Giasuddin Ahmed (Petitioner)
Green Delta Insurance Company Limited and another (Respondents)
High Court Division
(Civil Original Jurisdiction)
Mainur Reza Chowdhury J
August 20, 1995.
Cases Referred To-
Shoaib (Md) Vs. Uttara Bank Ltd and another 43 DLR 329; State Vs. Indian Chemical AIR 1957(Orissa) 203; B Choukhani Vs. Western Indian Theatres Ltd. AIR 1957; Bajaj Auto Ltd. Vs. N K Firodia AIR 1971(SC) p-321; Halgh Vs. Arderna Cinemas Ltd. 1951 C. 286; (1950) 2 All FR 1120 (CA).
Salahuddin Ahmed, Advocate—For the Petitioner.
AR Yousuf Advocate—For the Respondent.
Matter No. 61 of 1994.
Mainur Reza Chowdhury J.- This is an application under section 38 of the Companies Act for rectification of the share register of respondent No.1 Company namely, Green Delta Insurance Company Limited.
2. The case of the petitioner is as follows:
3. The petitioner is a share holder in Green Delta Insurance Company Limited hereinafter referred to as the Company. The petitioner as on 31-10-1993 was a substantial share holder in the company with his name recorded as such in the share register of the company. The petitioner had at various times bought shares in the Company and these were duly recorded in his name in the share register of the company without objection from any quarter. The company is a public company limited by shares, whose shares are listed on the Dhaka Stock Exchange. The authorised share capital of the company is Taka 10 crore, of which Taka 6 crore is issued, subscribed and paid up capital. On 31-10-1993 the petitioner had purchased 22,000 shares of Taka 100.00 each by means of a duly executed and stamped instrument of transfer. The said shares were sold to petitioner by respondent No. 2. Mr. Md. Sarqum Ali, who is and was at all material times a member of the Board of Directors of the company. The sale of the said shares was as aforesaid through a duly signed and stamped proper instrument of transfer executed by both the transferor and the transferee as required under the Companies Act, 1913 and the Articles of Association of the company. Prior to the purchase of the said shares by the petitioner, the respondent No. 2 had pledged these shares as part security for a bank guarantee provided by IFIC Bank Ltd. Motijheel Branch, Dhaka. Respondent No. 2 had pledged these shares as part security for a Bank guarantee provided by IFIC Bank Ltd. for Taka 25.00 lac favouring Biman Bangladesh Airlines, Accordingly, respondent No. 2 wrote on 31-10-1993 to IFIC Bank Ltd. informing them of the agreement to sell the said shares to the petitioner and instructed them to deliver the shares to the petitioner on receipt of a banker’s pay order for Taka 44.00 lac from the petitioner. The petitioner handed over a pay order No. 0005838 dated 31-10-1993 issued by Agrani Bank, Dhaka for Taka 44.00 lac to respondent No.2 in the presence of the bank officials and respondent No. 2 gave a receipt dated 31-10-1993 for the said pay order. The petitioner having made the requisite payment as aforesaid, the Bank delivered the share certificates to the petitioner on 2-11-1993, receipt of which the petitioner acknowledged by letter dated 1-11-1993. The letter of the respondent No. 2 dated 31-10-1993 and receipt dated 31-10-1993 and the letter of the petitioner dated 1-11-1993 are annexed as Annexures 3, 4 and 5 to the petition. In order to have the transfer of the said shares registered the petitioner on 2-11-1993 lodged with the company the instrument of transfer signed by himself as a transferee and respondent No. 2 as transferor along with the share certificates in respect of the said shares, respondent No. 2 also wrote on 31-10-1993 a letter to the Managing Director of the Company informing the latter of the transfer and stating that the share certificates had been delivered to the petitioner and that the transfer was irrevocable. A copy of the said letter dated 31-10-1993 is annexed as Annexure 6. The petitioner upon enquiry came to know that various attempts were being made to prevent the registration of the said shares in his name. The company took no action to comply with the petitioner’s request to register the transfer of the said shares in his name and, in fact, deliberately kept the matter in abeyance at the instance of certain interested quarters. At the 88th Board meeting the Directors of the company considered 46 different transactions involving the transfer of shares for the period when the petitioner had purchased the said 22,000 shares and also lodged all necessary documents for registration of his purchase, but quite deliberately kept the transfer of the shares to the petitioner off the agenda of the Board Meeting. The petitioners request for requisition was not included in the statement for share transfer prepared for the Board’s 88th meeting, but nevertheless other share transfers subsequent to the petitioner’s were considered and approved for registration. In fact question of registration of the petitioner’s said shares were discussed at 88th, 89th and 90th board meeting held on 8-11-1993, 28-11-1993 and 29-12- 1993 respectively. It was also considered by a special committee of Board members which was set up by the Board to resolve the matter. It appears from the minutes of the board meetings and the reports of the said committee that the board refused to register the said shares in the name of the petitioner in order to compel the petitioner to sell the same to the board members themselves. It is stated that it appears from the minutes of the 88th Board meeting held on 8-11-1993 that the managing director of the company raised certain questions regarding the purchase of the shares by the petitioner stating that respondent No. 2 had stated that these shares were subject to an understanding between the petitioner and the transferor. The board then constituted a 3 members committee with the following terms of reference:
1. To ascertain the extent of liability of Mr. Sarqum Ali with Mr. Giasuddin Ahmed in respect of these shares.
2. To determine the legality of the instrument submitted by Mr. Giasuddin Ahmed for transfer of shares in his favour.
3. Upon the determination of liability by the Committee, Mr. Sarqum Ali will be given days’ time to settle the outstanding with Mr. Giasuddin Ahmed failing which the matter be referred to the next Board Meeting for finial decision.
The Minutes of the 88th Board Meeting is annexed as Annexure-9.
