LUXMI TEA COMPANY LIMITEDversusPRADIP KUMAR SARKAR

A
                     LUXMI TEA COMPA."<Y LIMITED
                                 v.
                        PRAD!P KUMAR SARKAR

                              NOVEMBER 7, 1989

B             [M.N. VENKATACHALIAH, N.D. OJHA AND
                         J.S. VERMA, JJ.]

        Companies Act, 1956: Section 108---Share Transfer-Considera-
  tion-Power of Company to examine correctness-Company-Whe-
  ther can refuse registration of transfer of shares if transfer deeds are not
C properly stamped.

         Section 111(2)/Article 42 of Articles of Association-Expression
    "Or otherwise"-Scope of-Whether recognises existence of inherem
    power to refuse registration of shares.

D         Company Law-Share Transfer-Board of Directors-Whether
    has inherent power to refuse registration of transfer of shares-Resi-
                                                                                  •
    duary, implied or incidental power of corporate existence-Whether
    include power of refusal to register transfer of shares.

         Section 155-Share Register-Application for rectification of-
E   Transferor-Whether a necessary party.

          The respondent lodged certain fully paid-up shares with the
    appellant company for transfer in his name. The Board of Directors of
    the Appellant company disapproved the registration of the shares. The
    respondent filed an application under section 155 of the Companies Act,
F   1956 for rectification of the share register i.e. for inserting his name in
    the share register as a registered share-holder which was allowed hy a
    single judge of the High Court. The Compnay preferred an appeal
    which was dismissed hy the Division Bench of the High Court.

          In appeal to this Court it was contended on behalf of the company
O that (i) the Company had residuary inherent power to refuse the regist-
  ration Of the transfer of shares; (ii) the words ''or otherwise'' ill Article
  42 of the Articles of Association and section 111(2) of the Companies Act
  recognise the existence of an inherent power to refuse registration of the
                                                                    I
  transfer of shares; (iii) the application under section 155 was not main-
  tainable as the transferor had not been made parties therein; and (iv)
H the company was entitled to examine the correctness of transfer consi·

                                        82
                    LUXMI TEA CO. v. P.K. S~RKAR                        83

deration shown in the transfer deeds and refuse registration of the
                                                                              A
transfer of shares if the transfer deeds were not duly stamped.

      Dismissing the appeal, this Court,

       HELD: 1. Unless there is any impediment in the transfer of a
share of a public limited company, a shareholder has the right to trans-      B
fer his share. Correspondingly, in the absence of any impediment in this
behalf the transferee of a share is entitled to have a rectification of the
share register of the company hy inserting his name therein as a
registered shareholder of the share transferred to him. To have such
rectification carried out is the right of the transferee and can be
defeated by the company or its Directors only in pursuance of some
power vested in them in this behalf. Such power has to be specified and       c
provided for. It may even be residuary but in that case too it should be
provided for and traceable either in the Act or the Articles of Associa-
tion. Even if the power of refusal is so specified and provided for the
registration of a transferred share cannot be refused arbitrarily or for
any collateral purpose, and can be refused only for a bona fide reason        D
in the interest of the company and the general interest of the share-
holders. If neither a specific nor residuary power of refusal has been so
provided, such power cannot be exercised on the basis of the so-called
undeclared inherent power to refuse registration on the ground that the
compay or its Directors take the view that in the interest of the Com-
pany and the general interest of the shareholders, registration of the        E
transfer of shares should be refused. Indeed making a provision in the
Act or the Articles of Association etc. conferring power of refusal would
become futile if existence of an inherent power is assumed, for the
simple reason that the amplitude of the so-called undeclared inherent
power would itself take care of every refusal to register the transfer of
share. Assumption of such a power would result in leaving the matter of       F
transfer of share and its registration at the mercy and sweet will of the
company or its Directors, as the case may be. [86E-H; 87A-B]

      2. The objects or purposes for which a company is created should
be distinguished from the powers which it can exercise. So far as refusal
to register the transfer of a share is concerned the power has to be          G
specified and within the framework of the said specification. There is no
inherent power in this behalf. [90B]

     In re Smith Knight & Co., IV Chancery Appeal Cases 20; In re
National Provincial Marine Insurance Company, V Chancery Appeal
Cases 559; Moffatt v. Parqunar, VII Chancery Division 591; In re              H
    84         SUPREME COURT REPORTS                I 1989] Supp. 2 S.C.R.
A Cawley & Co., XL/I Chancery Division 209; In re Discoverers Fi-
  nance Corporation Ltd., [1910] I Chancery Division 312 and Sadashiv
  v. Gandhi Sewa Samaj, AIR 1958 Born. 247 followed.

