M/s. Gujarat Industrial Investment Corporation Limited is a Government of Gujarat Undertaking, filed Company Petition No. 13/111A/SRB of 2003 under Section 111A of the Companies Act, 1956 against

1. M/s. Sterling Holiday Resorts (India) Limited
2. M/s. Dove Investments Private Limited
3. M/s. Maxworth Investments Private Ltd., and
4. N. Mohan

before the Company Law Board, Southern Region Bench, Chennai.

To register the transfer of 22,93,000 shares of the company pledged by respondents 2 to 4 in favor of the petitioner. It is seen that the Gujarat Industrial Investments Corporation Ltd., a wholly-owned Government of Gujarat financial institution advanced a loan of Rs. 5 Crores in 1996 to the company for the conduct of its business, for which the company offered the shares held in the name of respondents 2 to 4 is the Company’s promoters and associates, by pledging the shares.

Since the Company committed default in repayment of the loan amount, the petitioner lodged with the Company, the original certificates of the pledged shares together with duly stamped and executed instruments of transfer for effecting registration of the transfer thereof in their name. It is the grievance of the petitioner that though the Company had registered the transfer of 2,99,800 shares pledged by respondents 2 and 3, it failed to affect the registration of the transfer in respect of the remaining 22,93,000 shares. It is also the claim of the petitioner that in spite of repeated demands and lawyer’s notice dated 29.7.2003, calling upon the company to transfer the balance 22,93,000 shares in the name of the petitioner in Demat form, the Company failed and refused to register the transfer of the pledged shares in favor of the petitioner.

In order to circumvent the claim of the petitioner, the respondents 2 to 4 have filed Civil Suits in City Civil Court, Chennai for a permanent injunction restraining the Company from affecting the transfer of the pledged shares in favor of the petitioner. The respondents 2 to 4 filed a common counter affidavit wherein it is stated that the petitioner failed to comply with the provisions of sub-section (1C), according to which the instruments of transfer ought to have been stamped or endorsed by the petitioner and thereafter delivered them to the Company together with the share certificates for registration of the transfer within two months from the date so stamped or endorsed.

The requirements of Section 108 of Companies Act 1956, being mandatory have not been duly satisfied and therefore the Company is not under an obligation to effect the transfer of shares in the name of the petitioner. The petitioner filed a rejoinder stating that the plea of non-compliance with the requirements of Section 108(1C) has neither been raised before the Civil Court nor in the present proceedings. The Company has already given effect to the transfer of 2,99,800 shares.

Issues

1. Whether the obligation to register a transfer of shares within a particular period of time was mandatory or directory?
2. Whether the company can cancel or reject the transfer where stamps on the transfer form were not defaced or canceled?
3. Whether the transfer of shares was valid in nature or not?
4. Can a company reject the transfer form if it was resubmitted and by that time it’s validity period has expired?

Rules

1. Section 108 of The Companies Act, 1956
2. Transfer not to be Registered except on production of the instrument of transfer
3. Section 108 1A of The Companies Act, 1956
4. Every instrument of transfer of shares shall be in such form as may be prescribed within sub-sub-clause (a) and (b)
5. Section 108 1B of The Companies Act, 1956
6. Notwithstanding anything contained in sub-section (1A), an instrument of transfer of shares, executed before the commencement of section 13 of the Companies (Amendment) Act, 1965 (31 of 1965) or executed after such commencement in a form other than the prescribed form, shall be accepted by a company with sub-clauses (a) and (b) of 108 1B.
7. Section 108 1C of The Companies Act, 1956
8. Nothing contained in sub-section (1A) and (1B) shall apply to conditions mentioned in sub-sub-clause A, B, or C.
9. Section 108 1D of The Companies Act, 1956
10. Notwithstanding anything in sub-section (1A) or sub-section (1B) or sub-section (1C) wherein the opinion of the Central Government, it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub-sections by such further time as it may deem fit whether such application is made before or after the expiry of the periods aforesaid; and the number of extensions granted hereunder and the period of each such extension shall be shown in the annual report laid before the Houses of Parliament under section 638.
11. Section 56 of The Companies Act, 2013
12. Transfer and transmission of securities

Judgment

The Madras High Court held that the provisions of sections 108(1A) and (1C) are directory. The ruling of the Supreme Court in Mannalal Khetan had considered only sub-section 108(1), since the transaction in question, in that case, was prior the insertion of the sub-sections (1A) (IB) (1C) and (ID), and did not warrant their consideration. The court ruled that these new sub-sections were only procedural requirements and technical formalities to be fulfilled and could not outweigh the substance of a transaction.

In the case of transfer of shares in favor of a bank by way of pledge of the shares where along with the share certificate a blank instrument of transfer duly signed by the shareholder is deposited with the bank. A bank granting a loan against. the security of shares may either have them transferred in its name or may, in the alternative, obtain from the borrower shareholder a blank instrument of transfer duly signed, by him as a transferor, along with the related share certificates. If the bank opts for the first alternative, then, in the event of default by the borrower is repayment of the amount of loan, it might sell the shares so that the sale proceeds are applied towards satisfaction of its dues. If, however, the bank chooses the second alternative, it shall, in the event of the borrower’s default, complete the instrument and lodge it with the company for registration of the transfer in its own name or in the name of the buyer thereof. In either case, the bank will have to stamp or otherwise endorse on the instrument of transferring the date on which the bank decides to follow any of the above courses and the instrument so stamped or endorsed will have to be delivered to the company, together with the share certificate, for registration of the transfer within two months from the date stamped thereon as aforesaid.

Failure by the Company to repay the loan to State financial corporation not endorsing stamps itself but getting the endorsement of prescribed authority exercising right to be registered as the owner of shares, company transferring portion of shares. The company is not entitled to justify, failure to register remaining shares on the ground requirement of the section not fulfilled by the corporation.