4. The aforesaid 8 members Committee came to the under noted findings as recorded in its report dated 24-11-1993 to the Board of Directors of the Company.
Findings of the Company:
1.) It appears from the statements that Mr. Sarqum Ali took Taka 44,00,000 (Forty-four lac) from Mr. Giasuddin Ahmed. Mr. Giasuddin Ahmed obtained 22,000 share certificates from Mr. Sarqum Ali.
2) Instruments for transfer of shares as signed by Mr. Sarqum Ali was found in order as revealed by the Managing Director at the last Board meeting. Therefore, the committee did not go for verification of the instruments.
3) The Committee has not been informed, till today about the return of money to Mr. Giasuddin Ahmed by Mr. Sarqum Ali till date.
The report of the said committee dated 24-11-1993 is annexed as Annexure 10.
5. It is stated that from the minutes of the next 89th Board meeting held on 28-11-1993, one of the Directors of the company, Mr. Faruk A. Chowdhury, proposed that instead of registering the shares in the name of the petitioner, the said share should be equally divided amongst all the board members. All the attending board members, except Mr. Monzurur Rahman and Syed Moazzem Hossain, supported this proposal. Because of their refusal the committee set up earlier was requested “to discuss the matter further with Mr. Monzurur Rahman and request him to accept the views of the majority of members of the Board”. The committee submitted its further report dated 4-12-1993, stating that it had been unable to convince Mr. Monzurur Rahman to accept the views of the majority of the Board. At the next 90th Board meeting held on 22-12-1993 the Directors once again attempted to dispose of the said shares of the petitioner amongst themselves and again were only prevented by the refusal to agree to this malafide scheme because of the objections by aforesaid Mr. Monzurur Rahman and Syed Moazzem Hossain. Their refusal was recorded in the minutes as follows:
“Despite lengthy discussions and all efforts, an amicable settlement could not be reached between all the members of the Board and M/S Mr. Monzurur Rahman and Syed Moazzem Hossain.”
6. It is submitted that the aforesaid minutes of the board meetings and committee reports dated 24-11-1993 and 4-12-1993 clearly and manifestly demonstrate the unfair, fraudulent, oppressive and mala fide actions of the Board of Directors to register the transfer of the said shares. In view of the non-compliance of the company the petitioner finally had no option but to cause a legal notice dated 19-12-1993 to be served on the board calling upon the board to register the said shares in the name of the petitioner. Instead of complying with the request contained in the said legal notice, the board replied by letter dated 29-12-1993 refusing to register the transfer without assigning any reasons for the refusal. The company thought it lawyer also replied to the legal notice on 1-1-1994 stating that the board had acted in exercise of the power reserved to it by the Articles of Association of the company. The relevant article being Article 37 which reads as follows:
“37. The Directors may at any time in their absolute and uncontrolled discretion and without assigning any reason for such refusal decline to register any proposed transfer of shares. This Article shall also apply to a case where the proposed transferee is already a member.”
The petitioner thereafter wrote to the Securities and Exchange Commission (SEC) on 7-1-1994 praying for appropriate directions to be given by the Securities and Exchange Commission to the company so as to preserve investor confidence and prevent irreparable loss and injury to the petitioner. The Securities and Exchange Commission in turn wrote to the company but to no avail.
7. It is submitted that from the minutes of the deliberations and proceedings of the 88th, 89th and 90th board meetings and the committee reports dated 24-11-1994 and 4-12-94 it is manifest that the members of the board refused the registration in order to acquire the 22,000 shares for themselves. It is therefore submitted that such refusal was clearly in violation of the duty of the directors to act bonafide in the interest of the company. It is further stated that by letter No. GDI/HO/AC/89/1161 dated 23-7-1989 the company applied to have its shares listed and quoted in the Dhaka Stock Exchange, and gave the following undertakings in item Nos. 4 and 14 of the said application as follows:
“4. There will not be any restriction on the transfer of fully paid shares.”
“14. We agree that all transfers of shares lodged with us will be returned by us to the shareholders duly completed within six weeks from the date of its receipt.”
It is submitted that the company had clearly failed to comply with the above undertakings, which form part of the prescribed conditions for listing its securities in the Stock Exchange, making it liable to have its listing revoked by the Commission under section 9(4) of the Securities and Exchange Ordinance, 1969. It is further submitted that by its refusal the company was in violation of clause (Ga) of the order contained in notification dated 4-6-1992 issued by the Controller of Capital Issues, which prohibits any restrictions on the transfer of shares of a public limited company and required incorporation of regulations for the free transfer of shares. The petitioner wrote again on 4-1-1994, 22-2-1994 and 14-5-1994 to the Board to reconsider its decision, but the company refused to do so. The petitioner also claimed dividends @ 18% declared in the 88th Annual General Meeting, it is the petitioner who is entitled to receive dividends on the said 22,000 shares. The petitioner accordingly wrote to the company on 14-5-1994 to urge in advance that dividends payable on the said shares should be paid to the petitioner, and specifically that the dividends on the said shares should not be paid to the transferor of the share, since he had relinquished all right, title and interest in the shares, as informed to the company in his letter dated 31-10-1993 in which the transferor stated that the transfer was irrevocable and would not be revoked or cancelled at any time in the future. But the company refused to accept the request of the petitioner.
