Corporate Law; Bhagwati Developers Pvt. Ltd. Vs. Peerless General Finance & Investment Company Ltd. [Supreme Court of India, 15-07-2013]

Securities Contracts (Regulation) Act, 1956 – Section 13 – `Securities’ – Shares of Pearless General Finance and Investment Company – Marketability – Transferability – Spot Delivery Contract Whether the provisions of Regulation Act will apply to the shares of a public limited company which are admittedly not listed on any stock exchange? Held, for shares of a public limited company to come within the definition of securities they have to satisfy that they are marketable – `Marketability’ requires free transferability – Subject to certain limited statutory restrictions, the shareholders possess the right to transfer their shares, when and to whom they desire – It is this right which satisfies the requirement of free transferability – Shares of public limited company though not listed in stock exchange, come within the definition of `securities’ and, therefore, provisions of the Act would apply including the indictments contained in s.13 thereof.

Shares of a public limited company

AIR 2013 SC 1690 : (2013) 5 SCC 455 : 2013 (5) SCR 708 : JT 2013 (4) SC 624 : 2013 (5) SCALE 378

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CHANDRAMAULI KR. PRASAD AND V.GOPALA GOWDA, JJ.

JULY 15, 2013

CIVIL APPEAL NO.7445 OF 2004

BHAGWATI DEVELOPERS PVT. LTD. APPELLANT

VERSUS

PEERLESS GENERAL FINANCE & INVESTMENT COMPANY LTD AND ANR. RESPONDENTS

JUDGMENT

CHANDRAMAULI KR. PRASAD,J.

Appellant aggrieved by the judgment and order dated 30th July, 2003 passed in ACO No.76 of 1999 by the Company Judge, High Court of Judicature at Calcutta affirming the judgment and order dated 25th November, 1998 passed by the Company Law Board, Eastern Region Bench at Calcutta in Original Petition No.15(111)/ERB/1995 is before us with the leave of the Court.

The appellant, Bhagwati Developers Private Limited, hereinafter referred to as ‘Bhagwati’ was earlier known as Lodha Services Private Limited. Tuhin Kanti Ghose, hereinafter referred to as ’Tuhin’, Respondent No.2 herein, approached Bhagwati for a loan of Rs.38,83,000/- for purchasing 3530 equity shares of Respondent No.1, Peerless General Finance & Investment Company Limited, hereinafter referred to as ‘Peerless’. As requested, Bhagwati on 25th of July, 1986 advanced a sum of Rs.38,83,000/- as loan to Tuhin. Bhagwati and Tuhin later, on 19th November, 1986 entered into a formal agreement in respect of the aforesaid loan and Tuhin assured to repay the loan on or before 31st December, 1991. On 30th of October, 1987, Tuhin agreed to transfer 3530 shares of Peerless to Bhagwati by way of repayment of the aforesaid loan. In the light thereof, Tuhin handed over the original share scrips as also the transfer deeds for doing the needful byBhagwati. Tuhin on 30th October, 1987, wrote that Bhagwati would be entitled to all the benefits i.e. dividend, bonus shares etc. in respect of all these shares. It seems that the transfer deeds were not properly filled in and executed and accordingly, Bhagwati on 28th December, 1987 wrote to Tuhin to put his signature in the fresh transfer deeds and return them to it. Bhagwati further requested Tuhin to send it shares and dividends received by him from Peerless. During these developments, Peerless declared bonus shares in the ratio of 1:1 and Tuhin being the registered shareholder, received further 3530 bonus shares. Tuhin, it appears, did not sign the fresh transfer deeds and retained the bonus shares. Bhagwati by its letter dated 6th of July, 1988 asked Tuhin to furnish fresh transfer deeds in respect of the total shares i.e.7060 shares. Peerless declared further bonus shares in the year 1991 in the ratio of 1:1 and Tuhin being the registered shareholder of 7060 shares was further allotted 7060 bonus shares. In this way Tuhin altogether got 14120 shares.

