Conflict of interest is sufficient cause for refusal to share transfer u/s 58(4) of Companies Act 2013–Supreme Court

Conflict of interest is sufficient cause for share transfer refusal u/s 58(4) of Companies Act, 2013 –Supreme Court. CLB obliged consider contention of transfer being deceptive and mala fide.

ABCAUS Case Law Citation:
ABCAUS 2265 (2018) (03) SC

The appellant was a public company whose majority of shares were held by the State Government. The respondent company who was holding 28.54 % shares of the appellant, further purchased 100 shares, which together made its holding 39.77 per cent.

The respondent  company sent the share transfer deeds along with the original share certificates of the said 100 shares for registration of the transfer in its favour. However, the appellant company did not register the shares, the respondent company approached the Company Law Board (CLB).

The main contention of the appellant company was that the respondent Company was controlled by a competitor in business, and hence, it would not be in the interest of the Government Company to permit such transfer. The CLB, however opined that the only condition as per Article 44 of the Article of Association of the appellant Company authorising the Board to decline the transfer of shares was when shares were not fully paid up which was not the case. Therefore, CLB opined that the transfer cannot be refused arbitrarily and rejected the reason for non-registration of transfer on the suspicion of acquisition of control as baseless. As such CLB directed the registration.

The order passed by the CLB was challenged by the appellant company before the High Court under Section 10F of the Companies Act, 1956 raising various questions of law including the ground of limitation.

The High Court dismissed the appeal. The Hon’ble High Court took the view that since the appeal filed before the Company Law Board under Section 58/59 of the Companies Act, 2013 was liable to be admitted and considered even beyond the period of limitation, there was no other question of law taken in the appeal. The review petition was also dismissed by the High Court which led to the present SLP.

The Hon’ble Supreme Court observed that refusal of registration of the transfer of shares and the appellate remedy are provided under Section 58 of the Companies Act, 2013 which had come into force at the relevant time.

It was noted that u/s 58(2) of the Companies Act, 2013, the securities or interest of any member in a public company are freely transferable. However, under Section 58(4), it is open to the public company to refuse registration of the transfer of the securities for a sufficient cause. To that extent, Section 58 (4) has to be read as a limited restriction on the free transfer permitted under Section 58 (2).

It was further noted that section 10F of the Companies Act, 1956 provides that an appeal against an order passed by the Company Law Board can be filed before the High Court on questions of law. Right to refuse registration of transfer on sufficient cause is a question of law and whether the cause shown for refusal is sufficient or not in a given case, can be a mixed question of law and fact.

The Hon’ble Supreme Court observed that the appellant company had taken several grounds in the memorandum of appeal and raised questions of law as well on these aspects. One of the main questions of law stressed in the appeal pertained to the limitation. But the appellant had raised questions of law other than the question of law on limitation. Hence, the High Court had gone wrong in its view that the only question of law sought to be urged was with respect to the authority of CLB in reviewing petition beyond the period of limitation.

The Hon’ble Supreme Court opined that the stand taken by the High Court could not be justified in the factual background and the legal position. The appellant having taken specific grounds in the appeal and having raised questions of law regarding its right to refuse registration of transfer on sufficient ground, being a statutory appeal under Section 10F of the Companies Act, 1956, the High Court should have considered the same among other questions of law.

The Hon’ble Supreme Court opined that the view taken by the CLB that the refusal to register the transfer of shares can be permitted only if the transfer is otherwise illegal or impermissible under any law. Going by the expression “without sufficient cause” used in Section 58(4) was incorrect. Conflict of interest in a given situation can also be a cause. Whether the same was sufficient in the facts and circumstances of a given case for refusal of registration, was for the Company Law Board to decide since the aggrieved party is given the right to appeal.

The Hon’ble Supreme Court opined that the contention of the appellant before the Company Law Board that the whole transfer is deceptive and mala fide in the background of the respondent company, should have been considered.

The Hon’ble Supreme Court set aside the order of CLB and remitted the matter to the Company Law Board (now the National Company Law Tribunal) for consideration afresh.