8. It is submitted that the petitioner was a bona fide purchaser for value. He had paid valuable consideration to the extent of Taka 44.00 lac for the said shares, which was twice the face value of the said shares. He has completed all the necessary formalities for obtaining registration of the transfer and the property of the shares vests wholly in the petitioner. It is submitted that the refusal by the company to register the shares is illegal, capricious, whimsical, and mala fide and an attempt to deprive the petitioner of the rights attached to his ownership of the shares. It is further stated that the power of refusal to transfer of shares as contained in article 37 of the Articles of Association of the company is not valid, or exercisable in the case of a public limited company whose shares are listed and traded on the Stock Exchange. The petitioner is also entitled on the aforesaid undertaking given by company to the Dhaka Stock Exchange and the company is also estopped thereby. It is also submitted that grant of such power is held to be valid, such power is not uncontrolled and unfettered but has to be exercised in accordance with well settled principles. Even in the case of a private company, the discretion vested in the directors to refuse registration of a transfer must be exercised bona fide in the best interests of the company. It is submitted that in the present case there has been no exercise of such discretion, but rather an exercise of power which is oppressive, capricious, whimsical, corrupt and mala fide. The directors stand in a fiduciary relationship to the company and the power reserved to refuse to register transfer is a discretion which requires a just and proper consideration of the proposal to transfer in the facts and circumstances of the case. In the exercise of that discretion the directors are required to act for the paramount interest of the company and for the general interest of the shareholders inasmuch as the directors are in a fiduciary position both towards the company and towards every shareholder. The directors, are, therefore, required to act bona fide and not arbitrarily and not for any collateral motive. Any power granted to the directors must be exercised in the best interests of the company, and not for a collateral purpose. It has been submitted that in fact the directors of the company were aware that because of the financial position of the company and the proposed dividend that prices of the company shares would rise. The share price is in fact now around Taka 350.00. It is stated that the attempt by the directors of the company to seek refuge in Article 37 of the Articles of Association to justify their refusal to register the transfer of the said shares is manifestly a mala fide exercise of power for a collateral purpose, inasmuch as the directors were aware that high dividends would be payable for 1993 and therefore wished to illegally grab the shares purchased for value consideration by the petitioner.
9. An affidavit-in-opposition has been filed by the defendant No.1 denying the material allegations made against the board of directors of the company. It is, inter-alia, stated that the shares which were earlier purchased by the transferee were shares quoted in the Stock Exchange. They were the shares of public and not the shares of the sponsors. In the instant case the transferor is a sponsor’s director of the company. There is restriction on transfer of the sponsors shares held by the sponsors. It is stated that the board of directors acted bona fide in constituting the committee to examine the validity of the transfer as there was an objection from the transferor that he had not sold the shares to the transferee but had merely pledged his 22,000 shares as security for Taka 44.00 lac given by the petitioner transferor. It is further revealed that the purchase was a benami purchase and the transferor had in fact purchased the shares on behalf of two existing directors namely, Mr. Manzurur Rahman and Mr. SM Hossain. It is further stated that the board of directors in consideration of the interest of the company and the share holders of the company refused to register transfer in exercise of his power under Article 37 of the Article of Association of the company.
10. The learned Advocate appearing on behalf of the respondent company has submitted certain gazette notification to show that the 50% share of an insurance company must be held by the sponsors and no transfer of such share could take place for 3 years after incorporation of the company and thereafter transfer could take place only with the permission of the Controller of Insurance.
11. An affidavit-in-opposition has also been filed by the transferor respondent No. 2 who opposed the application for rectification of the share register on the ground that he has not transferred his share to the transferee but had only pledged his shares as security for loan taken by him and that he was prepared to repay the loan taken from the petitioner transferor.
12. For convenience I will first take up the question whether there is any restriction or bar to transfer the shares of sponsors.
13. Mr. AR Yousuf, the learned Counsel appearing on behalf of the respondent-company, submits that the sponsors are required at all times to hold 50% of the paid up capital of the company. In support of his contention he has referred to the consent of the Controller of Capital issues being memo No. MF/INV-1/C1-58/85/820 dated 10th December, 1985. By that order, consent was given under Capital issues (Continuance of Control) Act, 1947 to the proposed issue of share capital in Bangladesh by the above public limited company proposed to be registered in Bangladesh to the value of Taka 6, 00, 00,000.00 (Taka six crore) only divided into 6, 00,000.00 ordinary shares of Taka 10,000.00 each to be issued at par for cash in the following manner:
(a) Sponsors (50%) 3, 00,000 ordinary shares of Taka 100.00 each and
(b) General Public (50%) 3, 00,000 ordinary shares of Taka 100.00 each
14. The conditions of the consent, inter-alia, was that at least 50% (fifty percent) of the capital i.e. Taka 3,00,00,000.00 (taka three crore) only shall be offered at par to the general public.
15. Article 5 of the Articles of Association provides as follows:
5. (a) The Authorised capital of the company is Taka 10,00,00,000.00 (Taka ten crore) divided into 10, 00,000 ordinary shares of Taka 100.00 each with power to increase or reduce the same.
(b) The initial paid-up capital of the company shall not be below Taka 6,00,00,000.00 (Taka six crore) of which 50% shall be subscribed by the promoters and the remaining 50% shall be offered for public subscription within a period of 3 years from the date of incorporation of the company. The portion of the public issue of shares of Taka 3, 00, 00,000.00 (three crore) remaining unsubscribed shall be underwritten by the schedule banks and financial institutions.
(c) Not more than 20% of the promoters contribution to the paid-up capital shall be allowed to be subscribed by the promoters belonging to a family group i.e. father, mother, brother, sister, husband, wife, son, daughter, son-in-law and first cousins.
(d) Individual promoters share shall not be less than Taka 5.00 lac and shall not exceed 20% of the promoter’s share in the paid-up capital of the company.
(e) Promoters shall be required to hold their respective shares for a minimum period of 3(three) years from the date of commencement of insurance business and can not sell the shares without the written permission from the Controller of Insurance, provided that a promoter of any banking Company in Bangladesh shall not be a promoter of this Company.