When Tuhin did not accede to the request of Bhagwati for transferring the entire shares, Bhagwati on 29th May, 1991 filed a suit in the Court of Civil Judge at Allahabad and obtained an ad interim order of injunction restraining Tuhin from claiming any right, title or interest in respect of the aforesaid 14120 shares of Peerless. During the pendency of the suit, Tuhin and Bhagwati settled their dispute out of Court and executed an agreement dated 21st November, 1994, according to which Tuhin acknowledged to have sold 3530 equity shares to Bhagwati on 30th October, 1987 which entitled it to the bonus shares declared in the years 1987 and 1991 totaling 14120 equity shares. In terms of the agreement, an application for recording the compromise was filed in the civil suit and for passing a decree in terms of the compromise. The trial court acceded to the prayer of Bhagwati and Tuhin and decreed the suit in terms of the compromise by judgment and decree dated 28th November, 1994. The trial court further directedthat the compromise petition and the agreement between the parties shall also form part of the decree. According to the compromise decree, it was agreed that Tuhin shall retain as absolute owner the dividend on the entire shares up to the accounting year 1989-90 amounting to Rs.8,64,850/- as part of consideration for the settlement. In terms of the compromise decree, Bhagwati has also paid a further sum of Rs.10 lakh by way of pay order dated 21st November, 1994.

Armed with the decree, Bhagwati on 12th December, 1994 lodged the transfer deeds in respect of 14120 shares with Peerless for their transfer. Peerless, however, did not accede to the prayer of Bhagwati and by its letter dated 8th February, 1995 refused to register the said shares, inter alia, on the ground that the said transfer of shares by Tuhin in favour of Bhagwati was in violation of the provisions of

Securities Contracts (Regulation) Act, 1956

hereinafter to be referred to as ‘the Regulation Act’. According to Peerless, the contract for sale of shares was not a spot delivery contract, signatures of Tuhin differed from the signatures on the record of Peerless and further the stamps affixed on the instruments of transfer had not been cancelled. Bhagwati re-lodged the shares for transfer on 14th February, 1995 with Peerless but again Peerless did not register those shares in the name of Bhagwati.

Bhagwati, aggrieved by that, approached the Company Law Board, Eastern Region by filing an application under Section 111 of the Companies Act, 1956 hereinafter to be referred to as ’the Act’ and the Company Law Board by its judgment and order dated 25th November, 1998 dismissed the said application inter alia holding that transfer of shares in favour of Bhagwati was against the provisions of Sections 13 and 16 of the Regulation Act and as such, illegal. In the opinion of the Company Law Board Peerless rightly refused registration of transfer. While doing so, the Company Law Board further observed that the sharesof a public limited company which are not registered in the Stock Exchange also come under the purview of Regulation Act. In this connection, the Company Law Board observed as follows:

“We, therefore, hold that the provisions of the SCR Act, 1956, including the provisions of Sections 13, 16 and 17 of the Act would be applicable to a public limited company even though its shares may not be listed on any recognized stock exchange.”

As regards the plea of the appellant that the sales of shares in question is a spot delivery contract, the Company Law Board taking into account that consideration for sales of shares having been paid much after the date on which the sales of shares have taken place, observed that the transaction does not come within the expression, “spot delivery contract” as defined under Section 2(i) of the Regulation Act. While doing so, the Company Law Board observed as follows:

“It is, therefore, obvious that a part of the consideration for the sale of shares passed on much after the dateon which the sale of shares is alleged to have taken place on 30.10.87. We are unable to accept the argument of Mr. Bose that the payment of Rs.10.00 lacs was made only to buy peace. We find that the agreement dated 21.11.94 clearly states that the payment of Rs.10.00 lacs was made as a part of consideration for the sale of shares and we fail to see how it can be contended to be otherwise. There is other intrinsic evidence in the agreement dated 21.11.94 which indicate against the contention of Mr. Bose, Learned Advocate for the petitioner that the entire transaction of sale of shares was completed on 30.10.87. Clause 2.1 of the said agreement provides that notwithstanding anything contained anywhere in the agreement dated 21.11.94 which indicate against the contention of Mr. Bose Learned Advocate for the petitioner that the entire transaction of sale of shares was completed on 30.10.87. Clause 2.1 of the said agreement provides that notwithstanding anything contained anywhere in the agreement dated 21.11.94. It was agreed that the respondent no.2 would be entitled to retain as absolute owner of the dividend on the entire shares up to the accounting year 1989-90 amounting to Rs.8,64,850/- as part of consideration for the settlement. It is difficult to envisage as to how the respondent no.2 could continue to be absolute owner of the shares up to 1989-90 if the sale was completed on 30.10.87.”

