CMA/3188/2004 of M/S.DOVE INVESTMENTS PRIVATE Vs M/S.GUJARAT INDUSTRIAL INVEST- on 30 December 2004

COMMON JUDGEMENT

(Judgment of the Court was delivered by P. Sathasivam, J.,)

By consent of all the parties, the Appeals themselveshave taken up for disposal. M/s. Dove Investments Private Limited,Mumbai-21; M/s. Maxworth Investments Private Limited, Chennai-34;and Mr. P.N. Mohan, partner of M/s. Sandhya Priya Investments,Chennai-41-respondents 2 to 4 in Company Petition N.13/111A/S.R.Bof 2003 on the file of Company Law Board, Southern Region Bench,Chennai, aggrieved by the order dated 23-08-2004, directing M/s.Sterling Holiday Resorts-first respondent therein to registertransfer of 22,93,000 shares in the name of the M/s. GujarathIndustrial Investment Corporation Ltd., petitioner therein within30 days of receipt of the said order, have preferred C.M.A.No. 3188of 2004 under Section 10F of the Companies Act, 1956. Questioningthe very same order, M/s. Sterling Holiday Resorts, firstrespondent therein filed C.M.A.No. 3223/2004. Since both theappeals arise against the very same order of the Company Law Board,the same are being disposed of by the following common order:

Brief facts:

Facts

Brief facts:

For convenience, we shall refer the parties as arrayedbefore the Company Law Board. M/s. Gujarat Industrial InvestmentCorporation Limited/petitioner is a Government of GujaratUndertaking, filed Company Petition No. 13/111A/SRB of 2003 underSection 11A of the Companies Act, 1956 (hereinafter referred to as"the Act") against M/s. Sterling Holiday Resorts (India) Limited("Company" in short) and three others, namely, M/s. DoveInvestments Private Limited, M/s. Maxworth Investments PrivateLtd., and P.N. Mohan before the Company Law Board, Southern RegionBench, Chennai to register the transfer of 22,93,000 shares of thecompany pledged by respondents 2 to 4 in favour of the petitioner.It is seen that the Gujarat Industrial Investments CorporationLtd., a wholly owned Government of Gujarat financial institutionadvanced a loan of Rs.5 Crores in 1996 to the company for conductof its business, for which the company offered the shares held inthe name of respondents 2 to 4 being the Company's promoters andassociates, by pledging the shares (A-2 to A-9). Since the Companycommitted default in repayment of the loan amount, the petitionerlodged with the Company, the original certificates of the pledgedshares together with duly stamped and executed instruments oftransfer for effecting registration of the transfer thereof intheir name. It is the grievance of the petitioner that though theCompany had registered the transfer of 2,99,800 shares pledged byrespondents 2 and 3, failed to effect the registration of thetransfer in respect of the remaining 22,93,000 shares. It is alsothe claim of the petitioner that in spite of repeated demands andlawyer's notice dated 29-7-2003, calling upon the company to transfer the balance 22,93,000 shares in the name of the petitionerin demat form, the Company failed and refused to register thetransfer of the pledged shares in favour of the petitioner. Inorder to circumvent the claim of the petitioner, the respondents 2to 4 have filed Civil Suits in O.S.Nos. 3740, 3741 and 3742 of 2000on the file of City Civil Court, Chennai for permanent injunctionrestraining the Company from effecting the transfer of the pledgedshares in favour of the petitioner. The impugned shares are freelytransferable and the conduct of the respondents in not effectingregistration of the transfer of the pledged shares is with anoblique motive and without sufficient cause and, therefore, thepetitioner being a pledgee is entitled for registration of sharesin its favour on default committed by the Company.

2. The respondents 2 to 4 filed a common counteraffidavit wherein it is stated that the petitioner failed to complywith the provisions of Sub-section (1C), according to which theinstruments of transfer ought to have been stamped or endorsed bythe petitioner and thereafter delivered them to the Companytogether with the share certificates for registration of thetransfer within two months from the date so stamped or endorsed.The requirements of sub-section (1C)(B)(iv)(1)(c)(2), beingmandatory have not been duly satisfied and therefore the Company isnot under an obligation to effect the transfer of shares in thename of the petitioner. The Company cannot be compelled toregister the transfer of shares until a proper instrument oftransfer duly stamped and executed has been delivered to theCompany. By virtue of the deed of pledge executed by therespondents 2 to 4, the petitioner could dispose of the pledgedshares either by public auction or private contract and appropriatethe sale proceeds towards the dues of the Company. Therefore, thepetitioner does not have the right to get the shares transferred inits name without a corresponding reduction in loan obligations.

