G.R. Desai and others vs Registrar of Companies of A.P., Koti, Hyd. and others

First petitioner is the Secretary of M/s. Hyderabad Industries Limited, which is a Public Limited Company (hereinafter referred to as "the Company"). Petitioner No.2 is the President of the Company and petitioner No.3 is the Chairman. Petitioner Nos.4 to 9 are the Directors of the said Company. Respondent Nos.2 to 5 had applied to the company for transfer of certain shares of the Company in their name. Respondents 2 to 5 claimed that the said shares were transferred in their name by Company known as M/s. Deccan Enterprises Private Limited (hereinafter referred to as the ''Deccan Company''). Respondent Nos. 2 to 5 applied on 16th March, 1990 to the Company along with Transfer Deeds allegedly executed on behalf of Deccan Company by respondent No.2. the shares of the Company were also handed over to respondent Nos. 2 to 5 at the said time. When the said application along with shares were submitted to the Company, the first petitioner, being the Secretary, wrote back on 26th April, 1993 to respondent Nos.2 to 5 informing that the Board Resolution of Deccan Company dated 15-3-1986 which was the basis for claim of Respondent No.2, had not authorised respondent No.2 to transfer the said shares. The original shares and the Transfer Deeds were returned along with the letter dated 26-4-1990. Thereafter on 7-5-1990, respondent Nos. 2 to 5 again lodged the same shares along with Transfer Deeds and once again claimed that the Resolution dated 15-3-1986 passed by the Board of Deccan Company properly authorised second respondent to transfer the said shares. In the mean time on 11th May, 1990 the Company received letter from Mrs, Satyabhama, who is one of the share-holders of the Deccan Company, intimating about an undertaking dated 20th April, 1988 given by Mr. O.P Jalan, who is second respondent here, to the Court in which Company Petition No.27 of 1987 was pending. The undertaking was to the effect that no assets of Deccan Company would be disposed of pending decision of Company Petition No.27 of 1987. In view of such position, the Company sought advice of a Senior Advocate from Calcutta as to the proper course in respect of transfer of shares held by Deccan Company in favour of respondent Nos. 2 to 5. The petitioners claim that the advice given was that unless there was a specific resolution of the Board of Directors of Deccan Company, authorising sale of the shares, the transfer cannot be accepted. Armed with this advice, the Company on 14th June, 1990 informed respondent Nos. 2 to 5 accordingly and also brought to the notice of respondents the letter given by Mrs. Satyabhama, On 16th July, 1990 respondents 2 to 5 re-lodged the shares for purposes of transfer along with a Resolution of the Board of Directors of the Deccan Company allegedly passed on 5-5-1989. The petitioners contend that this wa not a proper authorisation as required by Section 297 of the Companies Act, 1956 (hereinafter referred to as the Act). The Company also felt that the Transfer Deeds had become invalid u/s 108(1-A) of the Act. In the mean time Interim Administrator was appointed for the Deccan Company in Company Petition No.27 of 1987. The said Interim Director did inform the Company that the sale of shares in favour of respondent Nos.2 to 5 was binding on Deccan Company and then respondent Nos. 2 to 5 again lodged the shares with letter dated 22-10-1990 and produced another Resolution of the Board of Directors of the Deccan Company which was allegedly passed on 16-10-1986. The Company contends that it then approached a Solicitor firm in Calcutta on 20th November, 1990 in view of the uncertainty felt by it. Opinion was sought from the said Firm of Solicitors. In accordance with the opinion obtained from the Solicitors, the Company wrote to respondents 2 to 5 on 21-11-1990 asking for further particulars. On 23rd of November, 1990, the Board of Directors of the Company resolved for calling of such particulars. On 3rd December, 1990 respondent No.2 intimated the first petitioner about the details and produced certain documents, in response to letter of Company dated 21-11-1990. The Company again sought advice of the Solicitors. Inspite of all the material submitted, the Company as per advice received from Solicitors'' firm refused to register the Transfer and Return the shares to respondent Nos.2 to 5 once more and called for opinion in full, as detailed in letter dated 21-11-1990.