          Palmer's Company Law 24th Edu. p. 121 referred to.

B       The Conservators of the River Tone v. Ash, 109 English Reports
  479; Attorney-General v. The Lord Mayor etc. of the City of Leeds,
  [1929] 2 Chancery Division 291; E.M. Muthappa Chettiar v. Salem
  Rajendra Mills Ltd., XXV Company Cases 283; Life Insurance Corpo-
  ration of India v. Escorts Ltd. & Ors., [1985] Suppl. 3 S.C.R. 909 and
   Haiaj Auto Ltd. v. N.K. Firodia and Anr., 41 Comp. Cases I, distin-
C guished.

         3. In the context in which the words "or otherwise" have been
  used in sub-section (2) of section 111, they only purport to cast a duty or
  impose an obligation of giving notice of refusal to register the transfer of
  a share irrespective of the fact whether such refusal is under the Arti-
D cles of Association of the Company or de hors the Articles, which would
  include even a case where such refusal has been made arbitrarily o.r for
  any collateral purpose. A fortiorari, this would be the interpretation of
  even Article 42 of the Articles of Association of the Company inasmuch
  as on its plain language which, except for the provision for punishment,
  is in pari materia with sub-section (2) of Section I II of the Act. The
E purpose of this Article is the same as of the said sub-section (2). To
  introduce a concept of either conferment or recognition of a right to
  refuse registration of the transfer of a share in sub-section (2) militates
  against and runs counter to the very texture and purpose of this sub-
  sec.tion. [88A-C; 87E]                                                  '

F         4. The transferor is not a necessary party to an application under
    section 155 of the Act unless the transfer was disputed by him. [92B-C]

         5. In the instant case, it has been found as a fact by the High
  Court that it had not been proved that the respondent had paid higher
  prices for the shares than those stated in the transfer deeds. Therefore,
G there is no justification for interfering with the said finding of fact. On
  this finding the transfer deeds could not be termed as unduly stamped
  and power to refuse the registration of the transfer of shares contemp-
  lated by section 108 of the Act could not be invoked. [92D-EJ             '

        CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4565
H of 1989.
                     LUXMI TEA CO. v. PK SARKAR [OJHA, J.]                 85

         From the Judgment and Order dated 4.5.1988 of the Calcutta
                                                                                A
    High Court in Appeal No. 806 of 1987

         <\.K. Sen, P.L. Sen, Bhaskar Sen, D.K. Sinha, A.N. Chatterjee,
    N.D.B. Raju and V.K. Jain for the Appellant.



r       F.S. Nariman, R.C. Nag, S.B. Mukharjee, R.F. Nariman,
    Kusum Agarwal, O.C. Mathur and D.N. Misra for the Respondent.

             The Judgment of the Court was delivered by
                                                                                B



      /,";-:f!,,_
             OJHA, J. Special leave granted.

          This appeal by special leave has been preferred against the judg-
                                                                                c
    ment dated May 4, 1988 of a Division Bench of the Calcutta High
    Court in Appeal No. 806 of 1987. Facts in brief necessary for consi-
    deration of the submissions made by learned counsel for the parties
    are that the respondent, Pradip Kumar Sarkar made an application
    under section 155 of the Companies Act, 1956 (hereinafter referred to       D
    as the Act) for rectification of the share register of the appellant-
    company by inserting his name therein as a registered shareholder of
    certain shares transferred in his favour. These shares were fully paid
    up and the company had no lien over them. According to the respon-
    dent, notwithstanding the shares being duly lodged with the Company
    along with the transfer deeds and requisite fees for registration being     E
    paid the Board of Directors of the Company disapproved of the regist-
    ration of the said shares. This disapproval led the respondent to make
    the application under section 155 of the Act for rectification of the
    share register. The case of the respondent was that the shares in ques-
    tion being fully paiCI up and the company having no lien over them the
    registration of the transfer of the shares in his favour could not be       F
    refused under Article 39 of the Articles of Association of the Company
    which was the article relevant for the purpose.

