Research into Transfer of Shares

The topic under research is “transfer of shares” now before understanding the transfer of shares and the technicalities associated with the law regarding the same it is essential to understand the meaning of shares. Section 2(46) of the Companies Act 1956 defines the share as following “share” means share the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied. A share is not a sum of money but it is the interest of a share holder in the company measured by a sum of money for the purpose of liability in the first place and also shows the interest. Hence the position which comes out form the above mentioned position is that a share does not merely represent the interest of the company but also carries with it certain rights and liabilities. There are certain rights and liabilities of a share holder such as following: [1]

• To elect the directors and hence participate in management through them.
• To vote on resolutions of meeting.
• To enjoy the profit of the company in the form of dividend
• To apply to the court for relief in case of oppression.
• To apply to the court for the winding up of the company.

In more general terms a company divides its capital into a number of indivisible units of a fixed amount and these units are known as shares. Shares of a company are movable articles which can be transferred according to the articles. ‘Shares and debentures are specifically excluded from the definition of the definition of ‘Goods’ under the ‘Sales of goods Act 1930’. Hence it is necessary to provide by the articles the manner in which transfers are to be affected’. [2] A company cannot refuse to accept the transfer of shares except as provided by its articles. Hence, only restriction in transfer of shares is according to the articles. So, if some private agreement is entered between some of the share holders then it would not be binding on the company or its share holders. In the case of Vishwanathan v East India Distillers [3] it was observed by the court that: “A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to totally different category or property. It is incorporeal in nature and consists merely of a bundle of rights and obligations.”

Now coming to the issue of transfer of shares as we have seen above also section 82 of the Company’s Act empowers all the share holders to transfer his shares in the manner laid down in the article of association and in accordance with the various provisions of law. ‘Transferability of shares is a great feature of the company. The investor of an incorporated enterprise cannot withdraw his money from the company he can only convert his investment into cash outside the company in the share market or by private sale. The company gets a permanent capital, the share holder liquid investment. That is why from the very beginning in the public company the free transferability of shares has been considered to be of very importance.’ [4] For a complete transfer of shares it is essential that it should be registered. Now, when a transfer of share can be registered is to be found under section 108 of the companies Act. Section 108(1) provides that ‘a company shall not register a transfer in shares in. Or debentures of the company, unless proper instrument of transfer duly stamped and executed on by or behalf of the transferor and by or behalf of the transferee and specifying the name address and occupation, if any, of the transferee, has been delivered to the company along with the certificate relating to the shares or debentures, or if no such certificate is in existence, along with the letter of allotment of the shares or debentures. In the case of International Credit and Investment Co. Ltd. v Adham [5] it was held that where no proper transfer has been executed in favour of a person whose name has been entered in the register of members, the person whose name is so entered in the register of the members, the person whose name is so entered and who is a transferee without consideration, becomes a constructive trustee of the member to whom the share belonged. An order can be made from rectification of the share register of the company directing the company to delete the name and pu it back the name of the person in whose name the shares originally stood. In the case of LIC v Escorts [6] the Hon’ble SC has held that a transfer effective between transferor and transferee is not effective against the company and any person without notice of transfer until the transfer is registered in the company’s register. So long as his right is not registered. The transferee has no protected right of transfer which he would have had he been the registered owner of the share. A very interesting related concept is of blank transfer, ‘where a share holder signs a share transfer from without filling in the name of the transferee and hands it over along with the share certificate to the transferee thereby enabling him to deal with the shares, he is said to have made a transfer ‘in blank’ or blank transfer. The effect of blank transfer is that it facilitates the purchase and sale of shares by mere delivery of the share certificate along with the said blank transfer form.’ [7] A share in a company can only be transferred either by the registered owner and or by anyone else with his authority, and sale in contravention of these people would be void. Similarly, a forged transfer can pass no title and hence is void. In the case of Kaushalya devi v National Insulated Cable Company of India Ltd. [8] it was held that ‘when shares were transferred by means of a forged transfer deed, the transferee didn’t get nay right in respect of the shares. The fact that he was a bonafide purchaser for the value would not make any difference. A forgery is a nullity and hence a person receiving shares under a forged instrument of transfer does not get any right. He is bound to return the scripts to the person to whom they actually belong.’