It is not disputed that respondent Nos. 2 to 5 thereafter filed a Company Appeal before the Company Law Board. The Company Law Board after hearing both the sides directed the Company to effect the Registration of the shares in favour of respondent Nos. 2 to 5 and gave certain other directions. Against this decision of the Company Law Board, an appeal was preferred, u/s 10F of the Act by the Company, in this Court. This Court confirmed the order of Company Law Board by its judgment dated 4-2-1998. It was after decision given by this Court and after receiving the certified copy of the order of this Court, that the Company complied with all the directions contained in the Company Law Board read with order of this Court. The Share Certificates, duly transferred in favour of respondent Nos.2 to 5 were sent on 24th February, 1998.

It is not disputed that during all this time between March, 1990 to February, 1998, the dividend payable on the shares in question was not paid. The Company contends that the said unpaid dividend amount was during all these years kept in abeyance, pending registration of Transfer of Shares, and was transferred to the Special Dividend Account as required by Section 205A of the Act. The said amount of dividend was paid to respondent Nos. 2 to 5 immediately after registration of the shares in their favour was done.

Respondent Nos. 2 to 5 sent a letter on 10-3-1998 to the Company claiming that Company was liable for payment of interest at Compound rate of 2% per month for deliberately withholding the dividend amount from the year 1990 onwards. By the same communication, respondent Nos. 2 to 5 gave notice to petitioners that if the amount so claimed was not paid within seven days, each of the Directors of the Company would be prosecuted u/s 207 of the Act, apart from instituting civil claims against Company as well as its Directors. The receipt of this notice has given petitioners reasons to apprehend that proceedings might be brought against them u/s 207 of the Act by respondent Nos.2 to 5 and therefore, have approached this Court for seeking a direction that petitioners may be relieved wholly from any such liability, as there was neither negligence, misfeasance or any similar act and, that petitioners have all along acted reasonably and honestly in the matter.

Respondent No.1 did not file any counter when served with notice. However, a representation, by the Department has been sent to the learned Standing Counsel in which the stand taken by respondent No. 1 is that it is a proforma party and the real dispute is between petitioners on one hand and respondent Nos.2 to 5 on the other. The said communication has been produced before the Court. It is contended that respondent No. 1 would abide by whatever orders are passed in the matter.

Respondent Nos. 2 to 5 have filed a joint counter. The first objection taken to the claim of the petitioners is that a joint petition by all of them on common ground is not maintainable. There is distinct role of each of the petitioners and therefore, a separate case for each should have been made out along with appropriate affidavit by each. A common petition of this type, it is stated, is not maintainable. Apart from this technical objection, the respondents have alleged that there is some personal animosity between respondent No.2 and his brothers. Due to this animosity, respondent No.2''s brother joined hands with petitioner No.2, who a influential person. Petitioner No.2 also happens to be a Share-holder of Deccan Company. The brother of respondent No.2 with cooperation of petitioner No.2 has devised a plan to harass respondent Nos. 2 to 5 herein. Several allegations are levelled in that respect but we arc not concerned with mat. The sum and substance is that Respondent Nos. 2 to 5 are victims of a plan hatched by the brother of respondent No.2 with help of petitioner No.2. The reasons given are mere ruse for not transfering shares in the names of respondents inspite of lodgement of all the appropriate papers along with the shares of different dates. The Company purposely avoided to effect the transfer. Every time the shares were returned back along with a letter. Dividends were not paid for all the intervening period. Different reasons were given on every occasion for not registering the transfer of shares. The legal opinion obtained from so-called Senior Advocate and the Firm of Solicitors has also been commented with certain harsh allegations. It is alleged that the referred Senior Advocate was coerced to give a particular opinion. The Solicitors'' firm gave a tailor made opinion due to interest of the said Firm in the petitioners'' Company. It is alleged that the opinions given by the Senior Advocate as well as the Firm of the Solicitors have no credibility. It is further submitted that default in payment of Annual Dividend from 1990 onwards was illegal and was inspite of the communication sent by the Interim Administrator of the Deccan Company that the Deccan Company acknowledged the transfer. The withholding of dividend was not at all for genuine reasons. It is argued that the petitioners cannot take shelter u/s 206A of the Act, because it was the act of the Company to refuse the registration. Section 206A of the Act applies only when the dispute is pending about the transfer of registration, and not, when the Company illegally refuses to register and returns the papers. It is alleged that particularly petitioner No.3 has shown total indifference and has abdicated his duties in not abiding by the true legal position and there is no justification for claiming any relief u/s 633 of the Act.