3. The petitioner filed a Rejoinder stating that theplea of non compliance with the requirements of section 108 (1C)has neither been raised before the Civil Court nor in the presentproceedings. The Company has already given effect to the transferof 2,99,800 shares. Further, the Company by letter dated 23-07-2001 admitted that it is in the process of transferring andconverting the balance of 22,93,000 shares into marketable lots.Their only grievance in the Civil Suit is that the petitioner isattempting to transfer the pledged shares in its favour at a valuefar below the market value. The Company has, therefore, waived itsrights to enforce the requirements of sub-section (1C) of Section108. The requirements of section 108 (1C) are only directory andnot mandatory. The petitioner has every right to effect thetransfer of the impugned shares in its favour, in view of thedefault committed by the Company. As against the loan amount ofRs.5 Crores availed in 1996, the present outstanding amount as on August, 2003 payable by the Company comes to Rs.38,84,50,793/-.The Company is neither settling the dues nor giving effect to thetransfer of the pledged shares in the name of the petitioner interms of the loan agreement, thereby jeopardising the publicinterest, on account of the huge public money blocked in thesubject transaction. Therefore, no sympathy should be shown to achronic defaulter and the requirements of sub-section (1C) beingonly directory. The Company Law Board in exercise of Powers vestedin section 111A may direct the company to effect registration ofthe transfer of the remaining pledged shares in the name of thepetitioner.

4. In the light of the stand taken by all the partiesand after considering the relevant provisions as well as judicialdecisions thereon, the Company Law Board by the order underchallenge after holding that compliance of Section (1C) isdirectory in nature and not mandatory and taking note of theconduct of the company having waived all the requirements of sub-section (1C), directed the Company to register the transfer of22,93,000 shares in the name of the petitioner within 30 days ofthe receipt of the said order. Questioning the same, the Company aswell as the investors have preferred the above appeals.

5. Heard Mr.Alagiriswamy, learned senior counsel forthe appellants in C.M.A.No. 3188/2004, Mr. P.H. Aravindh Pandian,learned counsel for the appellant in C.M.A.No. 3223/2004 and Mr.Arvind P. Datar, learned senior counsel for the firstrespondent/Gujarat Industrial Investment Corporation Limited.

6. After taking us through the Company Petition,counter, rejoinder, the details regarding Civil Suits, impugnedorder of the Company Law Board and relevant provisions of theCompanies Act, Mr.Alagiriswamy, learned senior counsel for theinvestors, and Mr. P.H. Aravindh Pandian, learned counsel for theCompany, have raised the following contentions:

i) Whether the Company Law Board was correct in holdingthat the provisions of Section 108, except sub-section (1) of theCompanies Act, 1956 are only directory and not mandatory in nature?

ii) Whether the Company Law Board was right in arrivinga conclusion that the share transfer has to be registered by theappellant in spite of the fact that certain provisions of law hasnot been duly complied with by M/s Gujarat Industrial InvestmentCorporation Limited/petitioner before the Company Law Board.

7. On the other hand, Mr. P. Arvind Datar, learnedsenior counsel appearing for the Gujarat Industrial InvestmentCorporation / petitioner, would submit that Section 108 (1C) of theAct is directory and not mandatory. Even otherwise, according to

him, in view of the conduct of the company and also of the factthat transfers would complete only if procedural formalities werecomplied with, the conclusion and ultimate direction of the CompanyLaw Board cannot be faulted with.

8. We have carefully considered the claim of both partieswith reference to the materials placed and the statutory provisionsapplicable to them.

9. Before considering the rival contentions, it would beuseful to refer the relevant provisions of the Companies Act, 1956applicable to the case on hand:

"Transfer not to be registered except on production of instrument of transfer.

Section 108. (1) A company shall notregister a transfer of shares in, or debentures of,the company, unless a proper instrument of transferduly stamped and executed by or on behalf of thetransferor and by or on behalf of the transfereeand specifying the name, address and occupation, ifany, of the transferee, has been delivered to thecompany along with the certificate relating to theshares or debentures, or if no such certificate isin existence, along with the letter of allotment ofthe shares or debentures:

Provided that where, on an applicationin writing made to the company by the transfereeand bearing the stamp required for an instrument oftransfer, it is proved to the satisfaction of theBoard of directors that the instrument of transfersigned by or on behalf of the transferor and by oron behalf of the transferee has been lost, thecompany may register the transfer on such terms asto indemnity as the Board may think fit:

Provided further that nothing in thissection shall prejudice any power of the company toregister as shareholder or debenture-holder manyperson to whom the right to any shares in, ordebentures of, the company has been transmitted byoperation of law.

"Section 108 (1A) Every instrument of transferof shares shall be in such form as may be prescribed,and- (a) every such form shall, before it issigned by or on behalf of the transferor and before any

entry is made therein, be presented to the prescribedauthority, being a person already in the service of theGovernment, who shall stamp or otherwise endorsethereon the date on which it is so presented, and (b) every instrument of transfer in theprescribed form "with the date of such presentationstamped or otherwise endorsed thereon shall, after itis executed by or on behalf of the transferor and thetransferee and completed in all other respects, bedelivered to the company,-

(i) in the case of shares dealt in or quoted ona recognised stock exchange, at any time before thedate on which the register of members is closed, inaccordance with law, for the first time after the dateof the presentation of the prescribed form to theprescribed authority under clause (a) or within twelvemonths from the date of such presentation, whichever islater;

(ii) in any other case, within two months fromthe date of such presentation.

