Maruti Udyog Ltd. vs Pentamedia Graphics Ltd.

on 7 November, 2001

Equivalent citations: 2002 111 CompCas 56 CLB Bench: S Balasubramanian, K Balu Maruti Udyog Ltd. vs Pentamedia Graphics Ltd. on 7/11/2001 JUDGMENT K.K. Balu, Member 1. This is a petition filed under Section 111A of the Companies Act, 1956 ('the Act') seeking directions against Pentamedia Graphics Ltd. ('the company') to register 50,000 shares comprised in share certificate No. 67126 in the name of the petitioner and enter the name of the petitioner in the register of members of the company. 2. The facts in brief as stated in the petition are that the petitioner is the manufacturer of various models of cars by the name and under the brand of 'Maruti'. The second respondent is a supplier of certain car components. In the course of business dealings between the petitioner and the second respondent, the petitioner had advanced amounts aggregating Rs. 5 crores against, inter alia, the pledge of 50,000 shares of the company. The third respondent, being Chairman of Pentafour Group by a letter dated 20-4-1998 (Annexure-B) had deposited the Share Certificate No. 67126 relating to the impugned shares together with a signed blank transfer deed with the Director (Finance) of the petitioner enabling the petitioner to sell the impugned shares or transfer them in favour of the petitioner in case of default by the second respondent. In spite of repeated demands, the respondents 2 and 3 being the principal borrower and guarantor had failed to repay the amounts advanced by the petitioner, resulting in a civil suit filed by the petitioner before the Delhi High Court for recovery of the outstanding amount due from the respondents 2 and 3. Consequently, the petitioner was constrained to enforce the security by seeking transfer of the impugned shares of the company deposited by the third respondent. Accordingly, the petitioner by its letter dated 16-4-2001 forwarding the original share certificate together with duly executed and stamped transfer deed, requested the company to transfer the impugned shares in its favour. However, the company refused to transfer the impugned shares in favour of the petitioner on account of stop transfer instructions received from the third respondent, which, according to the petitioner is contrary to the provisions of Section 111A(2). Hence, the petition. 3. According to the respondents 1 and 2, the company had refused to register the transfer in respect of the impugned shares in favour of the petitioner on account of the stop transfer instructions given by the third respondent, which is a sufficient cause, contemplated under Section 111A(2), By virtue of the letters dated 29-6-1999 and 9-5-2001 (Annexure 'G' and Annexure 'H'), the third respondent advised the company that the shares have not been mandated for sale or transfer. In the circumstances, the company was constrained not to register the transfer in favour of the petitioner, in accordance with the guidelines of the Stock Exchange. 4. According to the third respondent the impugned shares were neither pledged nor sold in favour of the petitioner. However, the third respondent had given the impugned shares to Mr. A.R. Halasyam, in his individual capacity as comfort level security to be kept confidentially under his custody, who had without any authority delivered the share certificate to the petitioner. The third respondent had never advised Mr. A.R. Halasyam either to sell or transfer the shares in his own name. Consequently, the third respondent had to advise the company by his letters dated 29-6-1999 and 9-5-2001 (Annexure 'G' and 'H') that he has not mandated the shares for sale and requested to stop any registration of the shares. Moreover, there is no valid transfer of shares in accordance with Section 108 of the Act between the third respondent and the petitioner. The petitioner has no right to seek registration of transfer in its favour. The request of the third respondent to stop registration of the transfer in favour of the petitioner is sufficient cause on the part of the company to return the instrument of transfer together with share certificates. The transfer of shares in favour of the petitioner is not pursuant to sale of shares in favour of the petitioner. The shares pledged cannot be sold
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Maruti Udyog Ltd. vs Pentamedia Graphics Ltd. on 7 November, 2001

