1961 (12) TMI 41 - HC - Companies Law

Court affirms share transfer cancellation, dismisses appeal. Directors' actions deemed illegal.

The court dismissed the appeal, affirming the invalidity of the cancellation of the transfer of shares to the first respondent and ruling that Chhote Lal ... Transfer to shares – Power to refuse registration and appeal against refusal Issues Involved:1. Validity of the cancellation of the transfer of 133 shares to the first respondent.2. Necessity of impleading the transferor, Chhote Lal Sanwal Das, in the suit.Detailed Analysis:1. Validity of the Cancellation of the Transfer of 133 Shares:The primary issue was whether the transfer of 133 shares of Iron Traders Private Limited to the first respondent was validly cancelled by the company. The court examined the relevant clauses of the company's articles of association, specifically clauses 36, 37, 42, and 47, which govern the transfer of shares. Clause 36 allows the transfer of shares to other members but restricts transfers to non-members unless no existing member is willing to purchase the shares. Clause 37 requires a transfer notice to be given to the company. Clause 42 allows the transferor to sell to any person if no member is willing to purchase the shares within six months. Clause 47 permits the directors to decline registration of a transfer without assigning any reason.The court found that no notice was sent by the transferor to the company, and the company did not offer the shares to its members. Despite this, the company registered the transfer and appointed the first respondent as a director. The court held that the transfer was irregular but not ultra vires, as the articles did not absolutely prohibit the transfer to non-members. The court referenced Halsbury's Laws of England to distinguish between ultra vires acts and irregular acts, noting that the latter does not invalidate the transaction if the transferee acted in good faith and without notice of the irregularity.The court also applied the doctrine of indoor management, which protects innocent third parties dealing with the company, presuming that internal procedures have been followed. The court concluded that the directors' cancellation of the first respondent's name from the register was illegal and unjustifiable, particularly as it was done without notice to the first respondent and appeared to be motivated by malice due to internal disputes.2. Necessity of Impleading the Transferor, Chhote Lal Sanwal Das:The second issue was whether Chhote Lal Sanwal Das was a necessary party to the suit. The court determined that since the first respondent's name had been registered as a member at the instance of Chhote Lal Sanwal Das, and the dispute was between the company and the first respondent regarding the cancellation of the transfer, it was unnecessary to implead Chhote Lal Sanwal Das. The court reasoned that Chhote Lal Sanwal Das had ceased to be a member of the company after the transfer, and thus, was not a necessary party to the suit.Conclusion:The court dismissed the appeal, affirming that the cancellation of the transfer of shares to the first respondent was invalid and that Chhote Lal Sanwal Das was not a necessary party to the suit. The appeal was dismissed with costs.