(1B) xx xx

(1C) Nothing contained in sub-sections (1A)and (1B) shall apply to- (A) any share-

(i) which is held by a company in anyother body corporate in the name of a director ornominee in pursuance of sub-section (2), or as the casemay be, sub-section (3), of section 49, or

(ii) which is held by a corporation,owned or controlled by the Central Government or aState Government,in any other body corporate in thename of a director or nominee, or

(iii) in respect of which a declaration hasbeen made to the Public Trustee under section 153B, if-

(1) the company or corporation, as `thecase may be, stamps or otherwise endorses, on the formof transfer in respect of such share, the date on whichit decides that such share shall not be held in thename of the said director or nominee or, as the casemay be, in the case of any share in respect of which

any such declaration has been made to the PublicTrustee, the Public Trustee stamps or otherwiseendorses, on the form of transfer in respect of suchshare under his seal, the date on which the form ispresented to him, and

(2) the instrument of transfer in suchform, duly completed in all respects, is delivered tothe- (a) body corporate in whose share suchcompany or corporation has made investment in the nameof its director or nominee, or (b) company in which such share is heldin trust, within two months of the date so stamped orotherwise endorsed; or (B) any share deposited by any person with-

(i) the State Bank of India, or

(ii) any scheduled bank, or

(iii) any banking company (other than ascheduled bank) or financial institution approved bythe Central Government by notification in the OfficialGazette (and any such approval may be accorded so as tobe retrospective to any date not earlier than the 1[st]day of April, 1966), or

(iv) the Central Government or a StateGovernment or any corporation owned or controlled bythe Central Government or a State Government,by way of security for the repayment of any loan oradvance to, or for the performance of any obligationundertaken by, such person, if-

(1) the bank, institution, Government orcorporation, as the case may be, stamps or otherwiseendorses on the form of transfer of such share- (a) the date on which such share isreturned by it to the depositor, or (b) in the case of failure on the part ofthe depositor to repay the loan or advance or toperform the obligation, the date on which such share isreleased for sale by such bank, institution, Governmentor corporation, as the case may be, or

(c) where the bank, institution,Government or corporation, as the case may be, intendsto get such share registered in its own name, the dateon which the instrument of transfer relating to suchshare is executed by it; and

2) the instrument of transfer in such form,

duly completed in all respects, is delivered to thecompany within two months from the date so stamped orendorsed.

Explanation: xx xx

(1D) xx xx "

Among the above mentioned provisions, we have to see whether theentire Section 108 including (1C) is mandatory or 108 (1) aloneis mandatory. We have already referred to the fact that thepetitioner before the Company Law Board is the Government ofGujarat Undertaking registered under the Companies Act and that theprovisions of State Financial Corporations Act, 1951 are madeapplicable to it. It is not in dispute that the Company, namely,Sterling Holiday Resorts (India) Limited had availed a loan ofRs.4.5 Crores during the year 1996 and as per the security for thesame, the investors had pledged their respective shares in thepetitioner Corporation to the extent of 25,92,800 in favour ofGujarat Industrial Investment Corporation Limited. Since theCompany had failed to repay the loan, the petitioner had exercisedits powers under the pledged Agreement and Power of Attorney dulyexecuted by the respondents and requested them to transfer thoseshares in its name. Since there is no response from the Companyeven after repeated registered notices and reminders, thepetitioner had filed a petition under Section 111A of the CompaniesAct before the Company Law Board. It is the claim of the Companythat the provisions contained in Section 108 (1C) of the Act aremandatory, and without strict compliance of which, the petitionercannot seek for the relief of the registration of the remaining22,93,000 shares in favour of the petitioner though it had effectedtransfer of 2,99,800 shares. On the other hand, it is the claim ofthe petitioner that the provisions of Sub-Section (1C) of Section108 of the Act are only directory and not mandatory, and that moreover the requirement of which is waived by the Company by way ofeffecting the transfer of 2,99,800 shares out of 25,92,800 pledgedshares in the name of the petitioner. sub-section (1) of Section108 provides that a Company shall not register a transfer of sharesin the company, unless a proper instrument of transfer duly stampedand executed by or on behalf of the transferor and by or on behalfof the transferee has been delivered to the company. Sub-section(1) provides that a company shall not register a transfer of sharesin the company, unless a proper instrument of transfer duly stampedor executed by or on behalf of the transferor and by on behalf ofthe transferee has been delivered to the company. Though severaldecisions have been cited on either side, the decision of the ApexCourt in Mannalal Khetan v. Kedar Nath Khetan, reported in (1977)47 Company Cases 185 is relevant wherein the Supreme Court heldthat the provisions contained in Section 108 (1) are mandatory. Byheavily relying on the said decision, it was contended thattherefore the Company cannot be compelled to register the transfer

of shares until the mandatory requirements of law are compliedwith. As per Section 108 (1A) (a) every instrument of transfer,before it is signed by or on behalf of transferor, and before anyentry is made therein, be presented to the 'prescribed authority',who shall stamp or otherwise endorse thereon the date on which itis presented to him. After an instrument is duly dated by theprescribed authority and completed in all respects, it shall bedelivered to the company for registration of the transfer, togetherwith related certificate of shares or the letter of allotment,within the time limit specified in clause (b) of sub-section (1A).In sub-section (1A) and sub-section (1C) two months time limit hasbeen prescribed for presentation, stamping or compliance of allother conditions. It is the categorical claim of the Company andthe investors that sub-section (1C) has not been fulfilled sincethe instrument is not duly stamped by the prescribed authority andnot presented within the time prescribed. There is no obligation onthe part of the company to register the transfer of 22,93,000shares in the name of the petitioner as directed by the Company LawBoard. At the foremost, Mr. P.H. Arvindh Pandian, learned counselappearing for the Company, by relying on a decision in Union ofIndia v. International Trading Company, reported in 2003 AIR SCW2828, would contend that merely because the Company had registeredthe transfer of 2,99,800 at the first instance, it cannot becompelled to commit a wrong action. The following statement of lawmade in para 14 of the said decision has been pressed into service:(para 14)

