DR.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW
2016-2017
B.A.,LL.B.(Hons.)-Vth Semester

CORPORATE LAW-I
PROJECT ON
JUDICIAL AND QUASI JUDICIAL INTERFERENCE IN TRANSFER
OF SHARES"

SUBMITTED TO:
Dr. Manish Singh
Teaching Associate (Law)

SUBMITTED BY:
Ayush Singh
Section-A
Roll No.51

1 | Page

INDEX
CONTENTS

PAGE NO.

1. Research Methodology.................................................................................................03

2. Introduction..................................................................................................................04

3. Difference between new and old company law............................................................05

4. Restriction on transfer of shares...................................................................................05

5. Transfer of shares in public and private company.......................................................06

6. Pre-emption clause.......................................................................................................07

7. Board of directors power to refuse transfer of share....................................................08

8. Remedies available.......................................................................................................08

9. Circumstances when judicial interference can be seen................................................09

10. Contribution of the student..........................................................................................10

11. Conclusion....................................................................................................................11

12. Bibliography.................................................................................................................13
2 | Page

RESEARCH METHODOLOGY
a) Object of the study- The objective behind this project is to

Find what type of restrictions can be imposed on transfer of shares either by any

statute or articles of company.

Find to what extend board of directors can restrict transfer of shares and
Find what are the remedies provided by the court to the parties.

b) Hypothesis- The power of directors to refuse transfer of shares is not an absolute power in
itself i.e. it is restricted by judicial interference and can only be allowed if directors act bona
fide for the paramount interest of the company and in the general interests of the
shareholders.
c) Research Questions

Which type of restrictions can be imposed on transfer of shares and why are they

imposed?
Do directors have discretionary power to refuse transfer of shares?
What type of remedies court provide and under which sections of CA (i.e. judicial

interferences)?
Is there any difference in provisions of old and new company and if yes than what?

d) Methodology used for the project- This project is based on doctrinal approach. This
project is descriptive and analytical in nature.
Primary resources such as the Indian Companies Act 1956 and New Companies act 2013
have been used.
Secondary resources like textbooks on Corporate Law, articles from leading Law Journals,
Supreme Court Cases, etc have been used.

3 | Page

INTRODUCTION
The great object of the company is its capability of transferring its shares easily. This is given
in Section 82 of the companies act and section 44 of new companies act. - It provides that
the shares or debentures or other interest of a member in a company shall be movable
property capable of being transferred in the manner provided by the articles of the company 1.
The company can make regulations related to restrictions on right to transfer of shares. But in
absence of any such regulations shareholders are free to transfer their shares to whomever
they want provided, it is a bona fide transaction meaning it is an out and out disposal of the
property without retaining any interest in shares. The directors of the company have the
power to refuse to register the transfer of shares but limited to some restrictions. The
conditions when judicial interference is there in transfer of shares are when Board of
Directors have not exercised their power in good faith and refuses a transfer of share because
of some mala fide reasons. Or if directors do not have adequate reasons to justify their
decision for the refusal to pass the transfer, or they have acted capriciously, fraudulently or
for a collateral purpose then the court can ask to give relevant reasons for the same. Then
there is a duty of the directors to take relevant considerations into account and permit the
transfer but if they act on irrelevant considerations and deny a transfer then they have to
specify the grounds on which they have declined the transfer. So these were some judicial
interference which is practiced if right to free transfer of shares is infringed by board of
directors.
So lets move on to the project and see the problems / restrictions people see in transfer of
shares. And then see what type of remedies court has provided with the help of the case laws.
Is there any need for some change in the law to provide justice to the shareholders or existing
law is sufficient to tackle them? Shares were meant to be transferred so till what limit it is

1 Section 44 of new companies act 2013

4 | Page

justified to put restrictions on the transfer of shares. Come and lets try to answer all these
questions in this project with the help of various case laws and statutes.

