LexBAJAJ AUTO LTD. versus N. K. FIRODIA & ANR. ETC.
Open in Lexace · Ask the AI about this caseJudgment (excerpt)
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
transfers-
Circumstances 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 Direc-
tors 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 in-
escapable 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 con-
cern.
Equally. th~re \\'US no cviJi:nc~ that the F group ever obstructed
H
/-
1
r
\
\,.
r
}
\
\
A
B
c
D
E
G
H
!!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 pro-
pe>· 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 un-
favourable 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 pro-
ceeded on a right or wrong principle.
As a result of the lExcerpt shown. Read the full judgment & AI analysis in Lexace.