"14.....A party cannot claim that sincesomething wrong has been done in another case, directionshould be given for doing another wrong. It would not besetting a wrong right, but would be perpetuating anotherwrong. In such matters there is no discriminationinvolved. The concept of equal treatment on the logic ofArt. 14 of the Constitution of India, 1950 cannot bepresented into service in such cases. What the conceptof equal treatment presupposes is existence of similarlegal foothold. It does not countenance repetition of awrong action to bring both wrongs on par. Even ifhypothetically it is accepted that wrong has beencommitted on some other cases by introducing a concept ofnegative equality respondents cannot strengthen theircase. They have to establish strength of their case onsome other basis and not by claiming negative equality."

On going through the factual details in that case and consideringthe fact that in the present case the said objection was admittedlynot raised before and that a portion of the shares have beentransferred and registered in the name of the petitioner withoutany objection, we are of the view that the principle referred aboveis not applicable to the case on hand.

10. Regarding compliance of sub-Section (1C) as wellas fulfilment of certain conditions "within the prescribed time",Mr. P.H. Aravindh Pandian has heavily relied on the followingdecisions:

In AIR 1935 Privy Council 85 (supra), it is stated that whileinterpreting Statutes, when an Act which in some limited respectsgives the Court a statutory discretion, there cannot be implied inthe Court, outside the limits of the Act, a general discretion todispense with its provisions.

11. The decision reported in AIR 1972 Mysore 50(supra) speaks about time limit i.e., 30 days prescribed forfiling appeal. The said decision is not helpful to the case of thecompany. In that case, the Appeal has to be filed within 30 daysafter the receipt of communication and factually it was found thatthe appeal has not been filed beyond 30 days. Even if there is anydoubt about the matter, the Court should lean in favour of theperson who is given the right of appeal.

12. In AIR 1953 Nagpur 81 (supra), a learned SingleJudge of Nagpur High Court has given explanation for the expression"at any time" stipulated in Section 428 (1) of City of NagpurCorporation Act, 1948. According to him, the words "at any time"made it clear that a voter is entitled to make an application atany time after the cause of action accrues. On going through thefactual details, absolutely there is no dispute in the principleslaid down in AIR 1928 Privy Council 273; AIR 1961 SC 1107; AIR 2003SC 511; and AIR 1991 SC 754.

(1995) All England Law Reports 367 (supra). The followingstatement is relevant for our consideration:

" Having reviewed the authorities cited bythe taxpayer in this appeal, not all of which arereferred to in this opinion, their Lordships considerthat when a question like the present one arises-analleged failure to comply with a time provision-it issimpler and better to avoid these two words 'mandatory'and 'directory' and to ask two questions. The first iswhether the legislature intended the person making thedetermination to comply with the time provision, whethera fixed time or a reasonable time. Secondly, if so, didthe legislature intend that a failure to comply withsuch a time provision would deprive the decision-makerof jurisdiction and render any decision which hepurported to make null and void?"

14. Mr. Aravind P. Datar has also relied on thefollowing decisions to find out whether a particular provision ismandatory or directory. The first decision relied on by him is inAdministrator, Municipal Committee Charkhi Dadri and another v.Ramji Lal Bagla, reported in (1995) 5 SCC 272 wherein theirLordships have held that absence of provision for consequence incase of non-compliance with the requirements prescribed wouldindicate directory nature despite use of word 'shall'. Theyfurther held that one of the well-accepted tests for determiningwhether a provision is directory or mandatory is to see whether theenactment provides for the consequence flowing from non-compliancewith the requirement prescribed. In the absence of any specificprovision namely, that non-compliance therewith results innullification of the acquisition which has to be construed thatthose provision is only directory in nature despite use of the word"shall" in Section 44-A of Punjab Town Improvement Act, 1922.

15. In Mohan Singh v. International AirportAuthority of India [(1997) 9 SCC 132] regarding the use of words"shall" or "may". The Supreme Court held that the distinction ofmandatory compliance or directory effect of the language dependsupon the language couched in the statute under consideration andits object, purpose and effect. The distinction reflected in theuse of the word 'shall' or 'may' depends on conferment of power.General rule of law is that where a general obligation is createdby statute and statutory remedy is provided for violation,statutory remedy is mandatory. The scope and language of thestatute and consideration of policy at times may, however, createexception showing that the legislature did not intend a remedy tobe exclusive. The language is the medium of expressing theintention and the object that particular provision or the Act seeksto achieve. Therefore, it is necessary to ascertain the intention.