DIFFERNCE BETWEEN OLD AND NEW COMPANY LAW

1956 Companies Act
Section 82
Section 3(1) (iii) (a)
Section 111(1)

2013 Companies Act

Section 44
Section 2(68)
Section58

RESTRICTIONS ON TRANSFER OF SHARES

It is open to a company to restrict the right of its members to transfer their shares. 2 There is a
need for restriction on transfer of shares because it is the Soul and Basis' of a private
company. Section 3(1) (iii) (a) of the Act and section 2(68) of new companies act provides
that the Articles of a private company shall restrict the right to transfer the company's shares.
Transfer of shares to a stranger is not usually permitted unless the existing members permit
so. Restrictions are imposed so that these private companies can earn profit and attain their
goals. So that they can serve the purpose for which they were set up. So for this reason the act
provides compulsory restrictions to be imposed by the private companies in their articles. Act
provides for restrictions but not in a particular way i.e. it depends upon the company itself
that which type of restrictions it want to impose. Private companies are basically set up by
families, friends etc so generally they do not want to transfer their shares to outsiders thats
why they put restrictions on transfer of shares.

Why there is restriction on transfer of shares?

So that the company can serve the purpose for which it was set up. A private company
is basically set up Firstly, to facilitate small traders or private persons carrying on a
family business to avail of the advantages of corporate trading. Secondly, to act as a
subsidiary in a group of companies so as to avoid having to establish a public

2 Luxmi Tea CompanyLtd v. P.K. Sarkar, 1989 Supp (2) SCC 656
5 | Page

company, given the plethora of exacting requirements they are required to follow.
A private company is more like a partnership than like public corporations. So its
directors should have strict control over its member so that the company can achieve
its goals. And secondly section 2(68) of new companies itself provides private
companies to put restrictions.

What type of restrictions imposed on the transfer of shares?

We can say by two types restrictions can be imposed:
1) Pre-emption clause- according to this clause no member can transfer his/ her
shares until all existing members refuse to accept them at face value.
2) Refusal by Board of Directors- articles of the company can authorise board of
directors to refuse to register shares if they want. Provided they are acting in bona
fide.

Case Law: V.B Rangaraj v. V.B Gopalakrishnan and Others3

Here the Supreme Court said that the shares are movable property and only the articles
regulate their transfer. Articles are binding upon both the company and its shareholders.
Therefore, only the articles can put restriction on the transfer of shares. No other additional
restriction can be imposed by a private agreement between two shareholders. No private
agreement can be made between people which places further obstacles in the way of
transferability. Thus this type of restriction is neither binding upon the company nor on the
shareholders. The transferee cannot be denied the registration of the shares purchased by him
on a ground other than stated in the Articles.

TRANSFER OF SHARES IN PUBLIC AND PRIVATE COMPANY

The biggest difference between private and public companies is that shares are easily
transferable in public companies but there is restriction in private companies. In a public
company there is no restriction, in respect to whom the shares are to be transferred but in
private company shares cannot be transferred to outsiders (provided by pre-emption clause).
On refusal of transfer of shares without sufficient cause, the member can go to Company Law
Board within two months from the date on which the instrument of transfer or the intimation
of transfer is delivered to the company. There are restrictions on transfer of shares in private
company because of the Partnership Principle, which is the soul and basis of private
3
6 | Page

companies. These are known as close corporations in US. These restrictions keep company
safe but if there are no restrictions as such than the person can transfer his shares without the
consent of anybody to any transferee, even though he be a man of straw, provide it is a
bonafide transaction in the sense that it is a disposal of the share without retaining any
interest in the shares.4
The company can only put restrictions on transfer of shares but cannot put ban on the transfer
of shares. Court in Chiranji Lal Jasrasaria v. Mahabir Dhelia held that a restriction which
amounts to a prohibition on transfer of shares or which precludes a shareholder altogether
from transferring is invalid. Restrictions upon transfer of shares in private company are
limited in the sense, they cannot restrict transfer if :

Member's want to transfer his shares to his representatives.

In the event of death of a shareholder, legal representatives may require the

registration of share in their name.

PRE-EMPTION CLAUSE
Articles providing that the shares must be transferred to outsiders only if no existing members
accept them at face value are called pre-emption clauses. Such a clause does not authorise the
directors to refuse to register a transfer so long as it is made to an existing member only.5

What do we mean by pre-emption clause?

The members of a private company are not allowed to transfer the shares to outsider
before asking all the existing members of the company is called pre-emption clause.

Pre-emption simply means right to redeem shares in order to avoid alienation.

Why is pre-emption clause needed?
So as to avoid transferability of shares to outsiders in order to protect soul of a private
company.