         The application aforesaid was contested by the Company on
    various grounds. Overruling the objections raised by the Company a
    learned single judge allowed the application. Aggrieved, the Company        G
    preferred the appeal aforesaid before a Division Bench of the High
    Court which has been dismissed by the judgment appealed against.

           It has been urged by learned counsel for the appellant that' even
    if the Articles of Association do not make any specific provision in this
    behalf the Company had residuary inherent power to refuse registra-         H
    86          SUPREME COURT REPORTS                I 1989] Supp. 2 S.C.R.
  lion of the transfer of the shares for the benefit of the Company and its
A existing sharesholders. Power of refusal to register the transfer of
  shares was also sought to be derived from the words "or otherwise"
  used in Article 42 of the Articles of Association and section 111(2) of
  the Act. The transferor not being made a party to the application
  under section 155 of the Act was also pleaded in justification of the
B submission that the said application deserved to be dismissed. It was
  also urged that in view of section 108 of the Act the Company was
  entitled to go into the qustion as to whether the consideration for trans-
  fer of shares as shown in the transfer deeds was real consideration for
  purposes o_f finding out as to whether the transfer deeds were duly
  stamped and refuse registration of the transfer of the shares if the
  Company was of the view that the transfer deeds were not duly
c stamped. For the respondent on the other hand it was urged by his
  learned counsel that in view of the specific provision contained in this
  behalf in Article 39 of the Articles of Association and no residuary
   power whatsoever having been conferred on the Company or its
   Directors to refuse registration of the transfer of shares it did not have
D the power claimed by it in aid of refusal of registration of the shares
  transferred to the respondent.

         Having heard learned counsel for the parties we are of the
   opinion that unless there is any impediment in the transfer of a share
   of a public limited company, such as the appellant, a shareholder has
H the right to transfer his share. Correspondingly, in the absence of any
   impediment in this behalf the transferee of a share. in order to enable
   him to exercise the rights of a sharesholder as against the Company
   and third parties, which is not possible until the transfer is registered in
   the company's register, is entitled to have a rectification of the share
   register of the company by inserting his name therein as a registered
F  shareholder   of the share transferred to him. To have such rectification
   carried out is the right of the transferee and can be defeated by the
   company or its Directors only in pursuance of some power vested in
   them in this behalf. Such power has to be specified and provided for. It
   may even be residuary but in that case too it should be provided for
   and traceable either in the Act or the Articles of Association. Even if
(; the power of refusal is so specified and provided for the registration of
   a transferred share cannot be refused arbitrarily or for any collat~ral
   purpose, and can be refused only for a bona fide reason in the intefest
   of the company and the general interest of the sharesholders.' If
   neither a specific nor residuary power of refusal has been so provided,
   such power cannot be exercised on the basis of the so-called unde-
 H dared inherent power to refuse registration on the ground that the
               LUXMI TEA CO. v. P.K. SARKAR [OJHA. J.[                    87

