# BAJAJ AUTO LTD v. N. K. FIRODIA & ANR. ETC

- **Citation:** [1971] 2 S.C.R. 40
- **Court:** Supreme Court of India
- **Decided:** 1970-09-04
- **Bench:** M. Hidayatullah, G. K. Mitter, N. Ray
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bajaj-auto-ltd-v-n-k-firodia-anr-etc-5132
- **Pages:** 15

## Headnote

Companies Act, 1956 s. 111 (3), s. 111 (SA)-Appeal against "fusat
to transfer shares-Scope of-Directors power to
refuse
transfersCircumstances when such refusal cannot be upheld.
A group of shareholders led by F applied to have transfers of certain
shares of the appellant company regi•tered in their names but the Directors refused to register the transfers.
In the course of an appeal by the
F group of respondents to the Company I.aw Boa.rd against the refusal,
and upon being asked by that Board to disclose the reasons for the
refusal, the appellant company gave three reasons : First, that F, who was
the· company's Chief Executive had written to the Company Law Board
against the extension of the term of the company's managing agents and•
had thus acted in a treacherous fashion against the interest of the com·
pany; it was therefore evident that F's design was to create mischief;
secondly, the transfer of shares applied for was part of a design of the
F group to acquire interest in the company which was likely to result in
a threat to the smooth functioning of the management of the comp.any.
and to vote down the passing of any special resolution required for the
management of the company; thirdly, the purchase of shares by the F
group was not with a view to a bona fide investment but was with a 1nala
fide purpose and evil design.
The Company Law Board allowed the
appeal and directed the appellant company to register the 'transfer of the
shares.
On appeal to this Court,
HELD, dismissing the appeal : (i) In refusing to register the transfers.
the Directors did not act bona fide nor did they act in the general interest
c
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of tl!e company.
On the contrary, they acted upon a wrong
principle
F
and for the oblique motive of squeezing out F.
On the facts,
the inescapable conclusion was that the Directors acted arbitrarily and with
the collateral and corrupt motive of keeping their own group in control
of the company.
It \\'as apparent that F. wrote to the Company Law Board against
the appointment of the Managing Agents in the larger interest of the·
company.
He was justified in opposing their re-appointment withc..ut a
G
·specific resolution of the shareholders of the company and without a
puhlic notice to the shareholders to represent thei'r views in the matter.
There are v.·ell recognised safeguards as to notice and consent for
passing a special resolution.
Special resolutions are for limited purposp·
and rire not matters of daily occurrence or of Jailv routine administration.
The n1ere apprehension that special rc,olutions v.riJl not be passed \\'as not
a legitimate reason.
There wo; no evidence that the transferees helonged to a rival concern.
Equally. th~re \\'US no cviJi:nc~ that the F group ever obstructed
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!!A.TAJ AUTO V. N. X. FIRODIA
41
in the management of the company.
On the contraly, they advanced
large sums of money and F was largely responsible for the gradual
.arowth and prosperity of the company. It was therefore an abuse of
;the fiduciary power of the Directors to refuse to register the transfers
,of the shares. [53 D; 54 DJ
{ii) Although the C0mpany's Articles of Association provided that
the Directors might at their absolute and uncontrolled discretion decline
to register any transfer of shares, such discretion does not mean a bare
affirmation or negation of a proposal. Discretion implies just and prope>· 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 fid\Iciary position both towards
the company and towards every shareholder. The Directors are therefore
required to act bona fide and 1101 arbitrarily and not for any collateral
motive. [ 46 Cl
(iil) If the Articles permit the Directors to detiine to regilter transfer
of shares without
statin~ the reasons, the Court would not dr

## Text

_Characters 0–39,985 of 42,083. This is a partial read: ask again with offset=39985 for what follows._

40
BAJAJ AUTO LTD.
v.
N. K. FIRODIA & ANR. ETC.
September 4, 1970
(M. HIDAYATULLAH, C.J., G. K. MITTER AND A, N. RAY, JJ.)
Companies Act, 1956 s. 111 (3), s. 111 (SA)-Appeal against "fusat
to transfer shares-Scope of-Directors power to
refuse
transfersCircumstances when such refusal cannot be upheld.
A group of shareholders led by F applied to have transfers of certain
shares of the appellant company regi•tered in their names but the Directors refused to register the transfers.