The word 'shall' is not always decisive. Regard must be had to thecontext, subject-matter and object of the statutory provision inquestion in determining whether the same is mandatory or directory.According to their Lordships, no universal principle of law couldbe laid in that behalf as to whether a particular provision orenactment shall be considered mandatory or directory and it is theduty of the court to try to get at the real intention of thelegislature by carefully analysing the whole scope of the statuteor section or a phrase under consideration. According to them, thequestion as to whether the statute is mandatory or directorydepends upon the intent of the legislature and not always upon thelanguage in which the intent is couched. The meaning and intentionof the legislature would govern design and purpose the Act seeks toachieve. While considering the language used under Section 41 andSection 6 of the Land Acquisition Act, 1894 in para 26 TheirLordships have held:

"26....The word "shall", though primafacie gives impression of being of mandatory character,it requires to be considered in the light of theintention of the legislature by carefully attending tothe scope of the statute, its nature and design and theconsequences that would flow from the constructionthereof one way or the other. In that behalf, thecourt is required to keep in view the impact on theprofession, necessity of its compliance; whether thestatute, if it is avoided, provides for any contingencyfor non-compliance; if the word "shall" is construed ashaving mandatory character, the mischief that wouldensue by such construction; whether the publicconvenience would be subserved or public inconvenienceor the general inconvenience that may ensue if it isheld mandatory and all other relevant circumstances arerequired to be taken into consideration in construingwhether the provision would be mandatory or directory.If an object of the enactment is defeated by holdingthe same directory, it should be construed as mandatorywhere if by holding it mandatory serious generalinconvenience will be created to innocent persons ofgeneral public without much furthering the object ofenactment, the same should be construed as directorybut all the same, it would not mean that the languageused would be ignored altogether. Effect must be givento all the provisions harmoniously to suppress publicmischief and to promote public justice."

After holding so, they concluded that though compliance withpublication of the 3 steps required under Section 4 (1) ismandatory while exercising the power of eminent domain underSection 4 (1), when the appropriate Government exercises the power

under sub-section (4) of Section 17 dispensing with the enquiryunder Section 5-A and directs the Collector to take possession ofthe land before making the award as the lands are needed urgentlyeither under sub-section (1)or (2) thereof, it is not mandatory topublish the notification under Section 4 (1) in the newspapers andgiving of notice of the substance thereof in the locality; the lastof the dates of publication should not be the date for the purposeexercising the power under Section 17 (4). They further held thatthis interpretation would subserve the public purpose and suppressmischief of non-compliance and seeks to elongate the publicpurpose, namely, taking immediate possession of the land needed forthe public purpose, envisaged in the notification.

16. In DLF Universal Ltd., v. Appropriate Authorityand another [AIR 2000 Supreme court 1985], the Supreme Court afterconsidering the language used in Section 269-UC (3) of Income-taxAct, has held that it is only directory and not mandatory.

17. In Sashikant Singh v. Tarkeshwar Singh [(2002) 5Supreme Court Cases 738], Their Lordships while considering therequirement under sub-section (1) of Section 319 of the Code ofCriminal Procedure that the person summoned "could be triedtogether with the accused" is directory, whereas requirement undersub-section (4) of Section 319 regarding denovo trial of suchperson is mandatory, have held that whether a particular provisionis mandatory or directory, the legislative intention has to beascertained by Court having regard to the whole scope of thestatute. They further held that where a statute does not consistmerely of one enactment, but contains a number of differentprovisions regulating the manner in which something is to be done,it often happens that some of these provisions are to be treated asbeing directory only, while others are to be considered absoluteand essential; that is to say, some of the provisions may bedisregarded without rendering invalid the thing to be done, butothers not. It was further held that the mandate of law of freshtrial is mandatory, whereas the mandate that newly added accusedcould be tried together with the accused is directory.

18. In P.T. Rajan v. T.P.M. Sahir [(2003) 8 SupremeCourt Cases 498], while considering certain provisions in theRepresentation of the People Act, 1951, the Supreme Court has heldthat even if a statute specifies a time for publication of theelectoral roll, the same by itself could not have been held to bemandatory and such a provision would be directory in nature. TheSupreme Court further held that where a statutory functionary isasked to perform a statutory duty within the time prescribedtherefor, the same would be directory and not mandatory. They alsoheld that a provision in a statute which is procedural in naturealthough employs the word "shall" may not be held to be mandatory if thereby no prejudice is caused and that the Court cannot supplycasus omissus.

19. In the light of the various decisions relating touse of the word "shall" or "may" in different statutes, now let usconsider the judgement of the Supreme Court in Mannalal Khetan v.Kedar Nath Khetan [(1977) 47 Company Cases 185] and the judgementsof the Karnataka High Court rendered by a Single Judge in MukundlalManchanda v. Prakash Roadlines [(1991) 72 Company Cases 575] aswell as by a Division Bench in Mukundlal Manchanda v. PrakashRoadlines Ltd., [(1995) 1 Company Law Journal 126 (Karnataka)].