4 Delavenne v Broadhurst, [1931] 1 Ch 234

5 Delavenne v Broadhurst, [1931] 1 Ch 234
7 | Page

The pre-emption clause is made to ensure that the control of the shares does not fall into the
hands of undesirable persons by allowing the existing shareholders the first opportunity to
buy the shares. There can be clause like in the case of death of a member, the surviving
members or directors are obligated to acquire the deceased member's shares.

BOARD OF DIRECTORS POWER TO REFUSE REGISTRATION OF SHARES

The articles of a company give the Board of Directors discretionary power to refuse the
transfer of shares if they think so. This power vested in the Board is fiduciary in nature i.e., it
must be employed in good faith and for the benefit of the company and not for some
inappropriate purpose. Directors exercise their power of refusal to register transfer by passing
a resolution. But there is a possibility that the directors may abuse their power. So the person
concerned can go to CLB against such refusal. But the burden of proof that directors have
wrongfully refused the transfer of share lies on person making the allegations and the court
will presume that the directors have acted in a bona fide until contrary proved.

REMEDIES AVAILABLE
Section 111(1) of the Companies Act and Section 58 of the New Companies Act provides
that a company refusing to register transfer of shares on any ground must send within two
months a notice of refusal to the transferor as well as the transferee. And the party can file a
suit in the CLB within two months from the date of receipt of such refusal notice. Section 111
of the Act seeks to prevent this abuse by the directors and ensure the interests of genuine and
bona fide transferees and shareholders are not adversely affected. Section 111 provides a right
of appeal to the Company Law Board (hereinafter, CLB') in respect of refusal to register
transfer/transmission of shares and Section 111A gives the right to petition the CLB for
rectification of register of members.

8 | Page

CIRCUMSTANCES WHEN JUDICIAL INTERFERENCE CAN BE SEEN

1. Mala fide The power of refusing a transfer of shares is vested in the Board of
directors for protecting the interests of the company. This power should, however, be
exercised bona fide by the board for the benefit of the company. But where the
Company law Board finds that in declining a transfer, the Board has acted
oppressively or mala fide, it can interfere in the matter and order transfer of shares. 6 A
mala fide refusal to register a transfer of share will not be sustained.7

2. Reason for refusal to transfer not being adequate - the Companies

(Amendment) Act, 1988 makes it obligatory on the part of directors to disclose
reasons for refusing to allow a transfer of shares. The Company Law Board can look
into adequacy of reasons and the refusal may be set aside if the reasons put forth by
the Board of Directors are not convincing to support to refusal of transfer.8

3. Extraneous Considerations In declining to accept transfer of shares the

directors should have regard only to considerations which the articles of the company
permit. Therefore a refusal on irrelevant considerations would be set aside.9 If the
director do not disclose the grounds on which transfer of shares was refused, adverse
presumption shall be drawn against them and refusal shall not sustain.10
V S Ratnam v. Ossar Estates Ltd.11the board rejected a transfer on the ground that
the transferee was the nominee of another person who was an undesirable man. The
6 Harinagar Sugar Mills v. Shyam Sunder, AIR 1961 SC 1669
7 Gresham Life Assurance Society, Re, [1972] LR 8 Ch App 446
8 Bajaj Auto ltd. V. Firodia, AIR 1971 SC 321
9 Babulal Choukhani v. Western India Theatres, AIR 1957 Cal 709
10 Mithapa Chettiar v. Salem Rajendra Mills, (1955) 25 Comp Cas 283
9 | Page

CLB held this ground to be extraneous and ordered the company to register the
transfer

4. Reasonable Time Where the articles authorise the directors to refuse a transfer,
they should exercise this power within a reasonable time. Section 111(2) of the
Companies Act, 1956 has specified a period of two months as a reasonable time to
decline the transfer and any period beyond two months shall obviously be
unreasonable. The Madras High Court in MC Amrithalingam v. Gudiyatham textiles
(P) Ltd.,12 however, upheld the rejection of transfer of shares which was notified after
two and a half months.