16. In view of the restriction imposed by the controller of the capital issues and the Articles of Association, this ratio of 50% between the sponsors share and the public share, no transfer of sponsor share can be made to effect or alter this ratio. The learned Advocate has also referred to a notification published in the Bangladesh Gazette dated 7th October, 1984, wherein it has said: In exercise of the powers conferred by section 114 of the Insurance Act, 1938 (VI of 1938), the Government is pleased to make the following amendments in the Insurance Rules, 1958. By the said amendment, Rule 4(a) provided for paid up capital in respect of the insurance companies which read as follows:
4A. Paid-up capital of an insurance Company and share holding.- (1) 50% of the total paid up capital shall be contributed by the sponsors and the remaining 50% shall be open for public subscription within a period of three years from the date of Registration of the company and the sponsors shall give undertaking to the Controller of Insurance at the time of applying for registration to the effect that before floating of public shares within the aforesaid period they shall obtain commitment from the schedule banks and financial institutions that any portion of public issue of shares remaining unsubscribed shall be subscribed by the schedule banks and the financial institutions:
Sub-rule 6 of rule 4(A) reads as follows:
(6) “Sponsors shall be required to hold their respective shares for a minimum period of three years from the date of commencement of the insurance business and cannot sell or transfer the shares without the written permission of the Controller of Insurance.”
17. The restriction on transfer of sponsors share as incorporated in Article 5(e) of the Articles of Association of the respondent company is almost identical to sub-rule 6 of rule 6 of rule 4(A) of the amended insurance rule of 1958.
18. It is in the light of these restrictions and or requirement that the learned Advocate for the respondent-company has argued that notwithstanding the undertaking given by the company and the subsequent notice of the Controller of the Capital Issues that there should be no restriction on transfer of shares, the members of the company were required to maintain this ratio of 50% shares between the sponsors and the public.
19. The question therefore arose whether the above restriction and limitation imposed on transfer of shares was for all time, that is, no transfer could be made without permission of the Controller of Insurance or that provision of sub-section 6 and Article 5 of the company ceased after expiry of 3 years from the incorporation of the insurance company.
20. The learned Advocate appearing on behalf of the petitioner has argued that these restrictions were only for a period of 3 years. After expiry of the period distinction between the sponsors shares ceased to exist and no permission was required for transfer of sponsor share from the Controller of Insurance. In this connection he has submitted a Photostat of a draft amendment of the Insurance Rule 1958 (???? ??????) published in the Bangladesh Gazette on 23rd October 1990 by the Ministry of Commerce under section 114 of the Insurance Act, 1938 (VI of 1938). By the said draft amendment rule 4(A) reads as follows:
‘Paid up capital of an Insurance Company and share-holding.
4A. Paid up capital shall be subscribed in the following manner:
(1) 50% of the total paid up capital shall be contributed by the sponsors and the remaining 50% shall be open for public subscription within a period of three years from the date of registration of the company and the sponsors shall give undertaking to the Controller of Insurance at the time of applying for registration to the effect that before floating of public shares within the aforesaid period they shall obtain commitment from the schedule bank(s) and financial institution(s) to the effect that any portion of public issue of shares remaining unsubscribed shall be subscribed by the schedule bank(s) and the financial institution(s):
(8) Sponsors shall be required to hold their respective shares for a minimum period of three years from the date of commencement of the insurance business and cannot sell or transfer the shares within that period after the said period transfer or sale of such shares can only be made with the written permission of the Controller of Insurance.
It will appear from this proposed amendment that the promoters were required to subscribe and pay for 50% of the paid up capital. Shares of the promoters could not be transferred for 3 years under the draft amendment. Sub-rule 8 of Rule 4A provides that after the expiry of 3 years sponsors could only transfer their shares with the permission of the Controller of Insurance. This appears to be in line with the argument of Mr. AR Yousuf that even after the expiry of 3 years the sponsor’s shares could only be transferred with the permission of Controller of Insurance. This amendment however was only a proposed amendment to ascertain public opinion. When the rules were actually amended the proposed sub-rule 8 of rule 4A of the draft amendment of the Insurance rules was not adopted.
21. The amendment which was made on 12-7-1994 by a gazette notification provided for 50% of the total paid up capital to be contributed by the sponsors within a period of 3 years but it did not include the draft amendment that after expiry of 3 years transfer or sale of sponsors shares could be made only with the permission of the Controller of Insurance. The exclusion of the draft amendment of the proposed sub-rule 8 of rule 4A indicates that there will be no restriction on transfer of sponsor’s shares by the promoters after expiry of 3 years from incorporation. Further, the company has given an undertaking with the Dhaka Stock Exchange that there will not be any restriction on the transfer of shares, and to amend the Articles of Association so as to bring them in conformity with their listing rules. I have said that clause (e) of article 5 of Association of the company is almost identical with sub-rule 6 of Rule 4(A) of the Insurance Rules 1958 and therefore, the restriction on transfer of sponsor’s shares was only for 3 years after incorporation. The company having been incorporated in 1958 there is no restriction now on the transfer of sponsor’s shares of the company.
22. However, having come to the conclusion that there is no restriction on the transfer of sponsors shares does not, in my opinion, mean that there is no right of the board of directors of the company to refuse registration of transfer of such shares or any shares under Article 37 of the Articles of Association of the company. The board of directors being in a fiduciary position with the company and its share-holders, in bona fide interest of the company and share holders may reject or refuse registration of transfer of shares. This is not a restriction on transfer of shares quoted in the Stock Exchange, it is a power given to the directors to refuse registration of transfer of share in order to protect the interest of the company and its share holders in appropriate cases.
23. Section 38 of the new Companies Act of 1994 provides for transfer of shares. Sub-section 7 of section 38 of the Companies Act 1994 provides that nothing in this section shall prejudice any power of the company under its Articles to refuse to register the transfer of any shares. Sub-section 7 of section 38 of the Companies Act, 1994 reads as follows:
“ ?? ????? ??? ????? ?????? ??????? ???????? ????? ????????? ??????? ????? ????????? ?????? ???? ???????? ???????? ?????? ??????? ????????”