without notice and in the instant case, there is no notice before the sale in favour of the petitioner. In these circumstances, the transfer of shares in favour of the petitioner is not valid in law. 5. Shri U.K. Chaudhary, senior advocate appearing for the petitioner, while reiterating the averments made in the petition has invited our attention to a letter dated 20-4-1998 (Annexure-B) of the third respondent, being Chairman of Pentafour Group. By virtue of Annexure-B, the third respondent had forwarded the impugned shares to Mr. A.R. Halasyam, Director (Finance) of the petitioner as security for the advances made by the petitioner. The original share certificate together with a duly signed transfer form (Annexure - C and D) was delivered to the petitioner. Shri Chaudhary urged that the impugned shares were delivered to Mr. A.R. Halasyam in his capacity as Director (Finance) of the petitioner. Consequent upon the default made by the respondents 2 and 3, the petitioner was compelled to file a civil suit for recovery of the outstanding amount against them before High Court of Delhi which is pending. In the circumstances, the petitioner by its letter dated 16-4-2001 (Annexure-E) forwarded the instrument of transfer together with the share certificate and copies of the Board resolution of the petitioner authorising investment in the shares of the company and the memorandum and articles of association of the petitioner, requesting the company to transfer the shares in its favour. Shri Chaudhary pointed out that the company is a listed public company whose shares are freely transferable under the provisions of Sub-section (2) of Section 111 A. The refusal of the company on the ground of stop transfer request received from the third respondent is not sufficient cause contemplated under the provisions of Section 111A. The requests dated 29-6-1999 and 9-5-2001 of the third respondent to stop the transfer in favour of the petitioner are contrary to the intentions and documents executed between the parties. He pointed out that the letter of request dated 29-6-1999 (Annexure 'G') though said to have been addressed to the company to stop the transfer, no copy of the same was endorsed in favour of the petitioner. According to Shri Chaudhary Annexure-G is a concocted document to defeat the claim of the petitioner. He further pointed out that such instructions are void and contrary to the provisions of Sections 9 and 111A(2) of the Act. He referred to a letter dated 15-5-2001 (Annexure-I) addressed by the company to the petitioner returning the share certificate placing reliance on a letter of the third respondent advising stop transfer which does not at all contain any date. The said letter according to Shri Chaudhary was created by the third respondent ante dated in order to stop the valid and legal transfer. Shri Chaudhary further pointed out that according to Annexure 'B' written by the third respondent, he was Chairman of Pentafour Group which falsifies his present claim that he ceased to be Chairman of Pentafour Group since 27-10-1997. He, therefore, sought for the reliefs made in the petition. 6. Shri T.K. Bhaskar, the counsel appearing for the company has reiterated the averments made in counter-statement and submitted that the company had refused registration of the transfer in favour of the petitioner for sufficient cause, being the stop transfer advice received from the third respondent. He further pointed out that the company is not a group company of the second respondent and that the third respondent is not group Chairman of the Pentafour Group companies. The third respondent who was once a Director and Chairman of the company ceased to be so with effect from 27-10-1997. Hence, the company has no connection with the respondents 2 and 3. The company had acted upon the stop transfer instructions from the transferor in good faith and in accordance with guidelines of Stock Exchange and, accordingly, advised the petitioner. 7. Shri T.K. Seshadri, appearing for the third respondent reiterated that the impugned shares were not pledged in favour of the petitioner. Nor was there any agreement between the parties as to the manner of dealing with the shares. Shri Seshadri made a reference to the recitals contained in Annexure 'B' to show that the shares were handed over to Mr. A.R. Halasyam in his individual capacity and not as Director (Finance) of the company. The shares were handed over to Mr. A.R. Halasyam in trust with an understanding that he would hold the shares as a comfort level security for the advances given by the petitioner. Annexure 'B' does not amount to a pledge. Though the third respondent had handed over the blank transfer form together with the original share certificate, he never authorised Mr. A.R. Halasyam to deliver the instrument of transfer and share certificate to the petitioner. He further pointed that the third respondent never received any notice regarding the default by the second respondent. Annexure 'F' shows that the petitioner at its meeting of board
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Maruti Udyog Ltd. vs Pentamedia Graphics Ltd. on 7 November, 2001

