Companies Act Case Law M/s Dove Investments Pvt. Ltd. & Ors Vs M/s Gujarat Industrial Inv. Corporation & Anr.

Appeal (civil) 942 of 2006

M/s Dove Investments Pvt. Ltd. & Ors.

M/s Gujarat Industrial Inv. Corporation & Anr.

DATE OF JUDGMENT: 02/02/2006

S.B. Sinha & P.K. Balasubramanyan

[Arising out of S.L.P. (Civil) Nos.5172 of 2005]
[Arising out of S.L.P. (Civil) No.5260 of 2005]
M/s Sterling Holiday Resort (India) Ltd. Appellant


M/s Gujarat Industrial Inv. Corporation Ltd. & Ors. Respondents

Leave granted in both the special leave petitions.
These appeals arising out of a common judgment and order dated
30.12.2004 passed by the High Court of Madras in C.M.A. Nos. 3188 and
3223 of 2004, were taken up for hearing together and are being disposed of
by this common judgment.

The factual matrix of the matter, however, would be noticed from
Civil Appeal arising out of S.L.P. (Civil) No.5260 of 2005.

The Appellant herein took a loan of a sum of Rs.4.5 crores from
Respondent No.1 in the year 1996. By way of security, Respondent Nos. 2
to 4 pledged 25,92,800 shares in favour of Respondent No.1. Respondent
No.1 on or about 02.01.2001 lodged the said share certificate pledged by
Respondent Nos. 2 to 4 along with the share transfer forms with the
Appellant for transferring the said shares in its name on the ground that there
had been delay in repayment of the said loan. A winding up petition also
came to be filed by Respondent No.1 against the Appellant in terms of
Section 434(1)(a) and 439(1)(b) of the Companies Act, 1956 (for short, ‘the
Act’) in the High Court of Judicature at Madras. Respondent Nos. 2 to 4
had also filed suits being O.S. Nos. 3742, 3740 and 3741 of 2003
respectively for permanent injunction restraining the Respondent No.1 and
the Appellant from effecting the transfer of the equity shares in favour of
Respondent No.1.

It is not in dispute that upon compliance of the requisite formalities, as
envisaged under Section 108 of the Act, Respondent No.1 was to present the
said shares with the Appellant by 08.12.1999. However, it did so only on
02.01.2001. Respondent No.1 raised a grievance that the Appellant
although had registered a transfer of 2,99,800 shares pledged by Respondent
Nos.2 to 4, but failed to effect registration of transfer in respect of the
remaining 22,93,000 shares. According to Respondent No.1, the said shares
are freely transferable and the conduct of the Appellant in not effecting
registration thereof is mala fide and without sufficient cause. Respondent
No.1 filed an application before the Company Law Board. The Company
Law Board by a judgment and order dated 23.08.2004 allowed the said
application holding :

i) The civil suits filed by the Respondents 2 to 4 in the absence of
any restraint order against the Appellant and Respondent No.1
for not giving effect to the transfer of shares, do not have any
bearing on the prayer made by Respondent No.1 herein.
ii) The other averments raised in the counter statement are neither
argued nor found to be germane to the issue in question.
iii) The Appellant is hereby directed to register the transfer of
22,93,000 shares in the name of Respondent No.1 herein within
30 days of receipt of this order.

An appeal thereagainst was preferred by the Appellant herein before
the High Court of Judicature at Madras in terms of Section 10F of the Act.
An appeal was also preferred by Respondent Nos.2 to 4 herein. By reason
of the impugned judgment, the appeals preferred by the Appellant herein as
also Respondent Nos. 2 to 4 came to be dismissed.

