LexCognito

In its recent judgement passed on 27 March 2018 in the matter of Mackintosh Burn Limited ("MBL") Vs. Sarkar and Chowdhury Enterprises Private Limited ("S&CEL"), the Supreme Court of India has upheld the limited right of a public company in restricting the free transferability of its shares for a sufficient cause and has held that conflict of interest can be one such cause.

Facts: MBL is a public company with majority of its shares held by the Government of West Bengal. S&CEL, already holding 18.54% shares, purchased another 100 shares which together would make its holding 39.77% and sought registration of transfer of the shares in its name. However, MBL refused to register the same on the ground that S&CEL is controlled by a competitor and hence, it would not be in the interest of a Government company like MBL to permit such transfer. Feeling aggrieved by such refusal, S&CEL approached the Company Law Board and challenged the said refusal. After hearing the parties, CLB passed order dated 15 October 2015 in favour of S&CEL by rejecting the contentions of MBL and directed registration of the shares in favour of S&CEL. The said order passed by CLB was challenged by MBL before the High Court of Calcutta, however, the appeal was dismissed. Thereafter, the matter went through several ups and downs for one or other technical and other reasons before it finally came before the Supreme Court for consideration.

Statutory Provision:

Section 58 of the Companies Act, 2013 (the "Act") reads as follows:

"(2) ...., the securities or other interest of any member in a public company shall be freely transferable.

(4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal."

Section 58 of the Act corresponds to Section 111A of the erstwhile Companies Act, 1956 ("Old Act") which reads as follows:

"(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company shall be freely transferable:

Provided that if a company without sufficient cause refuses to register transfer of shares within two months from the date on which the instrument of transfer or the intimation of transfer, as the case may be, is delivered to the company, the transferee may appeal to the Tribunal and it shall direct such company to register the transfer of shares.

(3) The Tribunal may, on an application made by a depository, company, participant or investor or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulations made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) or any other law for the time being in force, within two months from the date of transfer of any shares or debentures held by a depository or from the date on which the instrument of transfer or intimation of the transmission was delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or company to rectify its register or records."

Issue: The central issue in this matter revolved around the right of a public company to refuse registration of the transfer of shares under section 58 of the Act. CLB took the view that the refusal to register the transfer of shares can be permitted only if the transfer is otherwise illegal or impermissible under any law. Accordingly, CLB rejected the grounds taken by MBL for refusing the transfer of its shares to its competitor.

Held: While stressing on the expression 'without sufficient cause', the Supreme Court has said that under Section 58(2) of the Act, the securities or interest of any member in a public company are freely transferable. However, under Section 58(4) of the Act, it is open for a public company to refuse registration of the transfer of securities for a 'sufficient cause'. To that extent, Section 58(4) of the Act has to be read as a limited restriction on the free transfer permitted under Section 58(2) of the Act. The Court further said that "Conflict of Interest" in a given situation can also constitute a 'sufficient cause'. Whether the same is sufficient in the facts and circumstances of a given case for refusal of registration, is for the CLB to decide since the aggrieved party is given the right to appeal. Having said that, the Court set aside the order passed by CLB and further orders passed by the High Court and remitted back the matter to CLB (which is now National Company Law Tribunal/NCLT) for consideration afresh of the appeal filed under Section 58 of the Act. While doing so, the Court gave clear directions to NCLT that it shall pass orders afresh uninfluenced by any of the observations and findings in the orders passed by CLB and High Court in this matter in an expedited manner.

Our Comments: This is probably one of its kind judgement whereby the Supreme Court has said that a public company has a limited right to restrict the free transferability of its shares for sufficient cause and conflict of interest can also be a cause in a given situation.

The issue relating to right of a public company to refuse to register transfer of its shares pursuant to Section 111A of the Old Act also came before Andhra Pradesh High Court in the matter of Karamchand Investments Ltd. V. Nile Limited which was decided in 2001. The counsel for the appellant in that case had argued that the expression "sufficient cause" used in Section 111A(2) should be understood only in the light of the three grounds enumerated under sub-section (3) of section 111A of the Old Act, which authorized CLB to direct any depository or a company to rectify its registers or records and the company cannot refuse to register the transfer of shares on any other ground whatsoever. The court dis-agreed with the counsel for the appellant and held that sub-section 2 of section 111A is very broadly worded as compared to sub-section 3 of Section 111A. The court held that the expression used in sub-section-2 was "sufficient cause" and that will include the 3 grounds enumerated in sub-section 3. In a given case even contravention of some existing contractual obligations or some other obligations attached to those shares would come up.

In light of the above, it is to be decided based on the facts of each case what could constitute "sufficient cause" for a public company to refuse registration of transfer of shares. Therefore, it is imperative for the Board of Directors of a public company to understand the statutory rights of the Board and exercise such rights judicially while discharging their duties.

Our litigation team advised and represented MBL at all levels of legal proceedings before the Hon'ble Supreme Court till the matter was finally decided by the Apex Court in favour of our client.

Please feel free to contact us in case you need a copy of the judgement.

This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.