of directors held on 23-3-2001 passed a resolution granting approval to the company pursuant to Section 372A of the Act to take the impugned shares pledged by the third respondent as investment at an aggregate consideration equivalent to its market price on the date of transfer. According to the third respondent, there has been no evidence to show that the shares were pledged in favour of the petitioner. In case of pledge, the pledgee has right to sue for the outstanding amount, enforce the security by sale after due notice and file suit enforcing the security. However, the petitioner failed to give any prior notice. Shri Seshadri pointed out that the difference between mortgage of shares and pledge of shares. Only in case of mortgage of shares, the mortgagee can enjoy the shares and bring them in his name and not in the case of pledge. In view of the dispute in regard to the title of the shares, the petitioner cannot resort to any relief under Section 111A. He further pointed out that the provisions of Section 187 of the Act have not been complied by the company. Moreover, there has been no refusal of the transfer in favour of the petitioner by the company. Shri Seshadri relied upon the following cases in support of his various legal submissions : I. A.M.P. Arunachalam v. A.R. Krishnamurthy [1979] 49 Comp. Cas. 662 (Mad.) - to show that "the requirement of Section 108 are mandatory which have not been complied with in this case." II. Sri Raja Kakarlapudi Venkata Sudarsana Sundara Narasayyamma Garu v. Andhra Bank Ltd. AIR 1960 AP 273 to show that "a pledgee has only the special property in the goods pledged, that is, the right of retainer of the goods as security and in case of default he must either bring a suit against the pawnor or sell the goods after giving a reasonable notice". III. Shatzadi Begum Saheba v. Girdharilal Sanghi AIR 1976 AP 273 at p. 279 to show that 'A pledgee does not have the right of ownership, though he has the rights of a pledger which include only the right of possession, but not the right of enjoyment; a pledgee has the right of disposition which is limited to disposition of pledgee's rights only and of a sale only after notice and subject to certain limitation'. 'While the owner has the right of possession as well as the right of enjoyment and right of disposition, the pledgee has only the right of possession but not the right of enjoyment. The pledgee's right of disposition is governed by the terms of the pledge and is limited to the recovery of the amount due to him under that pledge.' IV. Lallan Prasad v. Rahmat Ali AIR 1967, SC 1322 - to show that "a pledgee cannot maintain a suit for recovery of debt as well as retain pledged property." V. T.S. Kotagi v. Tahsildar AIR 1985 Kar. 265 - to show that "if a pledgee wants to sell articles without the intervention of the Court, he can do so only after issuing a notice of sale to the pledger. Sale without notice is void." VI. Ramdeyal Prasad v. Sayed Hasan AIR 1944 Pat. 135 - to show that "Pawnee is entitled to sell the ornaments pledged by giving a reasonable notice of the sale to the Pawnor." 8. Shri Chaudhary in his reply has stated that the execution and delivery of blank transfer form together with original share certificate empower the petitioner to deal with the shares and seek transfer of the shares in favour of the petitioner. The decisions cited supra are not applicable in the facts and circumstances of the case, especially the shares impugned have not been enforced in a Court of law by the petitioner. The petitioner seeks transfer of shares in its favour pursuant to the blank transfer forms duly executed by the petitioner. In such cases, according to Shri Chaudhary, no notice need be given to enforce the right of the pledgee under Section 111A. The letter dated 15-5-2001 (Annexure I) of the company amounts to refusal to transfer the shares in favour of the petitioner, which empowers the petitioner to approach the CLB for appropriate remedy. He further pointed out that the CLB cannot go by the technicality but by the provisions of law for which he relied upon the decision of the Apex Court in 2001 4 SC 266 (sic). He, therefore, sought for the remedies against the company to register transfer of the impugned shares in favour of the petitioner.

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Maruti Udyog Ltd. vs Pentamedia Graphics Ltd. on 7 November, 2001

