Topics Covered in this article
Transfer of share means transfer of ownership from one person to another it happens inter vivo i.e. between two living persons.
The transmission takes effect by operation of law. It happens in case of death, insolvency or permanent incapability of an existing shareholder of the company. Shares of a public limited company are freely transferable while that of a private limited company is objected to the permission of the board of directors of the company.
In line of that there are circumstances in which a company can refuse to register transfer of shares the power of transfer of shares vested with the board of director of the company hence the article of Association usually give the board of directors the power to refuse registration for a transfer and particularly if the shares are not fully paid up. Power to refuse the registration and appeal against registration were earlier given under Sections 111 & 111A of The Companies Act, 1956. In recent times, it is governed under Section 58 of Companies Act 2013 and the rectification is given under Section 59 of Companies Act, 2013.
Refusal to register Transfer or Transmission
In case of Private Company limited by shares if the board of members refuses to register the transfer of or the transmission of the right to any security or interest of a member in the company, the company thereof sends the notice of refusal to the transferor, the transferee or to the person giving intimation of such transmission within a period of 30 days from the date on which the instrument of the transfer of the intimation of such transmission is delivered to the company. [Section 58(2)]
The transferee will appeal to the tribunal in consideration of the refusal within a period of 30 days from the date of receipt of the notice. In case of no notice has been sent by the company within a period of 60 days from the date of which the instrument of transfer of the intimation of the transmission was delivered to the company. [Section 58(3)]
In case of Public Company the security or other interest of any member shall be freely transferable. The transferee appeals to the tribunal on refusal within a period of 60 days from the date of receipt of the notice. In case of no intimation received from the company within a period of 90 days from the date on which the instrument of the transfer of the intimation of transmission was delivered of the company.[Section58 (4)]
While the Companies Act requires a limitation on the exchange of the offers in a privately owned business, the Act is quiet on the idea of such a limitation. There is no particular limitation given and the seriousness of the limitation could extraordinarily contrast from one organization to another. In any case, it has been reliably held by different courts that the said limitation can’t be in the form of an outright denial.
Statutory remedy against refusal under Section 58 of the Companies Act, 2013
- Make an application with the tribunal.
- Tribunal shall within a period of 10 days after hearing the parties either dismiss the appeal or order Transfer or transmission of such securities.[Section 58(5)]
- If a person contravenes the order of tribunal he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to 3 years with fine not less than one lakh rupees but which may extend to five lakh rupees under Section 58(6).
This is done in consideration to make it clear that the refusal is done in the interest of the company and the general interest of the shareholders.
In the Leading case of Bajaj Auto Ltd. v. N.K Firodia, the Supreme Court held that even where the articles give directors absolute and uncontrolled discretion to register or decline registration of shares, the director will act bona fide for the paramount interest of the company and in the general interest of the shareholders because they are in a fiduciary position both towards the company and towards every shareholder. The court has laid down three tests to determine the proper exercise of power by the Board of Directors. The tests are-
- Whether the directors have acted in the interest of the company.
- Whether they acted on a wrong principle
- Whether they acted with the oblique motive for a collateral purpose.
However, if the directors give reasons, the court would consider whether they were legitimate and whether directors proceeded on right or wrong principle. Such refusal must be conveyed in writing to the transfer and transferee within the stipulated time period from the date of which the instrument was deposited with the company giving reasons for the refusal. Therefore the director cannot exercise his discretion to refuse the transfer of shares without disclosing the reasons for diffusion, even after the act Bona fide in the interest of the company.
The transferor or transferee is entitled to appeal to the tribunal against any refusal of the company to register the transfer and this appeal hearing shall be made within two months of the receipt of notice of such refusal; or in a case no notice has been sent by the company then Within four months from the date of which the instrument of transfer was delivered to the company.
Refusal by the company for registering the transfer of shares
The following conditions in which a company may refuse to register the transfer of shares are different for listed company and unlisted company.
- Listed company
- The condition where the instrument of transfer is not properly signed or stamped.
- The condition where the instrument is not properly executed.
- Where the board of directors change to an extent because of transport which may affect the interest of the company.
- Where the transaction is prohibited by the law.
- Unlisted company
- The shares are partly paid up and the transfer is financially incapable of paying the balance.
- The shares are partly paid up and are being transferred to a minor who is incapable of entering into a contract.
- Due call is money that has not been paid by the transferor.
- In a case where a transfer is a debtor of the company and the company has a lien on such shares.
- The instrument is incomplete, defective or irregular or not properly stamped or against general rule of company.
Rectification of register of members under Section 59 of companies Acts, 2013
It provides the procedure for rectification of the register of members after the transfer of security; the provision states that.
- Remedy to the aggrieved for not carrying the changes in the register of members- Ground of appeal if without sufficient cause-
- The person name is entered in the register of members or
- The name of any person having entered in the register of members is without sufficient cause omitted from or
- Unnecessary delay or default is being made an entry in the register, the fact of any person having became a member or
- Unnecessary delay or default made in condition to entering in the register, the fact of any person having ceased to be a member
- The person aggrieved or any member of a company or even the company may appeal in such form as prescribed to the tribunal in case of foreign members of debenture holder sitting outside India, the appeal shall be filled in the competent court outside India as may be prescribed by the central government by notification.