CONTRIBUTION OF THE RESEARCHER

As we have already discussed that putting restrictions on the transfer of shares is one of the
important task. Restriction should be put on the transfer so as to protect private companies
and their secrecy can be maintained. So in my view, private companies should write all
necessary restriction in their articles. By doing this a concrete law will be there on the issue.
And in articles the powers of the directors should be clearly mentioned so that abuse of
powers by them should not be there. There will be a limit on the powers of the directors. Now
the question comes to what extent Board of Directors should exercise their power.
1) They should act in a bona fide manner for the paramount interest of the company.
2) For the fiduciary relations between the company and shareholders.
While taking the decisions three points should be keep in mind.
1) That whether the Board of Directors have acted in the interest of the company?
2) Do they acted on wrong principles or not?
3) Whether they acted with oblique motive for the purpose.
Finally they should give reasons in writing that why they refused to transfer such shares. By
doing this the powers of directors can be checked and the affected person would get remedy.
11 (1989) 3 Comp Cas 355 (CLB)
12 (1972) 42 Comp Cas 350
10 | P a g e

CONCLUSION
The whole issue is that there are restrictions on transfer of shares in private companies. A
private company should incorporate into its articles some restrictions. Section 3(1) (iii) (a) of
the Act and section 2(68) of new companies states for such restrictions. The only mentions
that restrictions should be there but what restrictions should be there are not specified in the
act and this burden has been put upon the frames of articles to design these restrictions.
These type of restrictions on the rights of the members to transfer their shares is the essence
of a private company and is considered something intrinsic to a private company given that it
is based on the partnership principle. A private company is generally nothing but an
association of persons bound together by close ties of kinship. A group of friends who have
trust and can easily share profits and loss make private companies. These type of restrictions
on transfer of share prevent shares from alienation which can be harmful for the company.
Because in private company bossiness takes place between friends, family etc and giving
shares to someone else i.e. outsiders can affect the business. Their privacy can be hampered..
The Courts have proved to be the guardians of these restrictions and have preserved the soul
of the private company and consequently enabling the private company to achieve its aims
and objectives.
There are certain things which affect the soul of the private company. These type of
restrictions put uncertainty which affect company law. For instance there are many
ambiguities related to the pre-emption clause and the rights of pre-emption. Who all are
bound by this pre-emption clause? Then a lot of care is needed to check whether these
restrictions exceed the scope or not. As any discretion by directors can hamper the rights of
members of company like shareholders and thus, the company may be adversely affected.
11 | P a g e

One of the common power found in the articles is the power of directors to refuse to register
a transfer of a private company. The Board can abuse this power. Therefore the 1988
amendment provides that the directors have to give reasons for its refusal. This has helped to
curb the misuse of this power. Moreover new checks can be made so that directors always use
their power in positive sense. Section 111(1) of the Companies Act and Section 58 of the
New Companies Act states the remedies available in case of abuse of this power. And at last
court has done a lot to check the abuse of this power and it always keeps a check and balance
on the powers of the directors. Thus gives justice to the aggrieved persons.
Not only statutory mechanism should be there, but companies should also take initiatives and
draft all the type of restrictions with utmost care and foresight. For example, the power that
directors abuse can be checked if proper guidelines were provided. So company should make
guidelines in order to avoid discretion by directors.
So the most important thing to be done is to take some steps which must rectify abuse and
can clear the ambiguous areas which are created by these restrictions imposed on the transfer
of shares in the companies. So it has become indispensable not only for the smooth working
and success of private companies but for the larger interest of the Indian economy.

12 | P a g e

BIBLIOGRAPHY
Primary Sources
Books:

Ramaiya, Guide to the Companies Act Part I 14th ed. (New Delhi:
Wadhwa and Company Law Publishers, 1998)

A.K Majumdar and Dr. G.K Kapoor, Company Law and Practice (New
Delhi: Taxmann Publications Limited, 2000).

A.L Saha, Lectures on Company Law (Bombay: N.M Tripathi Private

Limited, 1990).

Avtar Singh, Company Law (Lucknow: Eastern Book Company,

1999).

Clive M. Schmitthoff, Palmer's Company Law Vol. 1 (London: Steven

and Sons Limited, 1976).

Articles:

Avtar Singh, Company Law Annual Survey of Indian Law, Vol. XV (1979) at 43.
N.Vijia Kumar, Transfer of Shares SEBI and Corporate Laws, Vol. 35 (2002) at
122.

Secondary Sources:
13 | P a g e

www.manupatra.com
www.scconline.co.in

14 | P a g e