20. In Mannalal Khetan's case (supra), the questionthat was considered by the Supreme Court was whether the provisionsof Section 108 of the Companies Act, 1956 are mandatory in regardto transfer of shares. Mannalal Khetan, appellant before theSupreme Court, filed a petition in the High Court, Allahabad underSection 155 of the Companies Act, 1956 against the respondents,namely, Kedar Nath Khetan and others contending that the transfersof all the shares in the Company's register were illegal becausethe transfers were without any proper instrument of transfer. Healso contended that the transfers were in contravention of themandatory provisions of section 108 of the Act. The Single Judgeof Allahabad High Court, before whom the petition was originallyfiled seeking rectification of the register of members by annullingshares transfer register pursuant to the resolution of the board ofdirectors of the first respondent therein and for enforcement ofthe procedure prescribed in Article 7 of the Articles ofAssociation of the first respondent-company, issued direction tothe Company to rectify the register of its members by removing thenames of respondents 1 and 2 and to restore the names of theoriginal shareholders. Aggrieved by the said order, therespondents preferred an appeal before the Division Bench of thesame Court (Allahabad High Court). The Division Bench, whilesetting aside the order passed by the Company Judge and dismissingthe applications of the appellant, held that the provisionscontained in Section 108 of the Act are directory and notmandatory. Against the order of the Division Bench, the appellantpreferred appeal to the Supreme Court. The Supreme Courtconsidered sub-section (1) of Section 108, particularly theprovisos made therein, and held that the words "shall not register"are mandatory in character, since the negative form of the languageis used therein. Their Lordships have also held that negativewords are clearly prohibitory and are ordinarily used as alegislative device to make a statutory provision imperative.Ultimately, the Supreme Court has held that "the provisionscontained in section 108 of the Act are directory because non-compliance with section 108 of the Act are, for the reasonsindicated earlier, mandatory. The High Court erred in holding thatthe provisions are directory." Since the said decision of the

Supreme Court is with reference to the very same provisions namelySection 108 of the Act, we considered the entire judgement dated25-11-1976. Except sub-section (1) of Section 108, Their Lordshipshave not considered sub-sections 1A, 1B, 1C and 1D, which wereinserted in Companies Amendment Act, 1965, which came into forcefrom 1-4-1966. In other words, though on the date of the judgementof the Supreme Court i.e., on 25-11-1976, the inserted provisions,namely (1A), (1B), (1C) and (1D) were available for consideration.The Lordships have not expressed specific opinion with reference tothose inserted provisions. In other words, the Supreme Court wasinterpreting Section 108 (1) as it stood at the time of theimpugned transaction therein and it had no occasion to make anyobservation concerning sub-sections (1A), (1B), (1C) and (1D) ofSection 108 of the Act. In such a circumstance, as rightlycontended by Mr. Arvind P. Datar, learned senior counsel for thepetitioner and concluded by the Company Law Board, in MannalalKhetan's case, the Supreme Court had no occasion to make anyobservation concerning sub-section (1A) of Section 108, in view ofthe fact that the Supreme Court was dealing with the caseconcerning Section 108 when it did not contain sub-section (1A).Sub-section (1B) is not relevant in the context of the subjectdispute. In so far as Sub-section (1C) is concerned, if thetransfer of shares falls within any one of the exempted casesmentioned in that sub-section, the requirements as to presentationof the instrument of transfer in favour of the prescribed authorityand delivery thereof to the company within the prescribed timelimit, as contemplated in sub-section (1A) are not applicable,provided the conditions stipulated in sub-section (1C) aresatisfied. In view of the same, any bank or financial institutionor the Central Government or a State Government or any corporationowned or controlled by the Central Government or a StateGovernment, granting a loan against the security of shares, intendsto get such shares registered in its own name, in the event offailure on the part of the borrower to repay the amount loan, itshall complete the instrument of transfer and lodge it with thecompany for registration of the transfer in its own name. In such acircumstance, they will have to stamp or otherwise endorse on theinstrument of transfer the date on which the bank or financialinstitution decides to get such share registered in its own nameand the instrument so stamped or endorsed will have to be deliveredto the company, together with the share certificate, forregistration of the transfer within two months from the date sostamped or endorsed. It is not in dispute that the instruments oftransfer are neither stamped nor endorsed by the petitioner, asrequired under sub-section (1C), however, stamped by the prescribedauthority contemplated under sub-section (1A). As rightly pointedout by the Company Law Board, we have to consider whether thedelivery of the instruments of transfer beyond 2 months from thedate so stamped as specified in sub-section (1C) is proper, forwhich the learned senior counsel for the petitioner heavily relied

on a decision of the Karnataka High Court in Mukundlal Manchanda v.Prakash Roadlines Ltd., (1991) 72 Company Cases 575. Though it isa judgement of the learned Single Judge of the Karnataka HighCourt, he had an occasion to consider the very same provisions andsimilar questions. The learned Judge considered the decision ofthe Supreme Court in Mannalal Khetan's case wherein the SupremeCourt has held that the provisions in section 108 are mandatory.The learned Judge was also aware that the transactions in MannalalKhetan's case were prior to the amendment made in the year 1965-66and sub-section (1A), (1B), (1C) and (1D) were introduced for thefirst time by the Companies (Amendment) Act, 1965 [Act 31/1965].The learned Judge has observed that the Supreme Court wasinterpreting the provisions of Section 108 as it stood at the timeof the impugned transaction therein and the Supreme Court had nooccasion, therefore, to make any observation concerning sub-section(1A) of Section 108. As said earlier, since the learned Judgedealt with the very same question which is being canvassed beforeus, we considered the facts of that case and the ultimate decisionarrived at therein. The following conclusion of the learned Judgeis relevant: (page 586)

"The question therefore is, whether the barunder section 108 (1) is attracted to the requirements asto the period stated in clause (b) of sub-section (1A).Can it be said that, when a blank transfer form isstamped, and, thereafter, it is signed by the transferorand the transferee, the form still continues to be blank?I think not.

