Board Powers To Refuse The Transfer Of Securities By Shubham Budhiraja


Directors cannot arbitrarily refuse the transfer of shares even when specific power is given by the Articles. The directors stand in fiduciary position and cannot act contrary to collective Interest of the company. The tribunal can test the reasons for refusal/ approval of transfers on ground of arbitrariness.

Reese River Silver Mining Co. Ltd.’ V. ‘Smith’ (1869) LR HL 64.

Section 46 of the Companies Act provides that the ‘Register of Members’ is the prime face evidence of any matters that the Law directs or authorizes to be entered in the Register. Further, the Companies Act treats the ‘Register of Members’ only as prime face evidence and not the conclusive evidence of the entries therein.

It is to be noted that the power to refuse registration of shares can be exercised by the Directors of the Company if the ‘Articles of Association’ do contain specific powers for such refusal. However, the rider is the reasons for refusal to register the shares must be legitimate, notwithstanding the fact that ‘powers of refusal’ are conferred in the ‘Articles of Association.

If the Directors had assigned reasons for their refusal to register ‘Transfer of Shares’ then, the Tribunal is empowered to evaluate / scrutinize as to whether the said reasons are legitimate and that  where the Directors had committed mistake(s) and in fact, their action(s) can be displaced / set at naught to avoid serious miscarriage of justice.

The discretionary power to refuse ‘Transfer of Shares’ is not to be resorted to in a deliberate, arbitrary, fraudulent, ingenious or capricious fashion. As a matter of fact, the Directors are to exercise their discretion in good faith and to act in the interest of company. The Directors are to give due weight
age to shareholder’s right to transfer his share

In every transfer of ‘Shares’ there is a change of owner of shares in all relevant records and it is necessary to complete the formalities relating to ‘Shares Transfer’ without which transfer is incomplete. In the decision ‘Lyle & Scott Ltd.’ (1960) 30 Company cases 30 (HL) the Court held that ‘transferring a share involves series of steps (i) an Agreement to sell (ii) Execution of Deed and transfer and (iii) registration of transfer. ‘Shares’ are ‘Goods’ as defined in ‘Sale of Goods Act’ and can be transferred like any other movable property subject to the provisions contained in the ‘Articles of Association’ and the Companies Act. The word ‘Transfer’ employed in Section 108 of the Companies Act, 1956 Act refers to a transfer between persons pursuant to a voluntary act. Only when the ‘transference's’ name is registered in Company’s register, right to property is perfected

Kellick Nixon Ltd.’ V. ‘Dhanraj Mills (P) Ltd.’ (1983) 54 Comp cas 432 (Bom).

A company can register the transfer on such terms as to the ‘Indemnity’ as the Board may consider fit. In case of undelivered instruments or lost instruments registration is possible if the ‘Transferee’ agrees to give ‘Indemnity Bond’ or security on such terms as the Board may decide. By getting his name registered in the ‘Register of Members’, the ‘Transferee’ only perfects his title to the shares and is entitled in his own right to claim all the privileges which were previously claimed by the ‘Transferor’ in his name.

‘Colonial Bank’ V. ‘Hepworth’ (1887) 36 ChD 36 at p54

Wherein it is observed that till the transfer of shares is actually registered, the transferee’s title to the share is actually inchoate and the legal title remains vested in the transferor.

‘Hindustan Dorr Oliver Ltd.’ V. ‘A.K. Menon’ (1994) 80 Comp cas 384 (Bom)

Wherein it is observed that an owner of shares can follow the shares even into the hands of a bonafide purchaser for value. The term ‘transfer’ is used in regard to inter vivos transfer as per decision ‘Hemendra Prasad Barooah’ V. ‘Bahdur Tea Co. P. Ltd.’ (1991) 70 Comp cas p 792 (Guwahati).

Copal Varnish Co. Ltd.’ In re reported in (1917) Ch.D 349

Till the stage of execution of ‘transfer’ all that is made is to pass an equitable interest in the shares to the ‘Transferee’. In reality, there is no completion of legal assignment. Even when the ‘Board of Directors’ accepts the transfer and passes it for registration of transfers in records, the ‘transfer’ is not completed. Until the actual entry of transferee’s name was affected in the company’s register, the ‘transferor’ remains the legal holder of shares.

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