9. After considering the pleadings and oral submissions made on behalf of the petitioner as well respondents, the issue for consideration is whether the company should be directed to register the impugned shares in favour of the petitioner in the facts and circumstances of the case. 10. While the petitioner contends that the third respondent had pledged the shares of the company in favour of the petitioner to secure the advances made in favour of the second respondent, it is contended by the respondents that the impugned shares were not pledged by the third respondent in favour of the petitioner, but only delivered to one Mr. A.R. Halasyam, Director (Finance) of the petitioner in his personal capacity as a comfort level security for the advances made by the company. It is not disputed that the third respondent had delivered the original share certificate together with signed transfer form along with Annexure 'B', which gives the official address of Mr. A.R. Halasyam, but not his personal or residential address. It is to be seen whether Annexure-B has been sent by the third respondent to Mr. A.R. Halasyam in his personal capacity. In this connection, Annexure-H written by the third respondent to the company assumes importance, the relevant portion of which reads as under: "...Kindly refer to my letter of 29-6-1999 requesting stop transfer of certain specified shares. I wish to inform you that these shares had been offered as security for the loans obtained by Pentafour Products Limited (PPL) and arrangements are on for discharge of the debts due to Maruti Udyog Limited (MUL), the same has also been communicated to MUL. The Company (PPL) has also paid a sum of Rs. 1 crore during April 1999 in partial discharge of the debts due to MUL." It is revealed from Annexure 'H' that the impugned shares were offered as security by the third respondent for the loans obtained by the second respondent. This is further confirmed by Annexure 'C' and 'D', the original share certificate and share transfer form signed by the third respondent. In the circumstances, the plea of the third respondent that the impugned shares were not offered as security is not tenable and must fail. Having come to the conclusion that the impugned shares were offered as security by the third respondent to secure the advances made by the petitioner, the question that comes for our consideration is whether the company is justified in returning the original share certificate and the share transfer form on account of stop transfer advice received from the third respondent by his letters dated 29-6-1999 and 9-5-2001 (Annexure 'G' and 'H'). Section 111A empowers a public company to refuse registration of the transfer under the following three specific grounds : (i) Any transfer made in contravention of the provisions of the Securities and Exchange Board of India Act, 1992 or Regulations made under that Act. (ii) Sick Industrial Companies (Special Provisions) Act, 1985. (iii) Any other law. The CLB has held in a number of cases that apart from the grounds mentioned in Section 111A, a public company cannot refuse to register transfer of shares on any other grounds whatsoever. In the circumstances, the mere stop transfer advice at the instance of the third respondent, in our view is not a 'sufficient cause' for refusing to register the transfer in respect of the impugned shares in favour of the petitioner. The case laws cited supra by the counsel for the third respondent can be distinguished from the facts of the present case, especially the petitioner has not chosen to enforce the security through a competent court of law. Hence, the decisions cited supra do not come to aid of the company. We are, therefore, of the view that the company shall register the transfer of shares in favour of the petitioner. Accordingly, it is ordered that the company shall register the transfer of shares within 30 days of lodgement of the share certificate and instrument of transfer by the petitioner with the company. No order as to cost. 11. With the above directions, the petition stands disposed of.
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Maruti Udyog Ltd. vs Pentamedia Graphics Ltd. on 7 November, 2001

S. Balasubramanian 1. While I am in full agreement with the reasoning and directions given by the learned Member, I would also like to add the following. 2. One of the objections taken by the learned counsel for the respondents is that, even assuming that the case is that of a pledge, the petitioner being a pledgee cannot dispose of the shares pledged without notice to the pledger. He relied on a number of cases on this proposition. Unlike other movable goods, in normal commercial practice, when shares are pledged with blank transfer forms, the pledgor has the option of retaining the shares without registering the transfer in his name or get the shares registered in his name. Both the practices are common. Registering the shares in the name of the pledgor does not in any way constitute a sale requiring notice to be given to the pledgor. Therefore, by getting the shares registered in its name, the petitioner-company cannot be deemed to have effected a sale. Even though, it was contended by the learned counsel that board of directors of the petitioner-company has passed a resolution to sell the shares, yet mere passing of resolution does not amount to a sale. Further, in the present petition what we are concerned is whether the action of the company in not registering the shares when they were lodged for registration is with sufficient cause or not. The company is a listed company and as per the listing agreement if a transferor desires to stop the registration, the company can do so only if the transfer or obtains a restraint order from a competent court within 15 days. In the present case, the company has returned the share certificate merely on the basis of a letter from the third respondent. Such return of the share certificates along with the instrument of transfer amounts to a deemed refusal and as such the proviso to Section 111A(2) are squarely applicable in this case. Since the shares of a public company are freely transferable the company is not concerned with the inter se disputes, if at all any, between the transferor and transferee and as such should not have returned the share certificate to the petitioner without registration. The ground on which the shares were returned does not constitute 'sufficient cause'. Accordingly, as directed by the learned Member, the company should register the transfer of the impugned shares within 30 days from the date of lodgement of the same with the instrument of transfer.

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