Mr. M.N. Krishnamani, learned Senior Counsel appearing on behalf
of the Appellants, raised a short question in support of the appeals. It was
submitted that if the provisions of Section 108 of the Act are read as a
whole, it would be evident that the time specified therein is mandatory in
character. It was argued that Appellant had discretion in registering the
shares in terms of Section 108 (1C) of the Act, and if the same was not done,
inter alia, on the ground that the provisions of the Act had not been complied
with insofar as the obligations for registration of shares were not complied
with within the time stipulated, the Company Law Board and consequently
the High Court must be held to have committed an error in exercising their
jurisdiction. It was submitted that the High Court also erred in
distinguishing the decision of this Court in Mannalal Khetan and Others v.
Kedar Nath Khetan and Others [(1977) 2 SCC 424], inter alia relying on or
on the basis of the decision of a learned Single Judge of the Karnataka High
Court in Mukundlal Manchanda and Another v. Prakash Roadlines Ltd. And
Others [1991 (72) CC 575].

It was submitted that the principle of waiver which had been relied
upon by the High Court was not available, inasmuch as if on an earlier
occasion, the Appellant registered 2,99,800 shares in ignorance of law, it
cannot be expected to commit the same mistake over again.

Mr. Soli J. Sorabjee, learned Senior Counsel appearing on behalf of
the Respondents, on the other hand, would submit that the decision of this
Court in Mannalal Khetan (supra) is distinguishable inasmuch as the said
provisions were couched in negative language whereas Sections 108 (1A)
and 108 (1C) are structured differently and have a different scheme besides
having not used such negative language. The provisions of Sections 108
(1A) and 108 (1C) of the Act, Shri Sorabjee would contend, do not provide
for any penalty or consequences in the event of failure to comply therewith
and in that view of the matter, the said provisions must be held to be
directory in nature. In any event, the fact that the Company can move the
Central Government for extension of time itself indicates that the provisions
are directory and not mandatory.

In any event, the learned counsel urged that having regard to the fact
that at no point of time, the Appellant had taken objection of non-
compliance of the provisions Section 108 (1C) of the Act, it cannot now turn
round and contend that the obligation for registration of transfer of shares in
the name of Respondent No.1 was beyond the time stipulated under Section
108 (1C) of the Act.

Section 108 (1) prohibits registration of transfer of shares except on
production of the instrument of transfer and unless the conditions precedent
therefor are complied with. Section 108 (1A) provides that every
instrument of transfer of shares shall be in such form as may be prescribed,
and shall, before it is signed by or on behalf of the transferor, be presented
to the prescribed authority for the purpose of stamping or otherwise
endorsing thereon the date on which it is so presented and after it is executed
by or on behalf of the transferor and the transferee and completed in all other
respects be delivered to the company within two months from the date of
such presentation. Section 108 (1C) provides for a non obstante clause
stating, inter alia, that any share deposited by any person, inter alia, with a
financial institution by way of security for the repayment of any loan or
advance to, or for the performance of any obligation undertaken by such
person, if, inter alia, the financial institution stamps or otherwise endorses on
the form of transfer of such shares, if it intends to get such share registered
in its own name, the date on which the instrument of transfer relating to
such share is executed by it and the instrument of transfer of such form duly
completed in all respects is delivered to the company within two months
from the date so stamped or endorsed. Section 108 (1D) again provides for a
non obstante clause whereby the Central Government has been conferred
with the power to extend the period mentioned in those sub-sections by
further time as it may deem fit, if it is of the opinion that it is necessary so to
do to avoid hardship in any case. Section 111 empowers the Company to
refuse registration upon assigning reasons therefor. Sub-section (3) of
Section 111 provides for an appeal to the Company Law Board against such
an order.

A company may refuse to register shares for various reasons. In this
case, however, the shares being freely transferable refusal for transfer can
be made only on limited grounds. Some such grounds may be that the
transfer is mala fide or transferee is not a bona fide investor or transfer is not
permissible in terms of one or the other provisions of the Articles of
Association or the same is otherwise prohibited in law e.g. sub-section (3) of
Section 22A of the Securities Contract (Regulation) Act, 1956. However,
before the company can be asked to perform its duties in terms of the said
provisions, the procedural requirements contained in Section 108 are
required to be complied with. Section 108 requires the applicant desiring to
obtain the registration of transfer of shares in its favour to comply with the
provisions contained therein. It is, therefore, ordinarily for the applicant to
comply with all formalities. If it does not do so it cannot make the company
bound to effect the transfer, unless sufficient and cogent reasons are
assigned. The time is specified in the aforementioned provisions for filing of
such an application in the prescribed form and upon complying with the
requirements prescribed therein.