The first objection raised does not appear to be of any substance. As the notice letter dated 10-3-1998 issued by the respondents was admittedly to all the petitioners jointly without attributing any different role to any of the petitioners, filing of this joint petition by all of them cannot be faulted. The petition has been filed in consequence of the notice sent by the respondents. After all the prosecution threatened was u/s 207 of the Act. The prosecution would be based on the allegations made in the notice. The petition has set out necessary material for seeking relief u/s 633 of the Act. There was, in the circumstances, no necessity to file separate petitions or separate affidavits by each of the petitioners. The hyper-technical objection does not have much merit and is rejected.

The more serious objection raised by Sri Ratnakar, the learned Counsel for respondent Nos.2 to 5, is that the petitioners have not acted honestly or bona fide in not registering the transfer of shares in favour of respondents 2 to 5 and particularly in not paying the dividend in question from 1990 onwards to any one. In the argument it is reiterated that a plan was hatched to cause as much loss to respondents, as was possible in circumstances. This plan was result of a family feud between respondent No.2 and his brother. The brother of respondent No.2 has instigated and aligned with petitioner No. 2 to deprive the respondents 2 to 5 of their legitimate claim. I do not think that such a plea can be entertained in this petition. Whatever may be the personal disputes between respondent No.2 and his brother or, between respondent Nos. 2 to 5 and petitioner No.2 they have to be sorted out elsewhere and not in this petition. The Court is concerned with bona fides as can be found from factual and indisputable material available in the whole episode. It is unfortunate that respondent Nos. 2 to 5 thought it fair and fit to make certain allegations against a Senior Counsel of Calcutta High Court, who has given opinion to the petitioners and also against a Firm of Solicitors of Calcutta. They have no opportunity to meet such allegations. Making such allegations in collateral proceedings may not be appropriate. It cannot be disputed that the Senior Advocate, Sri R.N. Bojaria of Calcutta High Court, was consulted by the petitioner-company in the matter and he had given this opinion advising the petitioners to take certain steps before effecting the transfer. The material also shows that the Solicitors'' firm of M/s. Khaitan and Company was consulted in the matter and legal opinion was obtained from them. It may be that the opinion given was not in accordance with the correct legal position. It was not so, is now established by the decision of the Company Law Board which was affirmed by the decision of this Court. Fact remains that steps taken by the Company for not registering the claim of respondents 2 to 5 were on advice obtained by them from competent persons. The fact that steps were taken to obtain advice before refusing registration of the shares prima facie shows the lack of mala fides on part of the petitioners. It is argued by the learned senior Counsel Sri Shanthi Bhushan appearing on behalf of the petitioners, that the petitioners at no point of time wanted or desired to utilise the amount of dividend in question for the use of the Company. The Company has shown its fairness by depositing all the dividend due in the account called as "Unpaid Dividend Account" as envisaged u/s 205A of the Act. Section 206A of the Act enjoins that during the period when registration in respect of transfer of shares has not been done, notwithstanding any thing in any other provision, the dividend in relation to such shares has to be transferred to the Special Account referred to u/s 205A of the Act. It is thus argued that non-payment of dividend by the Company to respondent Nos.2 to 5 during the interregnum was in accordance with provisions of law and the petitioners cannot be held responsible for such non-payment.

Sri Ratnakar, the learned Counsel for respondent Nos. 2 to 5, has however argued that Section 206-A of the Act has no application in the facts and circumstances of this case. Such provision comes into play only when transfer of share is pending with the Company, (underlined to give emphasis). If the question of transfer is not pending with the Company (underlined to give emphasis), this provision will not apply. Section 206-A of the Act is as follows:

" Where any instrument of transfer of shares has been delivered to any company for registration and the transfer of such shares has not been registered by the company, it shall, notwithstanding anything contained in any other provision of this Act,

(a) transfer the dividend in relation to such shares to the special account referred to in Section 205A unless the company is authorised by the registered holder of such shares in writing to pay such dividend to the transferee specified in such instrument of transfer; and

(b) keep in abeyance in relation to such shares any offer of rights share under clause (a) of sub-section (1) of Section 81 and any issue of fully paid-up bonus shares in pursuance of subsection (3) of Section 205."