company or its Directors take the view that in the interest of the com-
pany and the general interest of the shareholders, registration of the         A
transfer of shares should be refused. Indeed making a provision in the
Act or the Articles of Association etc. conferring power of refusal
would become futile if existence of an inherent power such as claimed
by the company in the instant case is assumed, for the simple reason
that the amplitude of the so-called underclared inherent power would           B
itself take care of every refusal to register the transfer of share.
Assumption of such a power would result in leaving the matter of
transfer of share and its registration at the mercy and sweet will of the
company or its Directors, as the case may be. In the absence of any
valid and compelling reason it is difficult to comprehend such a
proposition.
                                                                               c
      Even the submission based on the words "or otherwise" in sub-
section (2) of Section 111 of the Act and in Article 42 of the Articles of
 Association to the effec.t that these words recognise the existence of an
inherent power to refuse registration of the transfer of the share does
not commend itself to us. The words "or otherwise" were inserted in            D
sub-section (2) of Section 111 of the Act in 1960 and it is this sub-
section so amended which is applicable to the facts of the instant case.
Sub-section (2) of Section 111 does not confer any right but only casts
a duty to give notice of refusal to register the transfer of a share and
provides for punishment in case of default in doing so. Giving of notice
is necessary, inter alia, to facilitate the exercise of the right of appeal    E   -
conferred by sub-section (3) and (4) of Section 111. To introduce a
concept of either conferment or recognition of a right to refuse regist-
ration of the transfer of a share in sub-section (2) militates against and
runs counter to the very texture and purpose of this sub-section. Such
an interpretation would ha.ve the effect of imputing to the legislature
an intention of making an effort to fix a square peg in a round hole,          F
when the purpose, if it was to confer or recognise any inherent power
to refuse registration of the transfer of a share, could plainly be
achieved by inserting the words "or otherwise" after the words "under
its articles" and before the words "to refuse to register" in sub-section
( 1) of Section 111 which is the sub-section relevant for such purpose.
                                                                               G
       The words "or otherwise" take colour from the context in which
they are used. In our opinion, the words "under its articles" in sub-
section (2) of Section 111 of the Act have been used in the same sense
as is expressed in legal terminology by the familiar words "conferred by
law". Consequently, if the opening part of sub-section (2) is read as "lf
a Company refuses, whether in pursuance of any power conferred by              H
    88         SUPREME COURT REPORTS                 [1989] Supp. 2 S.C.R.

A law or otherwise" it would be incongruous to suggest that the legisla-
  ture in using the words "or otherwise" intended to give recognition to
  a power to refuse registration of the transfer of a share even otherwise
  than in accordance with law. This would be tantamount to putting a
  premium on taking the law into one's own hands. The legislature can-
  not be imputed with any such intention. For these reasons, we are of
B the view that in the context in which the words "or otherwise" have
  been used in sub-section (2) of Section 111, they only purport to cast a
  duty or impose an obligation of giving notice of refusal to register the
  transfer of a share irrespective of the fact whether such refusal is under
  the Articles of Association of the Company or de hors the Articles,
  which would include even a case where such refusal has been made
C arbitrarily or for any collateral purpose. A fortiorari, this would be the
  interpretation of even Article 42 of the Articles of Assocation of the
  Company inasmuch as on its plain language which, except for the
  provision for punishment, is in pari materia with sub-section (2) of Sec-
  tion 111 of the Act, the purpose of this Article is the same as of the said
  sub-section (2). Even the marginal note of Article 42 lends support to
D this interpretation.

        At this place, we may point out that it has not been disputed
  before us by learned counsel for the appellant that the shares in ques-
  tion having been fully paid up and the Company having no lien over
  them, Article 39 of the Articles of Association could not be invoked to
E refuse registration of the transfer of these shares.

        We may now advert to the text books and the decided cases on
  which reliance has been placed by learned counsel for the appellant in
  support of the submission that the Company had an inherent power to
  refuse registration of the transfer of the shares. It was pointed' out that
F the board of directors is now the principal organ of a company. The
  management of the affairs of the company is vested in the board of
  directors and all powers excepting those which are specifically
  reserved for the general meeting by the act or the articles or
  memorandum of association or otherwise must now be done by the
  board of directors vide section 291 of the Act (The New Frontiers of
G Company Law by S.C. Sen 1971 Edition Page 51). Whatever may
  fairly be regarded as incidental to the objects for which the Corpora-
  tion was created is not to be taken as prohibited. The incidental power
  is one that is directly and immediately appropriate to the execution of
  the specific power created and not one that has a slight or 'remote
  relation to it. Furthermore, the want of an express enumeration of
H powers does not exclude such incidental powers as are reasonably
                  LUXMI TEA CO. v. P.K. SARKAR [OJHA, J.]                  89

    necessary to accomplish the corporate purpose. The mere creation of a
    corporation was alone sufficient, in the absence of prohibition, to          A
    confer upon such corporation all those powers which are regarded as
    incident to corporate existence. (Thomsons' Commentaries on the
    Law of Corporation 3rd Edition Vol. 3 Pages 820 to 822) As to the
    relationship between the general meeting and the directors to some