Whether a statute would be directory or mandatory will depend upon
the scheme thereof. Ordinarily a procedural provision would not be
mandatory even if the word “shall” is employed therein unless a prejudice is
caused. [See P.T. Rajan v. T.P.M. Sahir & Ors. [(2003) 8 SCC 498]

In Chandrakant Uttam Chodankar v. Dayanand Rayu Mandrakar and
Others [(2005) 2 SCC 188], this Court observed :
“74. In this case it is not necessary for us to go into
the question as to whether Section 83 is imperative in
character or not inasmuch it is settled law that even
where the expression “shall” is used, the same may not
be held to be mandatory. Even a mandatory provision
having regard to the text and context of the statute may
not call for strict construction.

75. In U.P. SEB v. Shiv Mohan Singh15 this Court
stated the law in the following terms: (SCC p. 440, paras

“96. Ordinarily, although the word ‘shall’ is
considered to be imperative in nature but it has to
be interpreted as directory if the context or the
intention otherwise demands. (See Sainik Motors
v. State of Rajasthan)

97. It is important to note that in Crawford on
Statutory Construction at p.539, it is stated:
‘271. Miscellaneous implied exceptions from
the requirements of mandatory statutes, in
general.Even where a statute is clearly
mandatory or prohibitory, yet, in many instances,
the courts will regard certain conduct beyond the
prohibition of the statute through the use of various
devices or principles. Most, if not all of these
devices find their jurisdiction in considerations of
justice. It is a well-known fact that often to enforce
the law to its letter produces manifest injustice, for
frequently equitable and humane considerations,
and other considerations of a closely related
nature, would seem to be of a sufficient calibre to
excuse or justify a technical violation of the law.”

In Mohan Singh and Ors. v. International Airport Authority of India
and Ors. [(1997) 9 SCC 132], this Court observed :

“17. The distinction of mandatory compliance or
directory effect of the language depends upon the
language couched in the statute under consideration and
its object, purpose and effect. The distinction reflected in
the use of the word ‘shall’ or ‘may’ depends on
conferment of power. In the present context, ‘may’ does
not always mean may. May is a must for enabling
compliance of provision but there are cases in which, for
various reasons, as soon as a person who is within the
statute is entrusted with the power, it becomes duty to
exercise. Where the language of statute creates a duty,
the special remedy is prescribed for non-performance of
the duty. In Craies on Statute Law (7th Edn.), it is stated
that the court will, as a general rule, presume that the
appropriate remedy by common law or mandamus for
action was intended to apply. General rule of law is that
where a general obligation is created by statute and
statutory remedy is provided for violation, statutory
remedy is mandatory. The scope and language of the
statute and consideration of policy at times may,
however, create exception showing that the legislature
did not intend a remedy (generality) to be exclusive.
Words are the skin of the language. The language is the
medium of expressing the intention and the object that
particular provision or the Act seeks to achieve.
Therefore, it is necessary to ascertain the intention. The
word ‘shall’ is not always decisive. Regard must be had
to the context, subject-matter and object of the statutory
provision in question in determining whether the same is
mandatory or directory. No universal principle of law
could be laid in that behalf as to whether a particular
provision or enactment shall be considered mandatory or
directory. It is the duty of the court to try to get at the real
intention of the legislature by carefully analysing the
whole scope of the statute or section or a phrase under


Recently, a 3-Judge Bench in Kailash v. Nankhu and Others [(2005) 4
SCC 480] while interpreting Order 8, Rule 1 of the Code of Civil Procedure
was of the opinion :

“33. As stated earlier, Order 8 Rule 1 is a provision
contained in CPC and hence belongs to the domain of
procedural law. Another feature noticeable in the
language of Order 8 Rule 1 is that although it appoints a
time within which the written statement has to be
presented and also restricts the power of the court by
employing language couched in a negative way that the
extension of time appointed for filing the written
statement was not to be later than 90 days from the date
of service of summons yet it does not in itself provide for
penal consequences to follow if the time schedule, as laid
down, is not observed. From these two features certain
consequences follow.”