Delivery of the instrument of transfer to thecompany, no doubt, is a mandatory requirement as persection 108 (1). But the time limit of two months statedin sub-section (1A)(b)(ii) does not say that the companyshall not accept the instrument of transfer deliveredthereafter. The stipulation of time for the performanceof an act is not read as a mandatory stipulation undercertain circumstances. If the person who has to performthe act has no control over the event which would resultin the expiry of the period, then, he cannot be defeatedof his rights by insisting on the performance beingwithin the prescribed period. Cases may arise when delaymay occur in transit, i.e., even though the instrument oftransfer is sent immediately on execution, it is notdelivered by the postal department or the courier, or themovement is delayed for reasons beyond the control of theperson sending the instrument; it is also possible thatthe company's office is closed due to strike or for someother reason resulting in the non-delivery of theinstrument of transfer, in time. It is not possible toforesee the several factors which may cause the delay in the delivery of the instrument. In these circumstances,the requirement of sub-section (1A)(b)(ii) has to be readreasonably, so as to enable its smooth functioning; adelivery of an instrument of transfer within a reasonabletime should be held as a proper delivery. It is onlywhere the company opines that the instrument of transferhas become stale and that it is improper to act upon it,the instrument of transfer has to be held as liable to beignored.

Nowhere the Companies Act declares that aduly executed instrument of transfer ceases to beeffective or becomes void after the period referred to insub-section (1A) of Section 108. In fact, under certaincircumstances, those instruments can be acted upon bymoving the Central Government under sub-section (1D) ofSection 108. The reasonable mode of understanding thescheme of section 108 will be, not to render delivery ofan instrument of transfer after the period specified insub-section (1A) as invalid, but as vesting a discretionin the company either to recognise the transfer or not torecognise it depending upon the staleness of theinstrument, and even in the latter case, the affectedperson may move the Central Government under sub-section(1D) by explaining the circumstances under which thedelay occurred and the hardship that results by the non-recognition of the transfer. While understanding thescheme of section 108, the court has to bear in mind thattrivialities would not render an act futile and technicalformalities required to be complied with for a validtransaction cannot outweigh the importance to be given tothe substance of the transaction."

The said decision of the learned Judge was taken by way of appealbefore the Division Bench of the Karnataka High Court in MukundlalManchanda v. Prakash Roadlines Ltd., [(1995) 1 Company Law Journal126 (Karnataka)]. The Division Bench accepted the merits pleadedby the Prakash Roadlines and confirmed the conclusion of theCompany Judge that the appellants-petitioners before him had notmade out any case for grant of relief under the provisions.However, the Division Bench has not expressed its view, includingthe question whether Section 108 (1A) of the Act is mandatory incharacter. Inasmuch as they disposed of the appeal in the light ofthe factual details, particularly with reference to acquisition andwaiver, they had not gone into the question whether sub-section(1A) is mandatory or directory.

21. The analysis of the above referred threedecisions would clearly show that in Mannalal Khetan's case, theSupreme Court had considered only sub-section (1) of Section 108

and no decision was made with reference to sub-sections (1A), (1B),(1C) and (1D) of Section 108, since the subject matter oftransactions had taken place prior to the coming into force of theCompanies (Amendment) Act, 1965. Then we have left with thejudgements of Karnataka High Court, particularly the judgement ofthe Single Judge in Mukundlal manchanda's case (supra), wherein thelearned Judge, after referring to the judgement of the SupremeCourt in Mannalal Khetan's case, holding that the Supreme Court hasno occasion to consider sub-sections (1A),(1B), (1C) and (1D) andin the absence of any specific bar as provided in sub-section (1)had concluded that sub-section (1A) is only directory in nature.As rightly observed by the learned Judge, the requirement of sub-section (1A) (b) (ii) has to be read reasonably, so as to enableits smooth functioning, a delivery of instrument of transfer withina reasonable time should be held as a proper delivery. We alsoagree with the conclusion that only where the Company opines thatthe instrument of transfer has become stale and that it is improperto act upon it, the instrument of transfer has to be held as liableto be ignored. Further, as rightly pointed out by him, even thebelated delivery can be acted upon under certain circumstanceswhile moving Central Government under sub-section (1) of Section108. In the light of the said provision, even though thediscretion lies in the company either to recognise the transfer ornot to recognise it depending upon the staleness of the instrument,as rightly observed by the learned Judge, the affected person canvery well move the Central Government under sub-section (1D) byexplaining the circumstances under which the delay occurred and thehardship that results by the non-recognition of the transfer. Wealso agree with the conclusion that in the light of the scheme ofsection 108, particularly after the insertion of sub-sections (1A),(1B), (1C) and (1D), the Courts have to bear in mind thetrivialities would not render an act futile and technicalformalities required to be complied with for a valid transactioncannot outweigh the importance to be given to the substance of thetransaction. As said earlier, though the matter was taken up byway of appeal before the Division Bench of the Karnataka HighCourt, the Division Bench had not gone into the said aspect,namely, whether mandatory or directory, however, confirmed thejudgement of the Single Judge on merits. In the light of theabove discussion, more particularly in view of the fact that inMannalal Khetan's case the Supreme Court has no occasion to go intothe inserted provisions, namely, sub-sections (1A), (1B), (1C) and(1D) of Section 108, in the absence of specific bar in sub-sections(1A), (1C) as found in sub-section (1) of Section 108, consideringthe scheme of the said provisions, we are in agreement with theview expressed by the learned Judge in Mukundlal Manchanda's case(1991) 72 Company Cases 575 and we hold that except sub-section (1)of Section 108, other provisions, namely, (1A) and (1C) aredirectory and not mandatory in nature.