In the course of an appeal by the
F group of respondents to the Company I.aw Boa.rd against the refusal,
and upon being asked by that Board to disclose the reasons for the
refusal, the appellant company gave three reasons : First, that F, who was
the· company's Chief Executive had written to the Company Law Board
against the extension of the term of the company's managing agents and•
had thus acted in a treacherous fashion against the interest of the com·
pany; it was therefore evident that F's design was to create mischief;
secondly, the transfer of shares applied for was part of a design of the
F group to acquire interest in the company which was likely to result in
a threat to the smooth functioning of the management of the comp.any.
and to vote down the passing of any special resolution required for the
management of the company; thirdly, the purchase of shares by the F
group was not with a view to a bona fide investment but was with a 1nala
fide purpose and evil design.
The Company Law Board allowed the
appeal and directed the appellant company to register the 'transfer of the
shares.
On appeal to this Court,
HELD, dismissing the appeal : (i) In refusing to register the transfers.
the Directors did not act bona fide nor did they act in the general interest
c
D
of tl!e company.
On the contrary, they acted upon a wrong
principle
F
and for the oblique motive of squeezing out F.
On the facts,
the inescapable conclusion was that the Directors acted arbitrarily and with
the collateral and corrupt motive of keeping their own group in control
of the company.
It \\'as apparent that F. wrote to the Company Law Board against
the appointment of the Managing Agents in the larger interest of the·
company.
He was justified in opposing their re-appointment withc..ut a
G
·specific resolution of the shareholders of the company and without a
puhlic notice to the shareholders to represent thei'r views in the matter.
There are v.·ell recognised safeguards as to notice and consent for
passing a special resolution.
Special resolutions are for limited purposp·
and rire not matters of daily occurrence or of Jailv routine administration.
The n1ere apprehension that special rc,olutions v.riJl not be passed \\'as not
a legitimate reason.
There wo; no evidence that the transferees helonged to a rival concern.
Equally. th~re \\'US no cviJi:nc~ that the F group ever obstructed
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!!A.TAJ AUTO V. N. X. FIRODIA
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in the management of the company.
On the contraly, they advanced
large sums of money and F was largely responsible for the gradual
.arowth and prosperity of the company. It was therefore an abuse of
;the fiduciary power of the Directors to refuse to register the transfers
,of the shares. [53 D; 54 DJ
{ii) Although the C0mpany's Articles of Association provided that
the Directors might at their absolute and uncontrolled discretion decline
to register any transfer of shares, such discretion does not mean a bare
affirmation or negation of a proposal. Discretion implies just and prope>· 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 fid\Iciary position both towards
the company and towards every shareholder. The Directors are therefore
required to act bona fide and 1101 arbitrarily and not for any collateral
motive. [ 46 Cl
(iil) If the Articles permit the Directors to detiine to regilter transfer
of shares without
statin~ the reasons, the Court would not draw unfavourable inferences agamst the Dir0 ctors because they did not alw
reasons.
Where however the Directors give reasons the Court would
consider whether they were legitimate and whether the Directon proceeded on a right or wrong principle.
As a result of the lntroductioa
of section 111 (SA) in the Companies Act, 1956, two consequences
follow. First, if the Articles permit the Directors not to disclose reuons
for declining to register a transfer, the statute confera power to intern>-
gate the Directors and disclose the reasons.
Secondly, if the Dhc!Dr•
do not disclose reasons, presumption can be drawn against the Directors
for non-disclosure of reasons in spite of being called upon to do so.,
[46 DJ
Mis Harinagar Sugar Mills Ltd. v. Shyam Sundar lhunghunwola &
Ors., [1962] 2 S.C.R. 339; Gr<enhalgh v. Arderne Cinemas Ltd., [1950]
2 A.E.R. 1120; Ex-parte Penney, L.R. 8 Ch. 446, Re. Bede Steam Shipping
Company Ltd., (1917) 1 Ch. 123; Re. Bell Brothers Ltd., 7 TIIDCS Law
Reports 689; Pender v. Lushington, L.R. 6 Ch. D. 70; &/want Transport
Co. Ltd. Amraoti v. Y. H. Deshpande, A.I.R. 1950 Nag. 20; Re. Smith
cl Fawcett Ltd., [1942] Ch. 304; Kaikhosro Muncherii Heera 'Mtl Neck
& Ors. v. The Coor/a Spinning d: Weaving Company & Ors., I.L.R.. 16
Born. 80 and The Muir Mills Company Ltd. of Cawnpore v. T. H. Condon
& Anr., I.L.R. 22 All. 410; referred to.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nas. 546,
547 and 692 to 1Q31 of 1970.
Appeals by special leave from the orders dated March 14,
1970 of the Company Law Board, Department of Company
Affairs, Ministry of Industrial Development, Internal Trade &
Company Affairs, New Delhi in Appeals Nos. 4 to 7 of 1969 etc.