The proviso clearly indicates that a company in its article may provide the board of directors with the power to refuse registration of transfer of any shares. In the instant case we have quoted Article 37 of the Articles of Association of the company which provides the board of directors with the power to refuse registration of any transfer of any share without assigning any reason and this includes transfer to an existing share holder. While this power exists, it must be exercised with judicial discretion. We will now see if in the facts and circumstances of the case the power was exercised bona fide keeping in view the interest of the company and the share holders.
24. Before we consider the bona fide of the power exercised under Article 37 of the Articles of Association the question whether there was any transfer at all may be decided. The respondent No. 2 Md. Sarqum Ali who is the transferor of the shares in question has stated that he, in fact, did not transfer 22,000 shares to the transferee-petitioner but that in consideration of loan of Taka 44.00 lac given by the transferee-petitioner to him, the shares which were pledged to IFIC Bank Ltd were handed over to the transferee with instrument of transfer signed by him as security for the loan. He was prepared to re-pay the loan and therefore wrote to the Board of Directors of the company not to approve the transfer of his shares to the petitioner-transferee. Be that as it may, instruments of transfer being duly stamped and executed by the respondent No. 2 they were blank transfers which are valid in law. The transferee had the option either to refund the loan or to sign the blank instruments of transfer as transferee and become owner of the shares. The Board of Directors has also found from the report of the Committee that the transfer of the shares were valid. Therefore the contention by the respondent No.2 that the shares were not transferred to the petitioner transferee cannot be accepted. They were validly transferred by the transferee-respondents No.2 to the petitioner.
25. Now we come to the question of refusal by the Board of Directors to register the transfer of the shares. We have already noted that the learned advocate for the respondent company has submitted that in the facts and circumstances of the case the Board of Directors bona fide refused to register the transfer of the shares. On the other hand, we have seen the submission by the petitioner that he is a bona fide purchaser, and that the value of the shares having gone up in the share market the Board Directors in order to grab the shares for themselves refused to register the transfer of the shares.
26. It will be convenient to discuss the principle laid down in some cases on the director right to refuse registration of transfer of shares in a company. In the case of Shoaib (Md) Vs. Uttara Bank Ltd. and another reported in 43 DLR 329 the company court held that in spite of any provisions in the Articles of Association providing the directors absolute and uncontrolled discretion to refuse to register transfer the directors must act reasonably. It held:
“It is provided in the Articles of Association and the prospectus that Directors have got discretion either to refuse or to accept the transfer of shares. It is true that the Directors have got discretion, but it must be a reasonable and judicial discretion. Such discretion should not be an arbitrary one at any rate. In my view, the discretion exercised by the Directors in the present case is absolutely arbitrary without having any legal basis.”
27. The Directors must act bona fide, citing in Re Gresham Life Assurance Society, Ex Parte Penny: 1872 LR 8 Ch. APP, 466 it was observed in the case of State Vs. Indian Chemical reported in AIR 1957(Orissa) 203:
“No doubt, directors are in a fiduciary position both towards the company and towards every share holder in it. The court would interfere with any violation of the fiduciary duty so reposed in the directors where it is made out that the directors have been acting from some improper motive or arbitrarily or capriciously.”
28. In the case of B Choukhani Vs. Western Indian Theatres Ltd. reported in AIR 1957 (Calcutta) 709; it was held:
“Even in a case where the articles of association give uncontrolled and absolute discretion to the directors to decline to register transfer of shares and also gives them power to withhold reason for such refusal, if it is shown that there has been no exercise of any discretion but an exercise of a whim or a caprice, then such purported exercise of power under such an article can be examined by the Court. The test of ‘discretion’ is not satisfied if the act or the decision of the directors declining to register is oppressive, capricious, corrupt or mala fide or not in the interest of the company at all. In the instant case precisely allegation is that the directors have been oppressive, capricious, corrupt and mala fide and that they have declined registration for collateral purpose and that it was not in the interest of the company.”
29. In the case of Bajaj Auto Ltd. Vs. NK Firodia reported in AIR 1971 (SC) p. 321 where Article 52 of the Articles of Association of the appellant company provided that the director might at their absolute discretion decline to register any transfer of share. The meaning of discretion was described as follows:
“Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the directors will act for the paramount interest of the company and for the general interest of the shareholders because the directors are in a fiduciary position both towards the company and towards every shareholder. The directors are therefore required to act bona fide and not arbitrarily and not for any collateral purpose.”
30. It was further held that “discretion” did not mean a bare affirmation or negation of a proposal, it implied just and proper consideration of the proposal in the facts and circumstances. In the exercise of the discretion the directors had to act for the paramount interest of the company and for the general interest of the shareholders because the directors were in a fiduciary position both towards the company and towards every share holder. The directors were therefore required to act bonafide and not arbitrarily and not for any collateral purpose. The discretion of the directors had to be tested as the opinion of fair and sensible men in the interest of the company.
31. In the same case it was held that in an appeal under section 113(3) of the Companies Act, 1956, against the refusal of the board of directors of a company to register a transfer of shares, the reason of the directors for the refusal have to be tested from three points of view:
(i) whether they acted in the interest of the company;
(ii) whether they acted on a wrong principle; and
(iii) whether they acted with an oblique motive or for a collateral purpose.
32. Based on those tests it was held that special resolutions are for limited purposes and are not matters of daily government or of daily routine administration. The mere apprehension that special resolution will not be passed if a transfer of shares is effected is not a legitimate reason for the directors refusing to register the transfer. On the facts it was held that the directors of the appellant-company did not act bona fide or in the general interest of the company in refusing to register the transfer of shares applied for by the respondents.