I
    extent a more-exact analogy would be with the division of powers             B
    between the Federal and State Legislatures under a Federal Constitu-
    tion and the residual powers are in this case with the directors
    (Gower's Principles of Modem Company Law 4th Edition Page 147).
    Corporate authority (powers) are determined by reference to (1)
    charter, (2) incorporation law or act, (3) general and special corpora-
    tion statutes relevant, (4) other applicable statutes, (5) case decisions
    (6) customary practices, and (7) treatises and other discussions. They       c
    include (1) general powers usually recognized in all corporations, (2)
    general powers usually recognized in corporations of the particular
    type, (3) powers inherent in or limited by the purposes or business as
    stated in the charter, and (4) implied powers to do all things reason-
    ably and properly incidental to the specified purpose and business.          D
    (Modem Corporation Law by Howard L. Oleck Vol. 1 Page 865) It is a
    well-recognised rule that a Corporation is not restricted to !he exercise
    of the powers expressly conferred upon it by its charter but has the
    implied or incidental power to do whatever is ·reasonably necessary to
    effectuate the powers expressly granted and to accomplish the
    purposes for which it was conferred unless a particular act sought to be     E
    done is prohibited by the law or its charter. (American Jurisprudence
    2nd Edition Vol. 19 Page 431) Every corporation is of course created
    with certain express powers but in addiiion to those every corporation
    has also certain powers which attach to it as an incident to its corporate
    existence. The powers which are incidental to corporate existence and
    which are always implied in the absence of express restrictions are: (1)     F
    The power to have perpetual succession, or succession during the
    period for which the corporation is created which includes the power
    to elect members in the place of those who are removed by death or
    otherwise, (2) The power to have a corporate name, (3) The power to
    purchase and hold land and chattels for authorised corporate purposes,
    (4) The power to have a common seal, (5) The power to make by-laws           G
    for the government of the corporation, (6) The power to disfranchise-
    ment or removal of members except in the case of modem joint-stock
    corporations. (Corpus Juris Secundum Vol. XIX Pages 372-373)

          Suffice it to say in this behalf that what has been stated above
    with regard to residuary, implied or incidental powers is calculated to      H
    90          SUPREME COURT REPORTS                  [1989) Supp. 2 S.C.R.
    accompltsh the opjects, the corporate purpose or corporate existence
A   of the corporation. Refusal to register the transfer of a share obviously
    does not fall in this category. As has been pointed out in Palmer's
    Company Law 24th Edition Page 121 the objects or purposes for which
    a company is created should be distinguished from the powers which it
    can exercise. So far as refusal to register the transfer of a share is
B   concerned it is almost the consistent view in decided cases that the
    power has to be specified and can be exercised only in the manner
    specified and within the framework of the said specification. There is
    no inherent power in this behalf. (See: In re Smith, Knight, & Co., IV
    Chancery Appeal Cases Page 20; In re National Provincial Marine
    Insurance Company, V Chancery Appeal Cases Page 559; Moffatt v.
    Parqunar, VII Chancery Division Page 591; In re Cawley & Co., XPI
c   Chancery Division Page 209; In re Discovers Finance Corporation,
    Limited, [1910) 1 Chancery Division Page 312 and Sadashiv v. Gandht
    Sewa Samaj, A.LR. 1958 Bombay Page 247)

          Reliance was then placed by learned counsel for the appellant on
D   The Conservators of the River Tone v. Ash, 109 English Reports Page
    479. In that case by an Act for making and keeping the river Tone
    navigable, it was enacted, that the· thirty persons therein named and
    their successors should be conservators of the river; and should h'ave
    various powers refered to therein. By a subsequent Act some more
    powers were conferred on them. A question arose as to whether the
E   conservators were entitled to sue in their corporate name for an injury
    done to their real property. It was held that as it manifestly appeared
    from the different clauses of the Acts of Parliament that the con-
    servators should take land by succession and not by inheritance,
    although they were not created a corporation by express words they
    were so by implication and that being so they were entitled to sue in
p   their corporate name for an injury done to their real property. In our
    opinion, on the basis of this decision it is difficult to cull out any power
    in the board of directors of the company in the instant case to refuse to
    register the transfer of a share by implication.