C. K. Daphtary, A. K. Sen. L. M. Singhvi, S. Swa•up, B. Datra,
l. B. Dadachanji, 0. C. Mathur and Ravinder Narain, for the
appellant (in all the appeals).
F. S. Nariman, A. B. Diwan, K. J. Merchant and I. N. Shroff,
for respondent No. 1 (in all the appeals).
L235Sup.CJ/71--4
42
SUPREME COURT REPORTS
[1971]2 S.C.R.
The Judgment of the Court was delivered by
Ray, J.
These appeals are by special leave against the order
dated 14 March, 1970 made by the Company Law Board, Department of Company Affairs, Ministry. of Industrial :Development,
Internal Trade and Company Affairs, New Delhi, under section
111(3) of the Compani;s Act, 1956 directing the appellant company"to register transfer of 3643 shares forming the subject matter
of these appeals.
The respondents iii these appeals are Jaya Hind Industries Ltd.
N. K. Firodia and other persons who will be referred to as the
Firo.dia group.
The appellant will be referred to as the Bajaj
group.
The Firodia group lodged in different lots 3643 shares o,f the
appellant for being transferred to different names.
Jaya .-Hind
Industries Private Ltd. applied for transfer of 1500 shares. in their
names.
Firodia applied for transfer of 30 shares in his name.
The other transfers were in the names of associates, nominees and
friends of the Firodia group. The Board of the appellant refused
to register transfer of the said shares at the Board meetings held
on 23 May, 1968 in respect of 2532 shares and on 24 June, 1968
in respect of 1111 shares. The appellant communicated the said
refusal to transfer the shares in the month of June, 1968.
Thereafter, in the month of August, 1968 338 appeals were
fiied before the Company Law Board in respect of refusal of the
~ppellant tu transfer 3643 shares. The Company Law Boar<! hy
1ts letter dated 16 January, 1969 asked the appellant to dis¢lose
the reasons for refusal to register ·lf'ansfer of shares. The appellant compan} gave three reasons for refusal to register transfer of
the said 3643 shares.
First, that Jaya Hind Industries Private
Ltd. was a beneficiary to the e_xJ:ent of 1/4. share in the Managing
Agency remuneration receivable bY Jamnalal Sons Private Ltd.
from Bajaj Au.to ltd. and yet N. K. Firodia chose to write to the
Company Law Board against the extension of the Managing
Agency of hmnalal Sons Private Ltd. The company further said
thnt N. K. Firoclia, according to the appellant company, was their
representative and when N. K. Firodia acted in such a treacherous
fashion and against the interest of the company and behind the
back of the Board of Directors it became evident that Firodia's
design was to create mischief. Secondly, the transfer ·of shares received from Jaya Hind Industries Private Ltd. was part of the
design to-acquire interest in the company which was likely to result in a threat to the smooth functioning of the management of
the company, and tg vote down the passing of a special resolution
required for the management of the companY,.
and, therefore,
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BAJAJ AUTO V. N. K. FIRODIA (Ray, J.)
43
transfer should not be permitted. Thirdly, the purchase of shares
by Jaya Hind Industries Private Ltd. was riot with a vieV.: to b?na:
fide investment but was with a mala fide purpose and evil design.
It was said that the issued share capital of the company was
1 04 250 shares of Rs. 100 each.
Firodia group was holding
zi,500 shares.
Transferring further · shares to the ·names of
Firodia group would obstruct the business of the appellant company in the passing of special resolution which was required in
the day to day business of the company.
It was also said that
from the investment point of view with a dividend of Rs. 10 per
share on a paid up share of Rs. 100 the purchase price paid by
Firodia group was artificial and could only be with a view to tFy
to take control and/ or obstruct the busine11s and smooth working
of the company and to injure the existing management. The appellant company concluded by saying that the Board of Directors came to the conclusion that it was in the interest of the company to refuse the said transfers.
In. order to appreciate whether the Directors used the discretion in proper exercise of their fiduciary power and the reasons
were bona fide and legitimate in the interest of the' company as a
whole, · it is necessary to refer to certain features of the case.
In the year 1947 a joint venture bus_iness was entered into
between Jaya Hind Industries Ltd. and Bachhraj Trading Cor-.
poration Ltd. In the month of March,_ 1950, Bachhraj Trading
Corporation· suffered heavy losses and the joint venture was transferrec! to Bajaj
Factories Ltd. with the consent of Jaya Hind
Industries Ltd.
· In the year 19S2 N. K. Firodia became a Director of Bachhraj.