33. The Supreme Court of India in that case while considering the words “bona fide and for the benefit of the company as a whole” discussed some English decisions on the subject. Reference was made to the decision in Green Halgh Vs. Arderna Cinemas Ltd. 1951 C. 286; (1950) 2 All FR 1120 (CA), where it was said that if a resolution had the effect” to discriminate between the majority shareholders and the minority shareholders so as to give the former advantage of which the latter were deprived” the resolution could be attacked on grounds of elements of dishonesty or impropriety. The acts of the directors would have to be scrutinised as to whether they were the honest opinion of the directors acting for the company as a whole. In Re Bede Steam Shipping Co. Ltd. Lord Cozens-Hardly MR said that: the personal objections to a transferee were where the transferee would be quarrelsome person or he would be an unreasonable person or he would be acting in the interest of a rival company (My emphasis). The directors there had power to refuse to register transfer of shares if “in their opinion it is contrary to the interest of the company that the proposed transferee should be a member thereof”. In that case there were disputes between the elder brothers who were directors. One of the elder brothers sold his two shares to a clerk of his and another share to his house-keeper. The other director said that the company was really a family concern and therefore the shares should not be transferred singly or in small lots to outside persons having no interest in, or knowledge of, shipping. In the said case the power of the directors was to refuse to register the transfer of share to any person of whom the directors did not approve as transferee. The directors in declining to register the transfer gave two reasons. First, that there would be increase in expenditure if the body of shareholders were numerically increased and, secondly, the individuals who were neither related to the founders family nor connected in business with the company would become members by the proposed transfer. Neither of these reasons was held to touch the fitness of the transferees. The real power of the directors in refusing registration of transfer was on the ground of personal objections to the transferees. The apprehension on the part of the directors in the increase in the number of shareholders was therefore found to be an abuse of power.
34. The Supreme Court of India in the case of Bajaj Auto Ltd. made reference to an old decision in In re Bell Brothers Ltd. (1891 1 ILR 689) as an illustration of the power of the directors to refuse registration of transfer. The relevant article in the case of Bell Brothers conferred discretionary power on the directors to refuse registration of transfer of shares on the ground that the directors did not approve of the transferee. Citty J. said in relation to the directors’ power that the directors must act in good faith and in the interest of the company and with due regard to the right of a shareholder to transfer his shares and they must fairly consider the question of the transferee’s fitness at a board meeting. The Directors in that case were not required to disclose reasons. It said that three propositions could be extracted from that case. First, where the directors do not assign any reason because of the articles it is competent for those who seek to have the transfer registered to show affirmatively by proper evidence that the directors had not duly exercised their power. Secondly, if reasons are given by the directors and the reasons are legitimate the court will not overrule the directors’ decision merely because the court itself would not have come to the same conclusion. Thirdly, if the reasons are not legitimate, the court would hold that the power had not been duly exercised (My emphasis). An example would be where the directors said that they rejected the transfer because the transferor’s object was to increase the voting power in respect of his shares by splitting them among his nominees. It went on to say that it follows that where the directors have uncontrolled and absolute discretion in regard to declining registration of transfer of shares, the court will consider if the reasons are legitimate if the directors have acted on a wrong principle or from corrupt motive. If the Court found that the directors gave reason which was legitimate, the court would not overrule that decision merely on the ground that the court would not have come to the same conclusion (My emphasis).
35. The decision in the re Smith & Fawcett Ltd. was found by the court to indicate the extent to which the court upholds exercise of absolute and uncontrolled discretion of the directors to refuse to register any transfer of shares. In that case there were two directors who held the shares in equal numbers. One died. The other director refused to register the transfer of shares in the names of the executors of the deceased director except in respect of a part of the holding and upon the condition that the balance be transferred to the surviving director.
It was found to be a justifiable act of the director in the interest of the company.
36. Then in the case of Muir Mills Co. Ltd. Vs. TH Condon Muir Mills disallowed the transfers on the ground that the transferees were subordinates of Mc Robert, the managing Director of Cawnpore Mills. There was personal animosity between Johnson, the managing director of the Muir Mills, and Mc Robert. The directors of the Muir Mills came to a conclusion that Mc, Robert should not add to his voting power and “harass the management”. It was found to be abuse of fiduciary discretionary power of the directors when they wanted to safeguard the directors’ personal interest against Mc Robert.
37. In the Bajaj Auto Ltd. case the third reason given by the appellant-company was that the shares were being acquired by the Firodia group not with a view of bona fide investment but with a mala fide purpose and evil design of obstructing the business of the appellant-company. The Supreme Court of India while considering this point observed that:
“Acquisition or transfer of shares under the articles of the present case does not suffer from any restrictive impediment like pre-emption or personal objection to the transferees. There is no evidence that the transferees belonged to a rival concern (My emphasis). Equally, there is no evidence that the Firodia group ever obstructed in the management of the company. On the contrary, the Firodia group advanced large sums of money. Firodia was largely responsible for the gradual growth of the appellant-company and for the prosperity of the company. It was, therefore, an abuse of the fiduciary power of the directors to refuse to register transfer of shares.”
38. In the instant case the petitioner as transferee applied for registration of transfer of his share. To prove the point that the company had not acted bona fide, the petitioner has, inter alia, stated that his transfer was not included in the Agenda although other transfers during the same period and thereafter were in the Agenda.
39. It appears from the minutes of the 88th meeting of the Board of Directors that the Managing Director informed the board that the transferor had written to him asking him not to register the transfer of his share in favour of the petitioner-transferee as he has not transferred the shares. He had merely given his shares to the petitioner as security for the loan. It is because of this letter by the transferor that the matter was not included in the Agenda. The letter written by the transferor respondent No. 2 has been annexed. Although it might not have been a good reason for not including in the agenda, in view of the explanation offered by the Managing Director it cannot be said that the Board acted mala fide in not including the transfer in the Agenda. The Board in order to look into the dispute constituted a committee to look into the transfer of shares by the respondent No. 2 to the transferee-petitioner. The terms of reference was as follows:
1. To ascertain the extent of liability of Mr. Sarqum Ali with Mr. Giasuddin Ahmed in respect of these shares.
2. To determine the legality of the instrument submitted by Mr. Giasuddin Ahmed for transfer of shares in his favour.
3. Upon the determination of liability by the Committee, Mr. Sarqum Ali will be given 7 days time following the date of the Board meeting to settle the outstanding with Mr. Giasuddin Ahmed failing which the matter be referred to the next Board meeting for final decision.