Unless and until the registration of shares takes place in the name of the transferee he cannot exercise any right as share holder in respect of the share transferred in his name as he does not become legal holder till then. ‘For transferring the ownership rights in shares it is necessary that the company must register the transfer and make new entries in its register of members. But, as we know, the transfer of shares is not a registered immediately on delivering the instrument of transfer of the company. In fact, the company is given two months time to either register or refuse it. Now, the question arises as to what shall be the position of the respective parties during this period? The matter may be of interest inasmuch as the company during this period may issue bonus shares or make offer of rights. Till the company has registered the transfer, the name of the transferor continues to appear in the register of the members. Technically therefore the transferor continues to be a lawful owner and the member of the company but the transferee is the beneficial owner. In order to prevent the interest of the transferee in such a situation, new section viz, section 206 A was added by the amendment in 1988. This section provides that where any instrument of transfer of share and bonus shares shall be kept in abeyance. The dividend, rights shares and bonus shares shall be kept in abeyance. The dividend in case of such shares shall be transferred to a special account called the “unpaid dividend account” as per section 205 of the act unless the company is authorised by the registered holder of such share in writing to pay such dividend to the transferee specified in such instrument of transfer.’ [9] This position was retreated by the court in the case of Killick Nixon Ltd. v Bank of India [10] the court held that’ the transferee of shares whose name is not registered in the register of the members can only exercise the rights of a member of the company through the transferor who is his constructive trustee. The transferor who remains the member of the company is bound to comply with all reasonable directions of the transferee with respect to the rights attached to the shares, such as voting according to the direction of the transferee.’

‘Where a shareholder has fraudulently sold his shares to two different transferees, the first transferees, the first purchaser will, will on the ground of time alone, be entitled to the shares in priority to second. When the company accepts the transfer, such transfer relates back to the date of the execution of the instrument of transfer between the transferor and the transferee. Thus, where two or more person lay their claim to the same shares, the transferee who is earlier in time will be preferred. However, where the transfer is registered, the transferee who secures registration will get priority over the rest of the irrespective of the date when his claim arose.’ [11] However there are certain reasonable restrictions on the transfer of shares under section 108B of the Companies Act, this section provides that everybody corporate or bodies corporate under the same management holding 10% of subscribed equity share capital of any company shall intimate to the central government any proposal for transfer of such shares. Transfer of preference shares does not come within the purview of this section. Central government is empowered to order that no such shares shall be transferred, or shares in a company engaged in any industry covered by the schedule to the Act shall be transferred to the central government or to such corporations owned or controlled by that government as may be specified in the directions. Transfer of shares between the bodies corporate under the same management is also covered by this section, if the holding of the transferor body or bodies is 10% or more of the subscribed equity share capital of the transferee company.

Subject to the provisions of this section viz sec111A the shares or debentures and any interest therein of a company, other than a private company shall be freely transferable. However if the company without sufficient cause refuses to register transfer of shares within two months, from the date on which, the instrument of transfer or the intimation of transfer, as the case my be, is delivered to the company, the transferee may appeal to the company law board and it shall direct such company to register the transfer of shares.

‘However it is essential to state here that there is power of the board of directors to refuse registration of transfer of shares where the article of association of company gives power to the board. The board may refuse to register the transfer as long as they are working in the interest of the company, but if they exercise their discretion to refuse malafides i.e. they act oppressively or corruptly, company law board will interfere and order registration. The article may, of course be specific and empower the board to refuse registration in certain situation. Thus where article of Association of a company contain a provision to the effect that no share shall be transferred to an outsider if any member of the company was willing to purchase the same at a fair price to be determined by the directors, and transfer to an outsider shall be allowed only when the board of director was unable to find a willing member within a stipulated time period; the directors having offered to purchase those shares, the question of registering shares in favour of an outsider would not arise.’ [12]

This right to restriction on transfer is applicable in case of the private company. The articles of a private company as against those of a public company contain more rigorous restrictions on the right of its members to transfer shares. This is so because the private company as in the case of private limited company are in law separate entities as much as are public company, but from the business point of view they are much more analogous to partnership than to public companies.