Trading Corporation Ltd. . In ihe mGoth of April, 11}54 Jaya
Hind Industries Ltd. aCCJUired 1800 shares of the face value ~f
Rs. l,80,000 of BachhraJ Trading Corporation Ltd .. at Rs. 36/8/-
per share which together with 50 shares held by N. K. Firodia
equalled 3/8ths of the share capital. In the month of May, 1954,
Bachhraj Trading Corporation Ltd. again took over the busi1tess of the joint venture from Bajaj Factories Ltd. In the year
1955 N. K. Firodia as 11. Director of Bachhraj Trading C01'P,oration Ltd. applied to the Central Government for the manufaeturing. licence of scooters, auto rickShaws and tempo three wheeler
vehicles. In the year 1957. Bac~aj Tradμ!g Corporation Ud.
was granted the manufacturing licence of tempo three wheelers.
In 1958 Bajaj Tempo Private Ltd. was formed to manufacture
tempo three wheeler vehicles and N. K. Firodia was appointed die
Man~ging Direct~ of the
same.
In the year 1959 Bachhraj
Tradmg Corporation Ltd. was granted licence to manufacture
scooters and auto rickshaws.
In. the year 1960 - the name of
SUPREME COU&T REPORTS
[ 1971] 2 s.c.R.
Bachhraj Trading c:_orp<>ration Ltd. was changed to Bajaj Auto
Private Ltd. Shar~s of Bajaj Auto Private Ltd. were offered to
shareholders of Bachhraj Trading Corporation in proportion to
their shareholding.
Between the years 1954 and 1960 J aya Hind Industries Private
Ltd. of the Firodia group had provided. substantial funds amounting to Rs. 4,36,000 to the appellant company in its former name.
ln the year 1960 there was a Managing Agency agreement between the appellant company and J amnalal Sons Private Ltd. for
.a period of five years. In 1960 when the appellant was converted
into a public limited company and Firodia was appointed as its
.Chief Executive, the respondent company of the Firodia group
by themselves,
their shareholders and friends
subscribed for
3 7i % of the shares offered to the then existing shareholders of
the appellant company. An agreement was entered into between
Jamnalal Sons Private Ltd. Managing Agents of the appellant
.company and the respondent Jaya Hind Industries Private Ltci. on
15 August, 1960 by which the Managing Agents agreed to pay
.25 % of the remuneration of the Managing Agency to the respon-
·dent company in consideration of services rendered to the appellant company.
Gradually, the appellant company grew into a
prosperous and very well developed automobile unit. Land wa&
.acquired, buildings we{e constructed and machinery and equipment worth more than a crore of rupees was purchased and installed. The manufacturing activity of the appellant company made
.good progress and 90% of the components of scooters and auto
rickshaws were capable of being manufactured indigenou~ly.
In the month of June, 1965 the appellant company applied to
the Central Government for re-appointment of Jamnalal
Sons
Private Ltd. as Managing Agents of the appellant company for a
period of 10 years. The Central Government on 11 August, 1965
sanctioned the said re-appointment of Managing Agents for the
period commencing 16 August, 1965 and ending 31 March, 1968,
viz., for an approximate period of three years.
The appellant
company entered into an agreement with the Managing Agents on
similar terms.
In the month of August, 1967 Kamalnayan Bajaj of the Bajaj
group proposed at the Board meeting of the appellant that an
application should be made to extend the term of the Managing
Agency. Firodia of the respondent compaμy group opposed any
such extension. In. the month of December, 1967 the appellant
applied to the Company Law Board for exten;ion of the term of
Managing Agency of Jamna!al Sons Private Ltd. for a period of
7 ·years so that the Managing Agents would have a term of 1 O
years commencing 16 August, 1965. The Jetter of the appellant
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BAJAJ AUTO V, N, K. FIRODIA (Ray, /.)
45
company was signed by the Secretary. In the month of March,
1968 Firodia came to know about the said letter and wrote tothe Chairman of the Company Law Board that there was neither
any resolution of the general meeting of the company for such
extension nor any publication of such appointment. Firodia said
that the appellant company contravened, in particular, the provisions contained in sections 326 and 640B of the Companies
Act, 1956. The Company Law Board, however, approved of the
extension of the Managing Agency for a period of two years from
31 March, 1970.
The a~pellant company was· converted into a public limited
company in 1960 and the share capital was increased from
Rs. 9,90,000 to Rs. 70,00,000. In the month of February and
March, 1967 the capital of the appellant company was increased
by issue of right shar~s. By the end of February,' 1968 out of the
issued share capital of 1,04,250 shares the BajaJ group held about
28,600 shares the Firodia group 23,400 shares and the general
public about 52,250 shares.