[See also Salem Advocate Bar Association, T.N. v. Union of India
(2005) 6 SCC 344].

However, even if a statute is directory in nature the same should be
substantially complied with. What would satisfy the requirements of
substantial compliance, however, would depend upon the fact of each case.

The Appellants do not state as to how they would be prejudiced by the
act of Respondent No.1 in not filing the application for registration of
transfer of shares within the aforementioned period. The Appellants have,
indisputably, filed suits. In para 10 of the plaint filed by Appellant No.1, in
O.S. No.3742 of 2003, it was categorically stated :

“Even though the plaintiff cannot have an objection on
the transfer, the plaintiff is concerned about the value at
which the second defendant is attempting to transfer the
equity shares in its favour”
On their own saying, thus, they were not prejudiced. In fact, they had
no objection in registering the shares. The only objection was with regard to
the value thereof. It is also not in dispute that they, in fact, registered
2,99,800 pledged shares, although they were also presented after a period of
two months without any demur whatsoever. The Appellants, therefore, must
be held to have waived their right. The pledge of shares is not in dispute.

The fact that the Appellant had taken a loan of Rs.4.5 cores is also not
in dispute. Furthermore, we are of the opinion that by reason of the
impugned judgment no injustice as such has been done to the Appellants and
in that view of the matter this Court in exercise of its jurisdiction under
Article 136 of the Constitution of India may not interfere with the impugned
order, even if it may be lawful to do so.

In Taherakhatoon (D) By LRs. v. Salambin Mohammad [(1999) 2
SCC 635], this Court observed

“20. In view of the above decisions, even though we are
now dealing with the appeal after grant of special leave,
we are not bound to go into merits and even if we do so
and declare the law or point out the error  still we may
not interfere if the justice of the case on facts does not
require interference or if we feel that the relief could be
moulded in a different fashion”

In Chandra Singh and Others v. State of Rajasthan & Another [(2003)
6 SCC 545], it was held :

“Furthermore, this Court exercised its discretionary
jurisdiction under Article 136 of the Constitution of India
which need not be exercised in a case where the
impugned judgment is found to be erroneous if by reason
thereof substantial justice is being done. [See S.D.S.
Shipping (P) Ltd. v. Jay Container Services Co. (P)
Ltd.17] Such a relief can be denied, inter alia, when it
would be opposed to public policy or in a case where
quashing of an illegal order would revive another illegal

The said principle was reiterated in Inder Parkash Gupta v. State of J
& K & Others [(2004) 6 SCC 786] in the following terms :

“In ordinary course we would have allowed the
appeal but we cannot lose sight of the fact that the
selections had been made in the year 1994. A valuable
period of 10 years has elapsed. The private respondents
have been working in their posts for the last 10 years. It
is trite that with a view to do complete justice between
the parties, this Court in a given case may not exercise its
jurisdiction under Article 136 of the Constitution of
India. (See Chandra Singh v. State of Rajasthan”
[See also Transmission Corporation of A.P. Ltd. v. Lanco Kondappali Power
(P) Ltd. (2006) 1 SCC 540]

Following the aforementioned decisions, we are of the opinion that
with a view to do complete justice to the parties, no inference with the High
Court’s judgment is called for.

For the foregoing reasons, we are of the opinion that no case has been
made out for exercise our jurisdiction under Article 136 of the Constitution
of India. The appeals are dismissed. No costs.

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