the legal representatives will be liable for any amount on Calls unpaid at the time of death jointly with the survivor. Provisions to this effect are made in regulation 25 of Table-A.



The remedies open to a person whose application for registration of transfer of shares in a public Company is refused by the Board of Directors of that company-

When registration of the transfer or transmission of shares is refused by the Board of Directors of a Company, the party aggrieved by such a refusal has two remedies available to him, namely:

• He may apply to the Court under Section-155 for the rectification of the register of members or

• He may appeal to the Central Government against the refusal of the Board of Directors


Section 155 - The aggrieved shareholder can make an application to the Court under this section for the rectification of the register of members on the ground that the Board of Directors had improperly refused registration of the transfer of his shares. Only cases involving malafide can go to the Court under this Section. On such application, the Court cannot only order rectification of the register but also payment by the Company of any damages sustained by any party so aggrieved. The order can be made even if the Company is being wound up.


Section III - This section provides an easy and quick remedy to an aggrieved shareholder against the arbitrary action of the Board of Directors in refusing to register a proposed transfer or transmission of shares.
The provisions of this section are as follows-
• In the case of a public Company or a private Company which is a subsidiary of any public Company, if registration of the transferor transmission of shares is refused, or if the Company fails to send notice of such refusal within the time allowed, the transferee or the person giving intimation of transmission may appeal to the Central Government presently within two months of the receipt of the notice of refusal or within two months form the expiry of the period fixed for sending the notice of refusal.


• Every appeal shall be made by a petition in writing and shall be accompanied by such fee (not exceeding Rs.50/-) as may be prescribed.

• The concerned authority shall consider these appeals on both principles of equity and justice, after giving reasonable opportunities to the parties concerned to present their views in writing, duly supported by documentary evidence, if any.


• The concerned authority then shall direct whether the transfer or transmission of shares need be registered or not. But before making any order, the concerned authority may require the Company to disclose to it, the reasons for refusing registration of transfer or transmission, and on the failure of the Company to supply such reasons, the concerned authority (presently the Central Government and in future the proposed Company Law Tribunal) may presume that the disclosure, if made, would be unfavorable to the Company.

• The Company must give effect to the decisions of the concerned authority within 10 days of the receipt of the order. If default is made in complying with the order, the company and every officer thereof who is in default is punishable with fine up to Rs. 1,000 and also with a further fine up to Rs. 100 a day during the period of default.




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