The Bajaj group however alleged
that in February, 1968 they held 31500 shares and the Firodia
group had 21735 shares. In the month of March, 1968 the
Bajaj group bought about 16,230 shares up to the maximum ·
value of Rs. 411 per share. It may be mentioned here that out
of the said 16,230 shares the Bajaj group bought about 4000
shares frotn the Life Insu:ance Corporation Ltd. and the Unit
Trust of India.
The Bajaj group obtained transfer of the . said
16,230 shares in thei_r names. The Firodia group, on the other
hand, from the month of April, 1968 onwards lodged in difierent
lots 3643 shares of the appellant company for being transferred
to their names. The Board declined to register any transfer in
respect of the said 3 643 shares.
It is also necessary to know about the antecedents and activities of Firodia in relation to the affairs of the appellant company.
When the joint venture was started in the year 1946 between
Bachhraj Trading Corporation Ltd. and the respondent company
Firodia was in actual charge of the joint venture. In tilt year 1950
Firol)ia went to Germany and obtained representation from Vidal
and Sohn Tempo Works Hamburg, Germany in connection with
the manufacture of tempo three wheeler vehicles. In 1952 Firodia
became a Director of Bachhraj Trading Corporation Ltd. Firodia
thereafter Sllbmitted a scheme for the mahufacture of scooters and
auto rickshaws and obtained a licence for Baclihraj Trading Cor~
poration Ltd. in that behalf. The Firodia group acquired shares
of the face value of Rs. 1,80,000 in Bachhrai Trading Corporation
in the year 1954 and helped its rehabilitation after it suffered
heavy losses. The Firodia group provided funds to the extent of
lits. 4,36,000 to the Bujaj group during the years 1954 and 1960.
SUPREME COURT REPORTS
(1971] 2 S.C.R.
When the appellant company became a public limited company in
A
the year 1960 the Firodia group subscribed for 37!% 'of the shares
and assisted in procuring subscription to the shares offered to the
public. J amnalal Sons Private Ltd. the Managing Agents of the
appe113illt agreed to pay 25% of their remm1eration of the Managing Agency tci the respondent company of the Firodia group in
consideration of the services rendered.
B
Article 52 of the appell<IJlt company provided that the Directors might at their absolute ~nd uncontrolled discretion decline to
register any transfer of shar~s. Discretion does not mean a bare ·
affirmation or negation of a proposal. Discretion inlplies just and
proper consideration of the proposal in the facts and circumstances ·
of the case. In .the exercise pf that discretion the Directors will act
C
for the paramount interest tjf the company and for the general interest of the shareholders b¢cause the Directors are in a fiduciary
position both towards the cc1mpany and towards every shareholder.
The Directors are therefore required to act bona fide and not arbi-
. trarily and not for any collateral motive.
If the Articles permit the Directors to decline to register transfer of shares without stating the reasons the Court would not draw
unfavourable inferences against the Directors because they did not
give reasons. In other words, the court will assume that the Directors acted reasonably and bona fide and. those who allege to the
contrary would have to prove and establish the same by evidence.
Where however the Directors gave reasons the Court would consider whether they were legitimate and whether the Directors proceeded on a right or wrong principle. As a result of the introduction of section 111(5A) in the Companies Act, 1956 two
consequences follow.
First, if. the Articles permit the Directors
not to disclose reasons for declining to register a transfer the statute confers power to interrogate the Directors and disclose the
reasons.
Secondly, if the Directors do not disclose reasons presumption can be drawn against the Directors for non-di5closure of
·reasons in spite of being called upon to do so.
In the present appeals, the reasons of the Directors have to be
tested from three poi11ts of view. First, whether the Directors acted
in the interest of the company; secondly, whether they acted on a
wrong principle; and, thirdly, whether they acted with an oblique
motive or for a collateral purpose. This Court in MI s Harinagar
Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwa/a & Ors(1) said
that "the discretion of the Directors would be i!lullified if it were
established that thP, Directors acted-oppressively, capriciously or
corruptly or in some other way ma/a fide".
The decision in
Harinagar Sugar Mills Ltd. (1) related to a case under the Com-
{i) [1962] 2 S.C.R. 339.
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BAJAJ AUTO V, N. K. FIRODJA (Ray, J.)
4 7
panies Act, 1956 prior to the introduction of section 111 (SA)
That is why if the Directors under the Articles were not to disclose
reasons it was said that the Court would presume where the Directors refused to register the transfer of shares that their power of
absolute discretion was exercised bona fide unless corrupt or ma/a
fide motives were affirmatively pleaded and proved. It would
be for the aggrieved tra11Sferor to show that the refusal to register
transfer was exercised ma/a fide and not in the interest of the
company and thereby the presumption of bona fide would be
displaced.