        Reliance was also placed on Attorney-General v. The Lord
G Mayor Etc. of the City of Leeds, [1929) 2 Chancery Division Page 291
  where it was pointed out that a corporation incorporated by royal
  charter stands on a different footing from a statutory corporation, the
  difference being that the latter species of corporation can do only such
  acts as are authorised direGtly or indirectly by the statute creating it
  whereas the former can, speaking generally, do anything that an,or-
H dim1ry individual can do. If, however, the corporation by_ charter be a
              LUXMI TEA CO. v. P.K. SARKAR [OJHA, J.]                   91

municipal corporation then it is subject to the restriction imposed by
                                                                              A
the Municipal Corporations Act, 1882. The question in connection
with which the above observations were made was whether the Corpo-
ration of Leeds, a municipal corporation, was entitled to work or run
certain omnibuses along any route whether within or without the
boundaries of the City of Leeds. This again was obviously a question
relating to the business of .the corporation to work or run omnibuses         B
and has no bearing on the question as to whether the direcmrs of the
appellant-company in the instant case had inherent power to refuse to
register the transfer of shares.

       In E.M. Muthappa Chettiar v. Salem Raiendra Mills Ltd. XXV
Company Cases Page 283 it was held that if a person is of such a
character as to throw their company into confusion and if he was not a
                                                                              c
desirable one, then the Board of Directors would certainly be acting in
the best interests of the company in refusing to register the shares in
his name and such a reason is quite a valid reason. Suffice it to say so
far as this case is concerned that Article 56 which was the relevant
article dealing with the refusal to register the transfer of a share itself   D
clearly conferred power on the board of directors to refuse to register
the transfer of a share inter alia "if the transferee of the share is not
approved". It was thus a case where power had been conferred by an
article and was not a case of refusal to register under any inherent
power.
                                                                              E
      Lastly, reliance was placed on Life Insurance Corporation of
India v. Escorts Ltd. & Ors., [1985] Supp. 3 S.C.R. Page 909. In that
case with reference to an earlier decision of this Court in Bajaj Auto
Ltd. v. N. K. Firodia and Another, 41 Company Cases page 1, it was
held that where the articles permitted the directors to decline to regis-
ter the transfer of shares without assigning reasons the court would not      F
necessarily draw adverse inference against the directors but will
assume that they acted reasonably and bona fide. Here again, as is
apparent from the decision in the case of Bajaj Auto Ltd. (supra)
Article 52 of the appellant-company in that case provided that the
directors might at their absolute and uncontrolled discretion decline to
register any transfer of shares. This too was, therefore, a case of power     G
being conferred by the articles of association and not a case of exercise
of inherent power. We may also point out that at page 997 of the
Reports of Escorts Ltd. (Supra) it was held that even though it was
open to the company and indeed it was bound to refuse to register the
transfer of shares of an Indian company in favour of a non-resident
where the requisite permission under the FERA was not obtained but            H
    92         SUPREME COURT REPORTS                 (1989] Supp. 2 S.C.R.

A once permission was obtained whether before or after the purchase of
    the shares, the company could not thereafter refuse to register the
    transfer of shares.

        The third submission made by learned counsel for the appellant
B that the application under section 155 of the Act was not maintainable
  as the transferors had not been made parties therein, may now be
  considered. A similar submission had been made before the Division
  Bench of the High Court also and was repelled by holding that the
  transferor is not a necessary party to an application under section 155
  of the Act unless the transfer was disputed by him. It was pointed 'out
  that even though in the instant case the transferors had been served
C with notice and in any event had knowledge of the proceedings for
  registration of transfer of shares they had not disputed the transfer of
  the shares. We do not find any infirmity in the order of the High Court
  on this point.

          Likewise, we find no substance even in the submission made by
D learned counsel for the appellant based on section 108 of the Act for
   the simple reason that after taking into consideration the evidence
   produced by the parties it has been found as a fact by the High Court .
   that it had not been proved that the respondent had paid higher prices
   for the shares than those stated in the transfer deeds'. We find no
   justification for interferring with the said finding of fact in the present
IE appeal. On this finding the transfer deeds could not be termed as
   unduly stamped and power to refuse the registration of the transfer of
   shares contemplated by section 108 of the Act would not be invoked.

          In the result, we find no substance in this appeal and it is accord-
    ingly dismissed with costs assessed at Rs.2,000.
F
    T.N.A.                                                 Appeal dismissed.