40. In compliance of the decision of the Board of directors, members of the committee submitted a report which, inter alia, found that the transferor Mr. Sarquam Ali along with Mr. M Rahman and Giasuddin Ahmed (transferee) have invested about 75.00 lac equally to acquire a commercial building to develop it on commercial basis with an understanding that the profit generated from the building would be shared equally. Mr Ali took money from Pubali Bank Ltd. as loan the interest of which along with principal amount now stands at Taka 88.00 lac. Pubali Bank had been putting pressure on Mr Ali to settle the outstanding loan and being unable to pay the debt because of his financial constraints/stringency. Mr. Rahman, Mr. G Ahmed and Mr. M Hossain who are the Directors of the Pubali Bank promised to assist him in settling the outstanding loan by making certain exemption/concession. He therefore, decided to take Taka 44, 00,000.00 from Mr. G Ahmed by signing the instruments of transfer of shares and issuing a letter undertaking as security with an understanding that these shares shall be returned to Mr. Ali if he can not refund the amount to Mr. Ahmed within 3 (three) months from the date of the receipt of this money. According to Mr. Ali, he made this transaction on good faith and did not take anything in writing as evidence. The committee wanted to know from Mr. Giasuddin Ahmed whether he was willing to return the shares if he was paid back. Mr. Ahmed informed the Committee that he was willing to return the shares but he could not confirm its return to Mr. S Ali without the consent of Mr. M Rahman for whom he purchased the shares. It therefore transpired to the Committee that the petitioner had purchased the shares in Benami on behalf of Manzurur Rahman. With these observations the committee made following findings:
i) It appears from the statements that Mr. Sarqum Ali took Taka 44.00, 000.000 (forty four lac) only from Mr. Giasuddin Ahmed, Mr. Giasuddin Ahmed obtained 22,000 shares certificates from Mr. Sarqum Ali.
ii) Instruments for transfer for shares as signed by Mr Sarqum Ali was found in order as revealed by the Managing Director at the last Board meeting. Therefore, the committee did not go for verification of the instruments.
iii) The committees has not been informed till today about the return of money to Mr Giasuddin Ahmed by Mr. Sarqum Ali till date.
41. It is therefore clear that on the basis of the terms of the reference the committee found that the petitioner had paid Taka 44.00 lac to respondent No. 2 and that the instrument of transfer shares of 22,000 shares were signed by the respondent No. 2 Sarqum Ali. In the 89th meeting where all the 19 directors were present this report of the committee was taken up to consider the registration of transfer of the shares. Mr. Faruk A Chowdhury raised the point that since the sales transaction was made between Mr. Md. Sarqum Ali and Mr. Giasuddin Ahmed the name of Mr. Monzurur Rahman should not come into the picture. Mr. Faruk Chowdhury further stated “Mr. Giasuddin Ahmed is an influential director of another Insurance Company which is a competitor of Green Delta Insurance Co Ltd. Over and above Mr. Giasuddin Ahmed has also purchased a good amount of shares of Green Delta in the past and it would not be wise for the board to approve the transfer of such a substantial amount (22,000 number of shares worth Taka 22,00,000) of shares to such a person”. Accordingly he proposed that either Mr. Md. Sarqum Ali (who is also a director of the company) should pay back the amount he had taken from Mr. Giasuddin Ahmed or all Board members including Mr. Manzurur Rahman should purchase these shares equally. Mr. Azam J Chowdhury also endorsed the views of Mr. Faruk Chowdhury. All the attending board members except Mr. Monzurur Rahman and Syed Moazzem Hussain supported the above proposal of Mr. Faruk Chowdhury. Because of the dispute another committee was formed to reach an amicable settlement of the matter. This committee in its report stated that in spite of their efforts they could not reach any amicable settlement with the directors Mr. Manzurur Rahman and SM Hossain. The committee evaluated the matter and recommended as follows:
1. The claim of Mr. Monzurur Rahman of purchasing 22,000 shares from Mr. Md. Sarqum Ali through Mr. Giasuddin Ahmed is not tenable as neither his name nor any reference has been made to the instruments submitted for transfer of these shares under dispute in favour of Mr. Monzurur Rahman.
2. It is also reported that Mr. Giasuddin Ahmed is a director of another insurance company engaged in same line of business. Transfer of these shares in favour of Giasuddin Ahmed will be a conflict of interest for the company and its share holders.
42. This report was considered in the 90th meeting of the board of directors. Although the petitioner transferee Giasuddin Ahmed admitted that he had purchased the shares on behalf of directors Manzurur Rahman and SA Hossain the board of directors in my opinion rightly did not go into the question of Benami shares, as trust is not recognised under the Companies Act. The petitioner Manzurur Rahman who claimed to be the real owner of the shares transferred, wanted that the Board to approve the transfer and therefore had his statement recorded in the minutes of the meeting which is as follows:
“It would be unfair, unjust, untenable, illegal and mala fide on the part of the board to refuse this transfer of shares from one shareholder to another shareholder. Article 37 of the Articles of Association is contrary to Companies Act and to the very concept of a publicly traded company.