The words 'bonafide and for the benefit of the company as "
whole' have been considered in some English decisions. Reference
may be made to the decision in Greenhalgh v. Arderne Cinemas
Ltd. (1) where Evershed, M.R. said that if a resolution had the
effect "to discriminate between the majority shareholders and thL·
minority shareholders so as to give the former advantage of which
the later 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.
Mellish, L.J. in Ex-parte Penney(') said that the Director'
would have no right to force a particular shareholder to continu~
as a shareholder and not to allow him to transfer shares at all because .that would be an abuse of their power. Lord Cozens-Hardy,
M.R. in Re. Bede Steam Shipping Company Ltd.(') said that the
personal objections to a transferee were where the transferee would
be a quarrelsome person or he would be an unreasonable person or
he would be acting in the interest of a rival company. The Direc-·
tors 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 Eldey Brothers sold his two shares to a clerk of his and
anothe1· 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.
'Ln Bede Steam Shipping Co.(8 ) the power of the Direc-/i
tors 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 share- ·
holders who numerically increased and secondly the individuals·
who were neither related to the founders family nor ccnnected in
(I) [1950] 2 A.ER. 1120.
(2) LR. 8 Ch. 446.
(3) [1917] I Ch. 123.
48
SUPREME COURT REPORTS
[1971] 2 S.C.R.
business with the company would become members by the proposed transfer. Neither of these reasons was held to touc!). 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 iu the increase in the number of shareholders was therefore found to be an abuse of power. It was found that the Directors in refusing registration to transfer thought of the proposed
transferees as mere nominees who could adopt the attitude of the
transferor who had disagreed with the Directors of the company.
The Directors did not look at the relevant circumstances in which
they were placed, namely, their status, their occupation, and, in
particular, whether the transferees were interested in any private
business competing with the company.
Reference may be made to an old decision in Re. Bell Brothers Ltd.(1) as an illustration of the power of the Directors to
refuse registration of transfer. The relevant Article in the case
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conferred discretionary power on the
Directors to refuse registration of transfer of shares on the Fund D
that the Directors did not approve of the transferee. Chitty, J.
said in relation to the Directors' power that the Directors muat 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
S
disclose reasons.
Three propositions can 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. An example would be where
the Directors said that they rejected the transfer because the transferor's object was to increase the votinjf power in respect of his
shares by splitting them among his nommees.
In the case of Bell Brothers(1) two Bell brothers John
and Lowthian and the members of their families were shareholders
in Bell Brothers. John ·died leaving a will and the beneficiaries
under the will were his widow and children. The will provided
for the widow an annuity. The will contained a general trust for
conversion. . John's shares were sold to provide a fund to meet
(J) 7 Times Law Reports 689.
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BAJAJ AUTO V, N. K. FIRODIA (Ray, J.)
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the annuity. Hodgson purchased those shares. The Directors were
Lowthian, his son Hugh and his son-in-law. High was an executor trustee under the will of John and as such was one of the transferors of the shares of John. The shares of the testator were in the
names of Hugh, the nephew and Charles, the son of the testator as
executor trustees. The shares being registered in two names, Hugh
as th~ first on the register had the right to vote.
Hugh had on
the one hand expressed !he opinion to sell the shares in the true
interest of the beneficiaries and on the other hand as a Director
opposed the sale to Hodgson on the ground that the shares should
be held by the members of the Bell family. The Directors did not
aliow registration either in the name of Hodgson or his nominees.
It has been well-settled since the decision in Pender v. Lushington ( 1) that the Directors are not entitled to look behinld the register
for any purpose. They do not take notice of trust. Similarly, they
cannot say that the transferee i.s the nominee of some one whom
th~y consider objectionable. The accent is always on personal objections to the transferee. The solicitors of the Directors in the
case of Bell Brothers gave the real reason for refusal of registration
that Hodgson was holder of shares in a rival company. Chitty, 1.
said that the Directors Qarefully abstained from stating what their
personal objection to Hodgson was and put forward their solicitors
to assign the reason for it. The Directors who had an opportunity
of exercising their power attempted to exercise it upon a wrong
principle and therefore their power was gone. It is quite likely
that if the Directors had given eyidence of their real reason the
Court might have accepted it as legitimate. The decision in the
case of Bell Brothers(') illustrates that where the Directors
have the power to refuse registration of the transfer of shares, their
exercise of power on a wrong principle will vitiate the exercise of
the pc;wer.
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 or the
Directors have acted on a wrong principle or from corrupt motive.