The argument is that in the instant case the Company had rejected the application of respondents 2 to 5 on each occasion and had returned the share certificates along with other documents on every occasion. The matter was not pending with the Company. It is argued that the Company was thus devising ways and means not to register the transfer. It is said that the course of events show that the whole exercise was mala fide. In any event, the question of transfering shares in favour of respondent Nos. 2 to 5d and registering them in their name was not pending with the Company and therefore, the payment of dividend could not have been kept in abeyance. The learned Counsel for respondent Nos. 2 to 5 brings to my notice the observations made by the learned Author Shri Ramaiya in his Book on the Companies Act, 1956, (13th Edition). The learned Author had stated that Section 206-A of the Act does not apply where registration of Company''s shares was refused by Company itself. Though such opinion of an author has undoubtedly some weight, it cannot be said that it is the last word. It is possible to take the view that Section 206-A of the Act applies in all cases where the instrument of transfer of shares has been delivered to a Company but the transfer has not been registered by the Company for any reason whatsoever. In any event, in view of advice obtained by petitioner-company from a senior Advocate and a Firm of Solicitors, the registration of transfer of shares was not done is the factual position.

It is next argued by Sri Ratnakar, the learned Counsel for respondent Nos. 2 to 5, that whether registration was done or not done on proper legal advice, is not very relevant. The learned Counsel argues that the Company should have obtained, if at all it was acting bona fide, opinion on the point of liability to make payment of dividend with reference to Section 206-A of the Act. The advice and opinion obtained by the petitioners was really with reference to Section 108 of the Act. In other words, the advice or opinion was obtained as to whether shares should be transferred and registered in the name of respondent Nos. 2 to 5 or not. It is true that the petitioners had obtained advise as argued by the learned Counsel for respondent Nos. 2 to 5, merely for registering the shares on a transfer. But once the petitioners were advised not to register the shares in the name of respondent Nos. 2 to 5 till necessary compliance was done, it followed naturally that the payment of dividend to respondent Nos. 2 to 5 could not have been made. The learned Counsel for respondent Nos. 2 to 5 then argues that in any event the petitioners were bound to pay the dividend to the Transferors from whom the respondent Nos. 2 to 5 were seeking transfer. Had such dividend been paid to the Transferors, the petitioners could have validity said that they had discharged the liability. Then the matter would have been between the Transferor and respondent Nos. 2 to 5. There is some force in this contention. There was no reason for petitioners not to pay dividend to the Transferor. If the petitioners were not inclined to accept the respondent Nos. 2 to 5''s request for transfer, it only meant that the said shares continued to be the property of the Transferor. There was thus no reason for not paying dividend to the Transferor. If the Transferor did not dispute the validity of transfer, he would have held the dividend amount in trust for respondent Nos. 2 to 5 or would have immediately passed it on, to respondent Nos.2 to 5. In fact there is material on record to show that prior to 1990 the dividend was paid to the Transferor. Sale of shares to respondent Nos. 2 to 5 was dated 15-9-1986. The dividend from 1986 to 1990, was then passed on by the Administrator, (to respondent Nos. 2 to 5) who also informed that the Deccan Company was acknowledging respondent Nos. 2 to 5 as the transferees. However, non-payment of dividend to the Transferor-share-holders is not the subject-mater of this petition, as the petitioners arc seeking protection, or shield from prosecution on a likely complaint to be filed by respondent Nos. 2 to 5 u/s 207 of the Act for non-payment of dividend to them. The question therefore is whether petitioners should be relieved unconditionally of liability arising out such likely prosecution?

I have found that non-payment of dividend to Transferor-share-holders by the petitioner-company was unjustified. However, for such non-payment to the Transferor-shareholders, complaint can be lodged by the Transferor-share-holders and not by respondent Nos. 2 to 5. As long as shares were not transferred and registered in their name they could not have made a claim to the dividend amount. Therefore, we have to find out in the first place whether non transfering and non-registering shares in name of respondent Nos.2 to 5 was a bona fide act or not? I have no doubt in my mind that if the Court finds that the Company mala fide or lacking bona fides, did not transfer the shares in the name of the Transferee then such act of non-registration will not be covered by provisions of Section 206-A of the Act. In such case the Company would be liable to pay the dividend not to the Transferor but to the Transferee, due to the absence of bona fides on its part. No body can take advantage of his own wrong. However, in the instant case as pointed out earlier, the Company had taken care to obtain advice from a Senior Counsel as well as from a Firm of Solicitors. Though the advice was proved to be incorrect, it cannot be said that the Company lacked bona fides. Further more, in my view it is not open now to attribute any ulterior motives to the Senior Counsel who gave opinion or to the Firm of Solicitors. The question had to be agitated before the Company Law Board as also in appeal before this Court. I have gone through the judgments of Company Law Board as well as of this Court dated 4-2-1998 in Company Application Nos. 1, 2, 3 and 4 of 1995. Neither the Company Law Board nor this Court has anywhere commented adversely or attributed any foul play in respect of opinion obtained by the petitioner-company. In those proceedings the opinion obtained by the Company was a point directly in issue. It does not appear that any argument was advanced about die lack of credibility of advice/opinions obtained by the Company. I do not think that it would be proper to allow to agitate that question now in the present proceeding. In my view the presumption has to be made about the honesty in matter of the opinions/advice given by the Senior Counsel as well as the Firm of Solicitors, notwithstanding the fact that the said opinion was found to be inaccurate and not accepted by Court of Law. In this view of the matter, I think that petitioners action in not paying the dividend to respondent Nos. 2 to 5 from 1990 to 1998 cannot be stamped as mala fide. True it is that non-payment of dividend to the Transferor was not proper but that is another issue and not required to be discussed at this juncture.

