2018 (8) TMI 1032 - HC - Companies Law

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

The court held that the respondent company's refusal to register the transfer of shares was unjustified. It found that the shares were validly pledged to ... Seeking company to register the transfer of 38, 04, 100 shares in favour of the petitioner bank - dispute about the title of the shares - This transfer was on the basis of an alleged pledge. - Company law board (CLB) dismissed the petition. Held that:- Considering the stand taken by the respondent no. 1 and the respondent no. 2 now, it appears that the impugned reasons not to transfer the share in favour of the appellant are that the respondent no. 2 Petrofils has gone in liquidation and that now there is a serious dispute with respect to whether the shares in question were pledged and put as security or not and that now the suit filed by the appellant herein is pending before the competent Court. Considering Section 111A( 2) of the Act visavis the principle of law laid down by the Hon'ble Supreme Court in the aforesaid decisions the shares of company are fully transferable, until and unless company is able to demonstrate sufficient cause to refuse such a transfer. Sufficient cause is not defined and therefore, has to be read in light of the decision of the Hon'ble Supreme Court referred to herein above. As observed herein above, on the basis of objection raised by the transferor, the same can be said to be “sufficient cause” not to transfer such freely transfer shares. In the present case, it is required to be noted that initially when the company refused to transfer the share in the name of appellant transferee in fact no objection at all were there by the respondent Petrofils. The respondent Petrofils lodged the objection only after the decision of the company not to transfer the shares in favour of the appellant transferee. It is also required to be noted that even thereafter also the respondent no. 1 did not refuse to register / transfer of share in the name of appellant on the ground that there are serious dispute with respect to title / pledge. The CLB in the impugned order rejected the appeal / application submitted by the appellant under Section 111A( 2) of the Act on the ground that the suit filed by the plaintiff is pending and there are serious dispute with respect to pledge and therefore, as such CLB gone beyond the reasons even given by the respondent no. 1 company. In view of the above and for the reasons stated above, impugned order made by the learned Company Law Board dated 26. 5. 2006 on Company Petition No. 37 of 2005 refusing to direct the respondent no. 1 company to register the transfer of shares in the name of appellant cannot be said to be sustained and same deserves to be quashed and set aside. Even the conduct / action on the part of the respondent no. 1 in retaining the original share certificate with it also deserves serious consideration. Learned counsel for the respondent no. 1 is not in a position to point out under which provision of law and how the company can retain the original share certificate assuming that company is justified in refusing to register the transfer of shares. Present appeal is allowed. - consequently respondent no. 1 is hereby directed to transfer the shares in question in favour of the appellant. 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.