If the Court found that the Directors gave reasons which were legitimate, the Court would not overrule that decision merely on the
ground that the Court would not have come to the same conclusion. Reference may be made to the decision in Ba/want Transport Co. Ltd. Amraoti v. Y. H. Deshpande(') which is a Bench
decision of the Nagpur High Court. Sapate was a shareholder in
theocoI;Jpany and owned 31 shares. One of his shares was sold by
public auction and was purchased by Deshpande. Deshpande applied for registration. The Article in the Nagpur case conferred
(I) LR. 6 Ch. D. 70.
(2) 7 Times Law Reports 6~9
(3) A.LR. 1950 Nag. 20·
'So .
SUPREME COURT REPORTS
[1971 J2 S.C.R.
.absolute and uncontrolled discretion on the Directors to refuse to
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register transfer where in the opinion of the Directors it was not
in the interest of the company to admit the proposed transferee to
.meinbership.. The evidence in that case was that Deshpande was
the lawyer of Sapate. Sapate was quarrelling with the company .
. Sapate also joined a rival concern. The Directors decision in those
surrounding circumstances was found to be a legitimate exercise
I
of the power of the Directors in the interest of the company.
The decision in Re. Smith & Fawcett Ltd. (1) indicates the
·extent to which the court upholds the exercise of absolute and uncontrolled discretion of the Directors to refuse to register any trans-
. ler of shares. In that case there were two .Directors who held the
shares m equal numbers. One died. The other Directi>r 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.
In the old Bombay decision in Kaikhosro Muncherji Heera
'Md Neck & Ors. v. The Coor/a Spinning & Weaving Company &
Ors( 1) the Board of Directors might decline to register any transfer of shares, unless the transferees were approved by the Boaid.
A shareholder became insolvent. His share vested in the Official
.(\ssiguee. The Official Assignee sold the shares. The purchaser
applied for registration.
The Directors declined to approve . of
the. transferees unless the transferees would pledge themselves not
to oppose a certain chang~ in the mode of remunerating the Agents
of the company, which the Directors desired to effect, arid which
they believed would be very advantageous to the company. Innay
be mentioned here .,that the purchaser of the shares required the
· Official Assignee to register transfer in the names of the two nominees who were already the holders of shares in the company. The '
company,, however, did not take any objection to the nominees in
their personal capacity. The Directors acted on wrong principlo
and in abuse of power in insisting on obtaining a pledge from the
transferees not to oppose change in remuneration of the 'Managing
Agents.
. A Bench decision of the Allahabad High Court in The Muir
Mills Company Ltd. of Cawnpore v. T. H. Condon & Anr.(8 )
related to the absolute power of the Directors to refuse registration
of transfer of shares on personal objections to the transferee. 'Jilte
Muir Mills in that case disallowed the transfers on the ground that
the transferees were subordinates
of McRobcrt, the Managing
(l) 1942 Ch. 304.
(2) I.L.R. 16 Born 80.
(3) l.L. R. 22 All. 410.
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Direclor of Cawnpore Mills.
There was personal animosity between Johnson, the Managing Director of the Muir Mills and
McRobert.
The Directori of the Muir Mills came to a conclusion that McRobert 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 McRobert.
The first reason of the appeliant company for the refusal of registration of transfer of the shares was that Firodia acted in a
treacherous fashion against the interest of the company and behind
the back of the Board of Directors.
The evidence is that the
Managing Agents of the Bajaj group in the year 1965 failed to
obtain from the Government approval of an extension of term for
10 years.
The Government sanctioned the term for about three
years which was to expire on 31 March, 1968. In the month of
August, 1967 when Kamalnayan Bajaj of the Bajaj group proposed an extension of the term of the Managing Agents Firodia
represented to the Board that Firodia was opposed to the same.
No application for extension of the term of Managing Agents was
made at that time.
The appellant however behind the back of
Firodia wrote to the Company Law Board in the month of December, 1967 and though Firodia was the Chief Executive the letter
was signed by the Secretary and kept conceale-0 from Firodia.
·Firodia came to know of the letter, in the month of March, 1968
and he wrote to the Company Law Board that the company had
made "false statement" in the application for extension of the term,
namely, that the appellant company gave a wrong impression that
it had received p_ermission to increase its production to 60,000
scooters per year whereas in fact no such permission had been
granted. Firodia also pointed out that the appellant suggested that
its progress was because of the Bajaj group and made no reference
to Firodia who was the Chief Executive of the appellant.