- Right to transfer and not restricted: section 59 of the act shall not restrain the right of a holder of security to transfer such security, any person acquiring such security shall be entitled to voting rights unless the voting rights have been suspended by an order of the Tribunal.
- Mutation of other members and the company in register of members: company that has changed a member’s name is entitled to ask those companies in which he is holding shares to substitute a company new name in the register of members in the place of old name held in the case Sulphate dyes v. six hickson & Dadajee Ltd. (1995) 83 Com 533 (Bom).
- Specific instances of rectification has been held to be permissible in the following cases: applicant induces to take shares by misrepresentation; shareholders name remove under unlawful surrender of his shares; irregular allotment name of nominee entered in the register without his knowledge of concerned allotment of shares to a non residents without taking necessary permissible for foreign exchange; allotment in violation of the memorandum of association of company.
- Order of the appeal the tribunal after hearing the parties to the appeal by order, either dismiss the appeal or direct the transfer of transmission to be registered with the company in 10 days of receipt of order or else direct rectification of the records, the depository, the register and also, directs to pay damages if any sustained by the party.
- Contravention of provision of the law where the transfer of security is in contravention of any of the positions of security contract regulation act 1956. According to Securities and Exchange Board of India Act 1992, the act or any law from the time enforced the tribunal can or any application made by the Depository Company, participant or to the holder of the security or the security and exchange board directs any company or depository to set right the contravention and rectify its adjuster or records concerned.
- Default in complying with the order if any defaulter is made in complying with the order of the tribunal under this section the company shall be punishable with fine which should be at least one lakh rupees. It can be extended to five lakh rupees and even the officer of the company in default can be liable for punishment with imprisonment for the term that can extend to one year or with fine of at least one lakh rupees but which may extend to three lakh rupees or, with both.
Restrictions on the transfer of shares
As a private limited company must mandatorily include restrictions on the transfer of shares in its Article of association, certain common types of restriction are imposed by different companies. Basically, to meet the requirements of a private limited company, the most common type of restriction is imposed in the company by the right of pre-emption and the right of first refusal.
Free transferability of shares of public company-
This is governed under section 58(2) of Companies Act, 2013. IT specifically declares that securities or any other interest of the members in a public company shall be freely transferable. In line of this there is a proviso that any contract or arrangement between two or more persons in relation to transfer of security shall be enforceable as a contract.
A company refusing to register the transfer on any grounds is required under section 58(1): to send within 30 days a notice of refusal to both the transfer and the transferee; or the person claiming transmission the company must disclose reason for such refusal; the transfer or transfer can prefer an appeal to the tribunal against the refusal; the appeal must be made within 30 days of either the notice of refusal; or whether the company has not given any such notice within 60 days from the date on which the papers were lodged with the company as the case maybe, an opportunity must be afforded to the transferee transfer in the company to make the representation [section 58(5)]. If the refusal on the concentration of the whole case does not seem to be justified, the tribunal will issue an order to the company to register the transfer which must be done within 10 days of the receipt of the order concerning the nature and scope of the power of central government which was inherited by the CLB.
In Accordance case with of Hari Nagar Sugar Mills v.. Shyam Sundar Jhunjhunwala, the power of the central government was held to be of judicial nature and that it must be exercised subject to the limitation of traditional tribunal. The central government has to decide whether in exercising the power the director was acting correctly or in some way mala fight. tTe decision has manifestly to stand those objective tests and has not merely to be found in the subjective satisfaction of the authority deciding the question, hence the CLB has to decide the appeal on the basis of the reason for refusal and they have been submitted by the company. This was not done in the present case and therefore the matter was reverted back. The power of the director refusing to accept a transfer is accessible whether the transfer is done by one member to another or from a member to an outside.
Also in the case of MJ Amrithalingam v. Gudiyatham textiles Private Limited ,the articles of association of a company confirmed discretion on the directors with regard to acceptance of transfers. This discretion is to be exercised in a bona fide manner by board. Also, to be considered to be in the interest of the company. If on a true construction of the article the director is only given the power to reject on a certain prescribed grounds and it is proved that on these grounds, the request for transfers will be rejected in the court and cant substitute the opinion of the board if article of Association given unfettered discretion the court would interfere with it only on proof of bad faith.
This can be concluded that as shares play an important part in the identity of a company, either private or public, the transferability of shares is what sets the company apart from the other businesses. In consideration to it, the power of the board to refuse registration that the directors have vested in the Article of Association.
In the light of the above mentioned, it very well may be said that the time of limit isn’t furnished any place in the Organizations Act as for the applications/petitions recorded u/s 111 (4) [now supplanted with Area 59 (1)] of the Organizations Act, 2013 yet the time of impediment for such applications/petitions will be represented by the arrangements of Article 137 of the Restriction Act, 1963. Henceforth the time of limit for applying for the amendment for register of individuals by the organization under the arrangements of Segment 59 (1) of the Organizations Act, 2013 is three years.
However, it was stated that the directors should act in a Bona fide manner that is, they have to act in the interest of the company on the right principle and in accordance with the law as they have fiduciary position both towards the company and towards the shareholder. The above mentioned case of Bajaj Auto ltd v. NK Firodia & others is one such case where it is shown that the directors were acting in a manner prejudicial to the interest of the company and was in the personal interest of directors, therefore the fiduciary power of directors were taken into consideration. Also the tribunal can interfere in the cases where the general interests of the shareholders are harmed.