Green Delta is a public company in the Dhaka Stock Exchange. Its shares are traded on the floor of Dhaka Stock Exchange. Refusing this transfer will have immediate and far reaching consequences on the image and reputation of the company in the market and in the country and will affect its business. By refusing this transfer the status of the company as a public limited company is nullified and negated. In the past, thousands of shares of Green Delta have changed hands since shares were floated in the market. But there is not a single instance of refusal. It would be regrettable if the transfer of 22,000 shares of GDICL from Md. Sarqum Ali to Mr. Giasuddin Ahmed is refused specially in the light of Mr. Sarqum Ali’s letter dated 31-10-1993 where he categorically instructed the company to transfer the shares to Mr. Giasuddin Ahmed and stated that his instruction to transfer is irrevocable and will not be cancelled. The Managing Director also, stated categorically in the meeting of the board of directors on 8-11-1993 that the transfer documents of Mr. Giasuddin Ahmed are in order.
Therefore for the sake of justice and equity the board should approve the transfer of the shares to Mr. Giasuddin Ahmed.”
43. In this connection Mr. Sarqum Ali also informed the Board of Directors in his letter to the company dated 6-11-1993 that he had taken a personal loan from Mr. Giasuddin Ahmed with the said shares as security on the condition that the shares would be returned to him on repayment of the loan and he therefore requested that the said shares should not be transferred to Mr. Giasuddin Ahmed. During the meeting Mr. Sarqum Ali also submitted another letter dated 22-12-1993 addressed to the Chairman and board of directors stating the following:
“I would like to confirm that I will refund the entire loan amount which I took from Mr. Giasuddin Ahmed under hypothecation of 22,000 shares of Green Delta Insurance Co Ltd. as security by 2nd January, 1994 positively.”
44. It was also recorded in the minutes of the meeting that after lengthy discussion and all efforts, an amicable settlement could not be reached between all the members of the board and Manzurur Rahman and Syed Moazzem Hossain. The board with the exception of M/s Manzurur Rahman and Syed Moazzem Hussain finally decided to decline to register the transfer of 22,000 shares of the company in the name of Mr. Giasuddin Ahmed. Accordingly, in exercise of the members powers under section 37 of the Articles of Association the transfer was refused. It appears that the members had found instrument of transfer of shares to be in order and that full consideration for the amount had been paid by the petitioner-transferee.
45. I have said that the learned Advocate appearing on behalf of the petitioner, inter alia, has submitted that the members had not acted in the interest of the company but acted mala fide, capriciously and for collateral purpose to grab the shares for themselves and to deprive the petitioner of his shares. The board had earlier approved the transfer of the shares in the company to the petitioner and therefore there could not be anything against the person of the petitioner. The value of the shares having arisen the question of dispute of over transfer was raised only to prevent the petitioner from acquiring the shares. The contention that the refusal was made as the members wanted to deprive the petitioner of the shares as the value of the shares had arisen in the market is not substantiated by evidence. Admittedly many other shares transferred before had received approval of those transfers by the Board of Directors in the 88th board meeting of the company. Therefore, it cannot be said that only on the ground that the price of the shares had gone up so the Board of Directors refused to register the transfer. Besides admittedly the present petitioner had purchased shares of the company earlier in open market which were approved by the board. Therefore, the contention of the petitioner that it was for collateral purpose to deprive the petitioner of shares whose market value had gone up does not appear to be correct.
46. The next question is whether the board of directors in its turn had acted bonafide in refusing to register the transfer of shares. It was reported and alleged that the petitioner is a director of a rival insurance company engaged in the same business and it would not be in the interest of respondent company to allow such substantial shares to be held by him as there would be a conflict of interest. This fact that the petitioner is a director of a rival insurance company has not been denied by the petitioner. In the case of Bajaj Auto Ltd V. NK Firodia discussed earlier the Supreme Court of India had referred to the case of Bede Steam Shipping Co in which it was held that a personal objection would be on the ground that a transferee would be quarrelsome or unreasonable person or/he would be acting in the interest of a rival company (My emphasis). The Supreme Court of India while deciding whether refusal of registration of shares was mala fide in that case found that “acquisition or transfer of shares did not suffer from any restrictive impediment like pre-emption or personal objection to the transferees. There was no evidence that the transferees belonged to a rival concern. (My emphasis). That is to say, it would have been material if there was evidence that the transferees belonged to a rival company. In the instant case it is found from the report of the committee and the statement made by Mr. Faruk in the board meeting that Mr. Giasuddin Ahmed is an “influential director” of an insurance company in competition with Green Delta Insurance Company and therefore, it would not be in the interest of the company to allow such substantial transfer of shares in favour of the petitioner. The transfer therefore if approved could give rise to conflict of interest as had been pointed out by Mr. Faruk Chowdhury, a director of the company, which opinion was shared by the majority of directors. This reason appears to be quite legitimate. In the old case of Bell Brothers Ltd. which has been referred to in Bajaj Auto case above, it was held that if the reasons given by the directors and reasons are legitimate the court will not overrule the directors’ decision merely because the court itself would not have come to the same conclusion. I have already said that there are cases where the boards have decided not to approve the transfer if the transfer was a share holder of a rival company.
47. It has been pointed out that the transferee-petitioner had earlier acquired shares but there was no refusal of those transfers on the ground that the transferee had shares or was a director of a rival insurance company. It is not clear whether the Board had such knowledge earlier but the difference is that the present transfer involved a substantial number of a shares and whether the court agrees or not the board of directors was afraid that transfer of such substantial shares to a director of rival insurance company may not to be in the interest of the company. Reference has also been made to the case of Smith and Fawcett Ltd. where the director refused to register transfer of share in the name of the executor except in respect of part of the holding and upon the condition that the balance be transferred to the surviving directors. It was found that such refusal for registering part of the transfer to be a justifiable act of the director in the interest of the company. In the instant case the opinion of the Board was that the transfer of such substantial shares to a director of rival company was not to be in the interest of the company.
48. In the facts and circumstances of the case it can not be definitely said that the board of directors acted malafide or capriciously or arbitrarily or for collateral purpose only for their own gain.
In the result, this application for rectification of share register of the respondent-company under section 38 of the Companies Act 1938 is reject without any order as to costs.
Source: 55 DLR (HCD) (2000) 41