Case Brief: M/S. John Tinson & Co. Pvt. Ltd. & Ors. Etc vs Mrs. Surjeet Malhan & Anr. Etc

NAME OF THE CASE	M/S. John Tinson & Co. Pvt. Ltd. & Ors. Etc vs Mrs. Surjeet Malhan & Anr. Etc
CITATION	AIR 1997 SC 1411
DATE OF JUDGMENT	February 3rd, 1997
APPELLANT	M/s. John Tinson & Co. Pvt. Ltd. & R. D. Bhagat
RESPONDENT	Mrs. Surjeet Malhan & Mr. B. K. Malhan
BENCH/JUDGES	K. Ramaswamy J.; G. T. Nanavati J.
STATUTES INVOLVED	Indian Contract Act, 1872Companies Act, 1956(as was applicable then)
IMPORTANT SECTIONS/ARTICLES	Section 10 of Indian Contract Act, 1872Section 25(1) of Indian Contract Act, 1872Section 82 of Companies Act, 1956Section 108 of Companies Act, 1956Clause 8 of Articles of Association of the Company

Facts of the Case:

We need to consider Mrs. Surjeet Malhan as Respondent 1 and Mr. B. K. Malhan as Respondent 2. The relationship between both the respondents is as husband and wife. They were shareholders of a company named M/s. John Tinson & Co. Pvt. Ltd., jointly. Respondent 1 had in total 1500 original shares, out of which 900 shares were in her name and 600 in the name of her relative. Apart from that, she had 10 preference shares as well. On the other hand, Mr. Malhan had 2,230 ordinary shares and 64 preference shares. 

However, a situation came when the company was undergoing some financial trouble. In order to revive the condition of the company, the respondent no. 2 entered into an oral agreement with Mr. R. D. Bhagat (the appellant) in order to transfer some shares. As agreed upon, the respondents gave share certificate to the appellant along with the transfer forms(signed by the bank). 

Now, here arose the main dispute when Mrs. Malhan claimed that she had neither authorised nor signed any agreement to transfer her part of the shares to the appellant. 

Two civil suit were filed by the respondents (petitioner)at High Court in order to seek declaration through the court, that the shares transferred to the appellant was invalid. Along with that, the other side was filed to apply for permanent and immediate injunction to stop further registration of those transfers. The single judge of Himachal Pradesh High Court dismissed both the suit that were filed. It held that the transfer of shares was valid and thereby effective. 

The case moved to the division bench(two judges bench) of Himachal Pradesh High Court, where the division bench overruled the decision of the single bench. The bench held the transfers to be invalid and the decision was ruled in favour of the Malhans. 

Now, this decision was appealed by the appellant before the Supreme Court of India using a special leave petition. The apex court held that the transfers were invalid. Therefore it dismissed the appeal and ruled in favour of the respondents, Mr & Mrs Malhan. Hence, the apex court upheld the decision of the division bench. The court opined that the transfer of shares took place without the consent and knowledge of Mrs. Malhan and therefore the transfer would be deemed to be invalid by law. Along with that, the transfer of shares of Mr. Malhan failed as well, because as according to the Clause 8 of Articles of Association of Company, for transfer of shares, it required the written approval from the Board of Directors, which was not obtained by Respondent no. 2.

Therefore, the appeal was dismissed with no order as to costs. 

Provisions Involved:

Some of the major provisions are guiding the case. Those are:-

1. Section 25(1) of Indian Contract Act, 1872
2. Clause 8 of Articles of Association of the Company

Issues Involved:

Some of the key issues that are involved in the case as was decided by the court. The key issues underlying the case are:-

1. Whether the transfer of shares on the part of Mrs. Malhan made to the appellant was valid or not
2. Whether the transfer of shares on the part of Mr. Malhan valid, since it lacked prior written approval from Board of Directs for transfer of shares. 

Arguments from the Appellant’s side:

The learned counsel presenting the case on behalf of the appellant party held that there existed implied consent on the part of Mrs. Malhan. The transfer of her portion of share took place through her implied consent. It was held that she raised no objection when her portion of shares was getting transferred by her husband, Mr. Malhan. On this basis, they proved the contract to be valid as well as enforceable. 

With respect to the dispute arose on the validity of the transfer of shares of Mr. Malhan, the appellant counsel held that he had the sole authority to determine the transfer or non transfer of his shares, for being the one the only director after his father’s resignation. Therefore, even though the transfer lacked legal formality, like prior written approval from the Boards of Directors, still based on the nature of transaction, it should be considered valid by the court. 

Along with these arguments, the counsel relied on two case laws to increase the weight of his arguments. In the case of Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakur, it was held by the court that once the shares get delivered, it would be deemed to be completed by law. In another case, Balkrishan Gupta v. Swadeshi Polytex Ltd., it was held that even though the shares were not registered legally, still the person would be regarded as the shareholder of the property, in case the ownership and transfer had already taken place. 

Arguments from respondent's side:

The learned counsel representing the respondent side countered the arguments put forth by the appellant counsel. It opposed the argument on the major line of contradiction. It held that the transfer of shares were invalid by law as it was done without prior knowledge or informed consent from the respondent no. 1, Mrs. Malhan. The transfer of shares using blank transfer forms would not imply actual transfer of shares. Therefore the shares on the part of Mrs. Malhan, which was transferred to the appellant was deemed invalid. Even, there was lack of valid consideration for the part of the share of Mrs. Malhan, making the contract void. Therefore, the transfer could be invalidated by law. 

Along with that, it countered the disputed transfer of shares on the part of Respondent no. 2, Mr. Malhan. The counsel held that the shares were not in compliance with the conditions under Clause 8 of Articles of Association. Since, it lacked prior formal sanction, the transfer would be invalidated by law. 

In response to the cases cited by the appellant party, the respondent held that this case holds difference from the other two cases. In those cases, the transfers had a valid consideration or followed due legal procedures unlike in this case, which lacked a valid consideration as well as refrained from undergoing a valid procedure by law. 

Judgment Pronounced:

As according to the decision of the apex court, the appeal was dismissed with no order as to costs. The decision of the court favoured the Malhans, the respondents. The judgment of Himachal Pradesh High Court, which was conclusively decided on November 14, 1996 was upheld by the apex court to decide this case. 

Due to lack of valid consideration, invalid due process of law, no prior approval by the wife to the husband, the transfer of shares of Mrs. Malhan would be invalidated. Along with, transfer of shares of B. K. Malhan, respondent no. 2 would be considered invalid. The reason for invalidation included the prior approval from directing authority (Board of directors) and inconsistency with Clause 8 of the Articles of Association of the company. 

Since the appeal was dismissed without costs, so each party would bear the cost for the legal proceedings carried out to determine the legality of the transfer of shares.

Conclusion:

In this case, the apex court finally held both the transfers of shares as invalid as it failed to comply with the basic requirements to consider the contract as valid by law. Therefore, the court failed to provide any relief to the appellant party. 

This case gradually turned out to be a landmark judgment for the exceptional validations based on the ruling of the case. The apex court held the step for taking prior approval from board of directors to transfer the property as of utmost importance and could not be compromised by equitable principles of justice. The court had decided the case on merits and conclusively held that without the consent of the possessor of shares, no transfer could take place. It would not be determined as an implied consent on that basis. 

The above decision set a major precedence for later cases that was related to property matter. This case, in a crux, dealt with the validity of the transfer of shares of immovable property.