In 1965 the appellant asked for appointment of the Managing
Agents for ten years. The Company Law Board approved of the
appointment upto 31 March, 1968. It is true that there was a
resolution of the appellant company in the year 1965 for the appointment of the Managing Ag~nts for a period of ten years. That
resolution of 1965 after the appointment of the Managing Agents
for a term of less than three years and, in particular, after an agreement had been entered into bt:tween the appellant company on the
one hand and the Managing Agents on the other in that behalf.
was exhausted, and spent its force and could not be said to have
either a life of its own for 10 years or to spring into actiOn in the
year 1968 for a mival of the resolution to enable the appellant
compmy to ask for appointment of Managing Agents for a period
of 1even years on the basis of any resolution.
Firodia rightly
52
SUPREME COURT REPORTS
[1971] 2 S.C.R.
protested against the absence of any resolution of the shareholders
A
and ~o against the absence of any publication of proposal for
appomtment of Managing Agents for seven years, Firoclia furthermore rightly cavilled against the total obscuration of his name or
of any reference to his activities in relation to the affairs of the
company and the contrary suggestion in the letter that the prosperity of the appellant company was an account of Kamalnayan
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Bajaj.
This aspect is important to show that the allegations of
Firoclia were against the Managing Agents and further that Firodia
.was acting in the larger interest of the company whereas the
Managing Agents were actuated by their personal motives ,-Of preservation and aggrandisement of their power. The letter written
by the appellant to the Company Law Board was not circulated c
to thi> shareholders. Firodia came to know about the letter and
that is why he informed the Company Law Board of the state of
affairs.
On this evidence it is apparent that Firoclia wrote to the Company Law Board in the larger interest of the company.
Firocli~'s
allegations were against the Managing Agents. Firoclia was justified in opposing re-appointment of the Managing Agents without
a specific resolution of the shareholders of the company and without a public notice to the shareholders to represent their views in
the matter.
The Bajaj group acted behind the back of Firodia
and wanted to steal a march. The real motive of the Bajaj group
.was revealed first by imposing restrictions in the month of March,
1968 on the powers of Firodia as Chief Executive of the appellant'
company and secondly by the resolution in the month of May,
1968 to terminate the services of Firodia as Chief Executive. The
refusal to register the transfers was at the meetings of the Board
held in the months of May and June, 1968.
The Directors had a hostile feeling against Firoclia and they
had the dominant desir~ to keep Firodia out of the company. The
Directors did not act in the interest of the company and their dis.,
cretion ·was tainted by unfair conduct and unjustifiable attitude
against Firodia.
The second reason given by the appellant company was that
the Firoclia group acquired the shares with a design . of acquiring
interest in the company which was likely to result in a threat to
the smooth functioning of the management of the company and
to vote down the passing of the special resolution. There are well
recognised safeguards as to notice and content for passing special
resolution. Special resolutions are for limited purposes and are
not matters of daily occurrence or of daily routine administration.
The mere apprehension that special resolutions will not be passed
is not a legitimate reason.
The shareholders will bestow their
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intention on matters forming the subject matter of resolution.
Passing of special resolutions will depend upon the mandate of
the shareholders. It is manifest that the reason given by the Directors was a camouflage to cover their collateral and corrupt motive
of preserving the hegemony of the Bajaj group. 'The motive is
corrupt because the Bajaj group acted for their p:rsonal interest
and not in the bonafide general interest of the company.
The third reason given by the appellant company was that the
shares were being acquired by the Firodia group not with a view
of bonafide investment but with a malafide purpose and evil design
of obstructing the business of the appellant company.
Acquisition or transfer of shares under the Articles of the present case
does not suffer from any restrictive impediment like pre-emption
or personal objections to the transferees.
There is no evidence
that the transferees belonged to a rival concern. 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. The Bajaj ·
group obtained transfer of 16230 shares in their favour in the
month of Marci), 1968. The Bajaj group purchased shares in the
market at a maximum value of Rs. 411 per share. The holding
of the Bajaj group prior to the acquisition of the said 16230
shares was 28600 shares or according to the Bajaj group 31,500
shares.
The Firodia group on the other hand prior to the proposed transfer had 23,400 shares or 21,735 shares according to
the Bajaj group.
The general public held 52,250 shares.
Thjs
was the position
in the month of February, 1968. The Bajaj
group by the acquisition of 16230 shares would have a numerical
strength of 44830 shares whereas the Firodia group would be having 26863 shares if the proposed transfers were allowed by the
Directors. The Bajaj group paid Rs. 411 per share. The Firodia
group paid roughly about Rs. 200 per share. Firodia.was not on
the Board of Directors of the appellant company. The Bajaj group
and their friends were the Directors. In the year 1967 the Firodia
group lodged 4243 shares for transfer in their names and the transfers were registered.