S. Gujarat Industrial (2004)

by curiousforlaw

2nd February 2021

CASE NOTE: Section 108 of Companies Act 1956—the contention of the petitioner that the provisions of sec 108 and the time bar on the registration of transfer of shares is mandatory.

By: Syed Suhaiba Geelani, 4th year, BALLB, University of Kashmir.

Appellant: M/s. Dove Investments Private Ltd.

Respondent: Gujarat Industrial Investment Corporation Ltd.

Hon’ble Judges: Mr. Justice P. SATHASIVAM and Mr. Justice AR. RAMALINGA

Counsels:

Appellant: Mr. S. Alagiriswamy, Senior Counsel for Mr. S.; Murugan, for Appellants in CMA No.3188/2004.; Mr. P.H. Aravindh Pandian, for Appellant in C.M.A.No. 3223/2004.

Respondent: Mr. Arvind P. Dattar, Senior counsel for Mr. Shivakumar: for 1st Respondent in CMA Nos. 3188/2004 and 3223/2004.

BACKGROUND:

Section 108 of Companies Act 1956 deals with the “Transfer not to be Registered except on production of an instrument of transfer”. In this case, the Company Law Board by the order under challenge held that compliance of Section (1C) of 108 is a directory in nature and not mandatory and directed the Company at default to register the transfer of 22,93,000 shares in the name of the petitioner within 30 days of the receipt of the said order. Questioning the same, the Company as well as the investors moved to the High Court of Madras.

FACTS:

The Gujarat Industrial Investments Corporation Ltd., a wholly owned Government of Gujarat financial institution advanced a loan of Rs.5 Crores in 1996 to the company for the conduct of its business, for which the company pledged the shares (A-2 to A-9).
Since the Company committed default in repayment of the loan amount, the petitioner lodged with the Company, the original certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting registration of the transfer thereof in their name.
The Company registered the transfer of 2,99,800 shares pledged by respondents 2 and 3 but failed to effect the registration of the transfer in respect of the remaining 22,93,000 shares, despite repeated demands and lawyer’s notice dated 29-7-2003, calling upon the company to transfer the balance 22,93,000 shares in the name of the petitioner.
To circumvent the claim of the petitioner, the respondents 2 to 4 filed Civil Suits. A common counter affidavit filed by respondents, claimed that the requirements of sub-section (1C) (B)(iv)(1)(c)(2), being mandatory have not been duly satisfied by the petitioner and therefore the Company is not under an obligation to effect the transfer of shares in the name of the petitioner.
The rejoinder filed by the petitioner stated that the plea of non-compliance with the requirements of Section 108(1C) has neither been raised before the Civil Court nor in the present proceedings. The Company has already given effect to the transfer of 2,99,800 shares. They pleaded the court to direct the company to effect the registration of the transfer of the remaining pledged shares in the name of the petitioner.

ISSUES:

Whether the provisions of Section 108, except sub-section (1) of the Companies Act, 1956 are the only directory and not mandatory?
Whether the share transfer has to be registered by the company despite the fact that certain provisions of the law have not been duly complied with?
Can a company register a transfer form if its validity period has expired?

RULES APPLIED:

Section 108 of The Companies Act, 1956.
Section 108 ,1A,1B,1C and 1D of The Companies Act, 1956.
The Companies Act, 1956.
Section 56 of The Companies Act, 2013.

ARGUMENTS:

Petitioner:

Counsel on behalf of the appellant contended that the respondent failed to comply with the provisions of Sub-section (1C), according to which the instruments of transfer ought to have been stamped or endorsed by the petitioner and thereafter delivered them to the Company together with the share certificates for registration of the transfer within two months from the date so stamped or endorsed.

The requirements of sub-section (1C) (B)(iv)(1)(c)(2), being mandatory have not been duly satisfied and therefore the Company is not under an obligation to effect the transfer of shares in the name of the respondent.

Respondent:

The Council on behalf of respondent contended that the requirements of section 108 (1C) are the only directory and not mandatory. The petitioner has every right to effect the transfer of the impugned shares in its favor, in view of the default committed by the Company. Moreover,

the requirement provided under the aforesaid section is waived by the Company by way of effecting the transfer of 2,99,800 shares out of 25,92,800 pledged shares in the name of the petitioner.

JUDGMENT:

The Hon’ble High Court of Madras on 30.12.2004, agreeing with the decision of Company Board held that the compliance of Section (1C) is a directory in nature and not mandatory. It after taking note of the conduct of the company has waived all the requirements of sub-section (1C), directed the Company to register the transfer of 22,93,000 shares in the name of the petitioner. The Court further held that the stipulation of time for the performance of an act is not read as a mandatory stipulation under certain circumstances.

The reasonable mode of understanding the scheme of section 108 will be, not to render the delivery of an instrument of transfer after the period specified in sub-section (1A) as invalid, but as vesting a discretion in the company either to recognise the transfer or not to recognise it depending upon the staleness of the instrument, and even in the latter case, the affected person may move the Central Government under sub-section (1D) by explaining the circumstances under which the delay occurred and the hardship that results by the non-recognition of the transfer.

While understanding the scheme of section 108, the court has to bear in mind that trivialities would not render an act futile and technical formalities required to be complied with for a valid transaction cannot outweigh the importance to be given to the substance of the transaction.”

PRECEDENT:

Mukundlal Manchanda vs Prakash Roadlines Ltd..

The learned Judge held that “the Supreme Court has concluded that sub-section (1A) is the only directory in nature. The requirement of sub-section (1A) (b) (ii) must be read reasonably, to enable its smooth functioning, delivery of an instrument of transfer within a reasonable time should be held as a proper delivery. Where the Company opines that the instrument of transfer has become stale and that it is improper to act upon it, the instrument of transfer must be held as liable to be ignored. Further, even the belated delivery can be acted upon under certain circumstances while moving Central Government under sub-section (1) of Section 108.”