22. Now we shall consider the other aspects,namely, the conduct of the Company, objection relating tomaintainability of the appeal, and the rights of pledger/pledgee.The materials furnished by the petitioner would show that on 2-1-2001 all the share certificates with transfer form were delivered.The total number of shares pledged were 25,92,800. Out of this, itis not in dispute that 2,99,800 were transferred within the timeand the transfer forms were submitted belatedly. The transfer withregard to the other shares has also been approved. The shares haveonly to be converted into Demat form. This was made clear byletter dated 23-7-2003 and thereafter several letters were writtenfor completion of the transfer. The last letter was 19-9-2002.Subsequently, a legal notice was also issued on 29-7-2003. All thedetails have been furnished in the form of typed set of papersbefore this Court. As rightly pointed out by Mr. Arvind Datar, theCompany never took the plea that Section 108 (1C) had not beencomplied with. Not a single defect has been specified. Thelearned senior counsel has also brought to our notice that even inthe counter filed before the Company Law Board, the plea of Section108 (1C) has not been raised.

23. Admittedly, the shares are owned by twoinvestment companies and one individual, namely (1) M/s. DoveInvestments Private Limited; (2) M/s. Maxworth Investment PrivateLimited; (3) P.N. Mohan, former M.D. of the company. The abovesaid transferees have not objected to the transfer. Even in thesuits filed by the pledgers before the City Civil Court, all the 3plaintiffs have categorically admitted that they have no objectionto transfer all the shares. As rightly pointed out by Mr. Datar,the only objection raised by them is with regard to theconsideration of the share transfer. On perusal of all thematerials, we are satisfied that non-compliance of Section 108 (1C)has not been raised at any stage. Further, even if the objectionwith regard to non-compliance of Section 108 (1C) had been raised,it is the claim of the petitioner that it would not immediatelyapproach the Central Government under Section 108 (1D) forextension of time.

24. The conduct of the Company is also notappreciable. They borrowed a sum of Rs.5 Crores and repaid onlyRs.2.5 lakhs. It is the stand of the company that the loan wouldnever have been given, but for the pledge of the shares. It is notdispute that the petitioner is a State Government undertaking andthe amounts advanced are public fund. As rightly pointed out by Mr.Arvind Datar, the Company has raised frivolous technical objectiononly to prevent the petitioner from realising its dues.

25. Learned senior counsel for the petitioner hasraised an objection that the above appeals are not maintainableunder Section 10F of the Act. He also contended that the appeals

lie only on a question of law arising out of the Company Law Board.He further contended that any question which is neither pleaded nordealt with by the Company Law Board will not be considered by thisCourt under the appellate power. We are unable to accept the saidcontention. Since this Court has entertained the appeals onsatisfying them and after formulating questions of law and thepetitioner/contesting respondent in the appeals put on Noticeregarding the same and both parties were heard on the question oflaw, we are of the view that the above appeals are maintainableunder Section 10F of the Act.

26. Though Mr. Alagiriswamy has contended that in thelight of the pendencv of the suits, the petitioner is not entitledto any relief at the hands of the Company Law Board, on goingthrough the relief prayed for, in the light of the contract/writtenagreement, particularly clause 8 and also of the fact that theCompany and their investors confirmed the right in favour of thepetitioner to get the shares transferred in their names, the saidcontention is liable to be rejected and the decisions relied on onthat score are not helpful to their case.

27. In the light of the above discussions, we arein agreement with the conclusion arrived at by the Company LawBoard; consequently, both the Appeals are liable to be dismissed asdevoid of merits; accordingly dismissed. No costs. Consequently,connected C.M.Ps., are closed.R.B.

Sd/Asst.Registrar

/true copy/

Sub Asst.Registrar

To:-

1. M/s. Gujrat Industrial Investments Corporation Ltd., Udyog Bhavan, 6[th] Floor, Block No.11 and 12, Sector No.11, Gandhi Nagar- 382 011. Corporation Ltd., Udyog Bhavan, 6[th] Floor, Block No.11 and 12, Sector No.11, Gandhi Nagar- 382 011.

2. The Presiding Officer, The Company Law Board, Southern Region Bench, Chennai. The Company Law Board, Southern Region Bench, Chennai.

+ One CC to Mr.P.H.Aravinda Pandian, Advocate SR 58480.+ Two CC to Mr.S.Murugan, Advocate SR 58192.+ Two CC to M/s.Shiva Kumar & Suresh, Advocate SR 58178.

Common Judgement in

C.M.A.Nos.3188 and 3223/2004

and CMP Nos. 17656 and 17925/2004.

Dt:- 30-12-2004

MDR (CO)EJ