From the affidavit and the counters including additional counter and additional rejoinders, it has come on record that the Company has opened an account in the name "unpaid dividend account" of that Company. It also appears that the company as soon as it declares dividend within the permitted period, transfers the whole amount of dividend to this Account and from that account payment of dividend to the Shareholders is made. The unpaid dividend remains in the same account, undisbursed. The learned Counsel for respondent Nos. 2 to 5 says that the Act no where envisages that the whole declared dividend of the Company should be transferred to such account. It is only the unpaid dividend which is required to be transferred to such account. The act of the Company in transferring gross-dividend declared at once to such an account is violation of the provisions of Act and for tliat violation, the petitioners can be prosecuted. It is argued that such factual position is admitted by the petitioners themselves and therefore, no shield should be provided to the Company for facing such prosecution. Apart from the fact that the present petition is in respect of seeking protection from prosecution only u/s 207 of the Act, the contention raised by the learned Counsel for respondent Nos. 2 to 5 though may appear attractive, does not convince me prima facie. The learned Senior Counsel appearing for the petitioners is right in saying that if the Company has done more than what it was required to do to provide protection to the Investing Public, the petitioners cannot be faulted for such overcautious attitude. Sri Shanthi Bhushan, the learned senior Counsel states that initially when Section 206-A of the Act was about to be inserted by an amendment in the Act, the note circulated for inserting the Section at the time of presentation of the bill envisaged that such an account should be opened in which Company should transfer the declared dividend. It was probably by way of extra-caution that the Company took the step of transfering of the whole dividend to the account. In any event, this point really does not arise in the present petition and therefore, need not be dealt any further.

Having regard to all the discussion above, I think that the petitioners should be given relief. However, the relief cannot be given unconditionally in the facts and circumstances of the case. The facts now show that the registration of the transfer of shares in name of respondent Nos. 2 to 5 was kept in abeyance for no fault of respondent Nos. 2 to 5. As pointed out already, the petitioners did not care to pay the dividend to the Transferor also during all the relevant period. The effect of the judgment of this Court in confirming the Company Law Board''s decision, is obviously that the transfer of shares ought to have been done in favour of respondent Nos. 2 to 5 when the shares were first lodged with Company. Respondent Nos. 2 to 5 have been for no fault of their deprived of the amount of dividend for all these years due to nonregistration of transfer in their favour. They are entitled to reasonable interest according to the current market custom. It would be improper, inequitable and unjust to direct the respondent Nos. 2 to 5 to file a suit for claiming relief of interest. In fairness, the petitioners company should have given reasonable interest to respondent Nos. 2 to 5 in the circumstances of the case. Further, respondent Nos.2 to 5 were embroilled in various litigations for considerable time.

In these circumstances, the petitioners are relieved of liability u/s 207 of the Act on a condition precedent that the petitioners or the Company pay interest to respondents 2 to 5 on their respective dividends, at the rate of 12% p.a. (simple) on the amount declared from 1990 till 1998 as and when the said amount become due for payment to the Share-holders. It is made clear that the respective interest shall start from the day when the Act requires the despatch of warrants to the Share-holders. The petitioners shall also pay costs of Rs.10,000/- in one set to respondent Nos. 2 to 5. If the interest and costs so ordered arc paid within a period of one month, the petitioners shall stand relieved of the liability of prosecution u/s 207 of the Companies Act on any complaint of respondent Nos.2to5 individually or jointly.

The Company Petition No.60 of 1998 is accordingly disposed of.