2018 (8) TMI 1032 - HC - Companies Law

Court orders registration of pledged shares to bank despite pending civil suit

MEHSANA DISTRICT CENTRAL COOPERATIVE BANK LTD. Versus GUJARAT INDUSTRIES POWER COMPANY LTD.

MEHSANA DISTRICT CENTRAL COOPERATIVE BANK LTD. Versus GUJARAT INDUSTRIES POWER COMPANY LTD. - TMI Issues Involved:1. Whether the refusal to register the transfer of shares by the respondent company was justified.2. Whether the shares were validly pledged to the appellant bank.3. The impact of the pending civil suit on the transfer of shares.4. The applicability of Section 176 of the Contract Act regarding the notice of invocation of pledge.5. The effect of the liquidation of respondent no. 2 on the transfer of shares.6. The jurisdiction of the Company Law Board (CLB) under Section 111A of the Companies Act.7. The legality of retaining the original share certificates by the respondent company.Issue-wise Detailed Analysis:1. Justification for Refusal to Register Transfer of Shares:The respondent company refused to register the transfer of shares citing several reasons, including an undertaking by Petrofils not to transfer shares without prior approval, a newspaper notice advising against dealing with the shares, a letter from Petrofils' Chairman requiring prior intimation before transfer, and the liquidation of Petrofils. However, the court found that the reasons given were not sufficient cause under Section 111A of the Companies Act. The court emphasized that shares of a company are freely transferable unless the company can demonstrate sufficient cause to refuse such a transfer.2. Validity of Pledge:The appellant bank claimed that the shares were pledged as security for a fixed deposit of Rs. 40 crores. The court noted that the shares and duly signed transfer deeds were handed over to Jashlok Finance, which acted as a broker. The court found that the appellant had possession of the share certificates and transfer deeds, and there was no dispute that these documents were lodged with the respondent company for registration. The court concluded that the appellant had a valid claim to the shares.3. Impact of Pending Civil Suit:The court rejected the argument that the pending civil suit for recovery of the deposit amount was a valid reason to refuse the transfer of shares. The suit was for the recovery of the fixed deposit amount and did not directly address the transfer of shares. The court noted that the respondent company had refused the transfer before any objection was raised by Petrofils, and there was no injunction or restraining order against the transfer of shares.4. Applicability of Section 176 of the Contract Act:The court addressed the issue of notice under Section 176 of the Contract Act, which mandates prior notice before invoking a pledge. The court found that the appellant had given prior notice before approaching the respondent company for the transfer of shares. The court concluded that at this stage, it could not be said that the appellant had invoked the pledge, and the requirement of notice under Section 176 was not applicable.5. Effect of Liquidation of Respondent No. 2:The court considered the argument that the liquidation of Petrofils barred the transfer of shares under Section 117 of the Multi-State Cooperative Societies Act. The court noted that the appellant bank had invested public money in the fixed deposit with Petrofils, and the shares were given as security. The court found that the liquidation of Petrofils did not justify the refusal to transfer the shares.6. Jurisdiction of the Company Law Board (CLB):The court examined the jurisdiction of the CLB under Section 111A of the Companies Act. The court noted that the proceedings before the CLB are summary in nature, and the CLB can refuse to register the transfer of shares only for sufficient cause. The court found that the CLB had gone beyond the reasons given by the respondent company and had erred in refusing to direct the transfer of shares.7. Legality of Retaining Original Share Certificates:The court strongly criticized the respondent company's action of retaining the original share certificates while returning only the transfer deeds. The court found this action to be arbitrary, illegal, and mala fide. The court held that even if the company was justified in refusing the transfer, it could not retain the original share certificates and must return them to the appellant.Conclusion:The court allowed the appeal, quashed the impugned order of the CLB, and directed the respondent company to register the transfer of shares in favor of the appellant. The court also ordered the respondent company to return the original share certificates to the appellant.