Accordingly, the Company Law Board reached the following conclusion:

“We, therefore, hold that the contract of sale of shares in question does not satisfy the definition of a spot delivery contract since part of the consideration passed on much after the alleged sale of shares on 30.10.87.”

Assailing the aforesaid judgment and order of the Company Law Board, passed in Original Petition No.15(111)/ERB/1995, Bhagwati preferred an appeal before the High Court, inter alia, contending that the shares of Peerless, a public limited Company having not been listed on any recognized stock exchange, it will not come within the definition of ‘securities’ under Section 2(h)(i) of the Regulation Act. Further the transaction between it and Tuhin was a case of spot delivery contract and therefore, the view taken by the Company Law Board on both the counts are erroneous. The Company Judge, negated both the contentions and observed that the provisions of the Regulation Act would be applicable to a public limited Company even though its share is not listed on any recognized stock exchange. Further, the transaction did not satisfy the definition of a spot delivery contract since part of consideration passed on 21st November, 1994, when Bhagwati made payment of Rs.10 lakh to Tuhin much after the transfer of shares on 30th October, 1987. To come to the aforesaid conclusion, the High Court also took into account the fact that in terms of the compromise decree as part of consideration Tuhin retained as absolute owner all the dividends on the entire shares including the bonus shares up to the accounting year 1989-90. The observation of the High Court in this connection reads as follows:

“In the abovementioned background it is necessary, in my view, to note the findings of fact arrived at by the Company Law Board. The Company Law Board found, as findings of fact, that the provisions of the Securities Contract (Regulation) Act, 1956 would be applicable to a public limited company even though it’s shares might not be listed on any recognized stock exchange. It was,further, held that it was obvious that the part of consideration for the sale of shares passed on much after the date on which the sale of shares took place on October 30,1987. The payment of Rs.10,00,000/-(Rupees ten lakh) only by Bhagwati to Tuhin on November 21, 1994 was a part of consideration for the sale of the said shares and, further it was agreed between the Bhagwati and Tuhin that Tuhin would be entitled to retain as absolute owner of the dividends on the entire shares including the bonus shares up to the accounting year 1989-1990 as part of consideration. The transaction did not satisfy the definition of a spot delivery contract since part of the consideration passed on much after the transfer of shares on October 30,1987. Moreover, the shares transfer forms were all dated November 21, 1994, that is, on the date on which the consideration of Rs.10,00,000/- (Rupees ten lakh) only passed from the Bhagwati to Tuhin. Therefore, the transfer of shares in question was hit by the provisions of the sections 13 and 16 of the Securities Contract (Regulation) Act, 1956 and, therefore, was illegal, void and a nullity”.

Ultimately, the High Court held as follows:

“The Company Law Board has considered all the materials placed before it and, thereafter, arrivedat the findings of fact that the impugned transactions is hit by the provisions of the Securities Contracts (Regulation) Act, 1956 and the guidelines issued by the Government of India. The Company Law Board cannot be termed as perverse in the sense that no normal person would have arrived at. The Company Law Board found, as findings of fact, that the consideration for transfer of shares included Rs.10,00,000/- (Rupees ten lakh) only paid by Bhagwati to Tuhin on November 21, 1994. The said findings is sustainable from the reasoning given by the Company Law Board and, therefore, cannot be interfered with in this appeal.”

That is how, the appellant is before us with the leave of the Court.

It is relevant here to state that the Company Law Board has held that transfer of shares in favour of Bhagwati is in the teeth of Sections 13 and 16 of the Regulation Act and hence, we deem it expedient to refer to the aforesaid provisions one after another. Section 13 of the Regulation Act makes contract in notified areas illegal in certain circumstances, same reads as follows: