Author(s): Jasleen Bedi and Abhishek Jain
Paper Details: Volume 4, Issue 3
Citation: IJLSSS 4(3) 43
Page No: 477 – 485
KERNEL OF TRUTH: UNDERSCORING BRIEF FACTUAL MATRIX
Facts in the instant case[1], albeit in brief, trace their genesis to a formal agreement executed on 19th November, 1986 in respect of a loan amounting to Rs. 38,83,000/- advanced by the Appellant, Bhagwati Developers Private Limited (‘Bhagwati’) to Respondent No. 2, Mr. Tuhin Kanti Ghosh (‘Tuhin’) for purchasing 3530 equity shares of Respondent No. 1, Peerless General Finance and Investment Company Limited (‘Peerless’).
As regards transfer of shares: Tuhin agreed to transfer 3530 shares of Peerless to Bhagwati by way of repayment of loan and handed over the original share scrips along with the transfer deeds. However, the deeds were not properly filled and executed which compelled Bhagwati to write to Tuhin to put latter’s signature on fresh deeds, return them and send shares along with dividends received from Peerless to Bhagwati in accordance with letter dated 28th December 1987.
As regards declaration of Bonus Shares by Peerless: In the meanwhile, Peerless declared bonus shares in the ratio of 1:1 and Tuhin being the registered shareholder, received 3530 bonus shares. Thereafter, Peerless also 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. Thus, cumulatively, Tuhin got 14120 shares.
As regards filing of Civil Suit by Bhagwati and consequent Settlement Agreement: However, despite several written requests from Bhagwati, Tuhin did not accede towards transferring the entire shares of Peerless to Bhagwati. Therefore, Bhagwati 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 and according to the compromise decree dated 28th November, 1994, it was agreed that Tuhin shall retain absolute ownership over 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 and similarly, Bhagwati also paid a further sum of Rs.10 lakh by way of pay order dated 21st November, 1994.
As regards Persistent refusal to register shares: On the basis of the aforesaid decree, Bhagwati on 12th December, 1994 lodged the transfer deeds in respect of 14120 shares with Peerless for their transfer, however, the latter 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 referred as ‘Regulation Act, 1956’) and the said contract for sale of shares was not a spot delivery contract. Moreover, the 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 the same were not registered in the name of Bhagwati.
As regards filing of application under Section 111 of the Companies Act, 1956 by Bhagwati and the Company Law Board’s judgment: Thus, despite Bhagwati’s relentless efforts, it finally approached the Company Law Board, Eastern Region by filing an application under Section 111 of the Companies Act, 1956 and the Company Law Board vide 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. The aforesaid judgement affirmed the action of Peerless for rightly refusing to register the transfer. It further observed that the shares of a public limited company which are not registered in the Stock Exchange also come under the purview of Regulation Act.
As regards Judgement by the Company Judge, High Court of Judicature at Calcutta: Further, vide 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, also held that the impugned transactions are hit by the provisions of the Securities Contracts (Regulation) Act, 1956 and the guidelines issued by the Government of India.
Instant Case before Apex Court: Henceforth, aggrieved by the aforesaid verdicts, the Appellant approached the Hon’ble Supreme Court exercising its appellate jurisdiction in Original Petition No.15(111)/ERB/1995.
ANALYSIS: STATUTORY ECDYSIS ON ‘MARKETABILITY’ OF ‘SECURITIES’
The forefront explanation given on marketable securities could be attributed to the case of Norman J. Hamilton and its appellate decision in Dahiben Umedbhai Patel[2] wherein the Bombay High Court through a detailed exposition scrutinised the meaning of marketability, keeping in mind the raison d’etre of the Regulation Act, 1956 and the mischief of undesirable transactions that it sought to prevent. While the Bombay High Court was only dealing with securities of a private company which are not marketable, the Court nevertheless ratiocinated sufficiently as to why the Regulation Act, 1956 would be applicable to transactions in securities that are listed on a stock exchange. However, the courts in subsequent decisions sought to distinguish the Bombay High Court judgement on the fundamental plank that the latter pertained to private companies and not to public unlisted companies.
Thus, the observations by Bombay High court in Bhagwati Developers’ case must be seen only in the guise of an obiter dicta and with its sole persuasive capacity at the best. Subsequent courts have also opted for a lexicographic interpretation of the expression “marketable”. It is often seen to be inter-changeable with the expressions “transferable” or “saleable”.
REPROFILING THE CATENA OF CONFLICTING JUDGMENTS ON ‘SECURITIES’ VIS-À-VIS APPLICABILITY OF SECURITIES CONTRACT REGULATION ACT, 1956
Now coming to the interpretation of ‘securities’ and the ‘applicability’ of Regulation Act, 1956, a conflicting viewpoint was taken by the Bombay and Calcutta High Courts. According to the gist of Bombay High Court verdicts in Dahiben Umedhbhai Patel[3] case and Brooke Bond India [4]case, the shares of a public company are covered within the definition of ‘securities’ if they are marketable and in order to be marketable they must be listed on the stock exchange.
Further the Hon’ble court in Dahiben Umedhbhai Patel[5] case, while dealing with restrictions on transfer in private companies, referred to Palmer’s Company Law[6] and qua transferability of shares, it perused through the Gore-Browne on Companies[7] to hold that:
‘Subject to certain limited restrictions imposed by law, a shareholder has prima facie the right to transfer his shares when and to whom he pleases. This freedom to transfer may, however, be significantly curtailed by provisions in the articles. Restricting provisions are legal and, indeed, mandatory in the case of private companies; on the other hand the stock exchanges require that the transfer of fully paid quoted shares should not be restricted by the articles in any way’.
IN THE BROOK BOND CASE[8], THE HON’BLE COURT EXPRESSLY HELD IN FOLLOWING WORDS
So far as the decision of the Division Bench of the Calcutta High Court in East Indian Produce Ltd., ([1988] 64 Comp Cas 259) is concerned, it seems to follow the earlier judgment in B. K. Holdings. With great respect to the learned Judges of the Calcutta High Court, who decided the aforesaid two cases, even if the matter was not res integra, one would be inclined to disagree with their observations made therein. However, in the view taken of the judgments of the learned single judge and the appeal judgment of our court, this court is bound to take the view that the Securities Contracts (Regulation) Act, 1956, is not intended to regulate private transactions in shares of public limited companies, not listed on the stock exchange.’
However, a contrary view was held by the Calcutta High Court in B.K Holdings case[9] and East Indian Produce case[10].
In the B.K. Holdings case, the relevant paragraph is extracted below-
‘The shares of a private limited company are not marketable in the sense that before they can be sold to outsiders, they have to be offered to an existing member of the private limited company. That being so, the shares of a private limited company stand as a class apart from other shares of a public limited company. We, in the present case, are concerned with a public limited company. As such, the decision in Dahiben Umedhbhai Patel case is of no assistance to the petitioner in the present case. In any case, the learned judge has held that what is easily saleable is ” marketable “.
Ultimately, the conflict in the viewpoint of the High Courts was resolved by the Supreme Court judgment of Naresh K. Aggarwala and Co. v. Canbank Financial Services Limited[11]. In this judgment, while determining the applicability of a circular issued by the Delhi Stock Exchange, the Court examined the definition of ‘securities’ under Regulation Act, 1956 and refused to distinguish between listed and unlisted securities upon a construction of the statute. The Hon’ble court in above case observed in following words-
‘A Perusal of the definition in Section 2 (h) of Regulation Act, 1956 shows that it does not make any distinction between listed securities and unlisted securities and therefore it is clear that the Circular will apply to the securities which are not listed on the Stock Exchange.’
To corroborate the above viewpoint, the Sahara v. SEBI[12] case also held that the definition of ‘securities’ under Regulation Act, 1956 is inclusive and covers all ‘marketable securities’, whether listed or not. Therefore, the instant case of Bhagwati Developers vs. Peerless Finance[13] merely reiterates the settled position of law on the applicability of Regulation Act, 1956 to unlisted public companies.
THE CONUNDRUM UNDERLYING OVER-FACILE JUSTIFICATION TO EXCLUDE TRANSACTION AS SPOT DELIVERY CONTRACT
Coming to the last issue pertaining to the question of inclusion/exclusion as spot delivery contract, the reasoning given by the Apex Court is not bereft of its own flaws. As per the Indian law of contracts and the ratio of Fazaladdin Mandai v. Panchanan Das case[14], an act done by a person at another person’s request, without any contemporaneous promise from the latter, may be a consideration for a subsequent promise from the latter. To take an example, in Board of Revenue Madras v. Annamalai & Company[15], a company giving a power of attorney to a bank enabling it to sell off its properties with the bank was held to be an acceptable consideration relatable to the loan advanced earlier by the bank.
On the similar plank, the loan given by Bhagwati in the instant case in 1986 was consideration for the subsequent transfer of 3,530 shares by Tuhin in 1987. With the share transfer done by Tuhin in 1987 for the discharge of the loan, the agreement of 1986-1987 had been concluded. Additionally, Bhagwati paid Rs. 10 lakhs to Tuhin in 1994 to settle the dispute. Clearly, the payment of Rs. 10 lakhs to Tuhin cannot be deemed to be part of consideration for the share transfer done by Tuhin in 1987. It is evident that Rs. 10 lakhs was consideration for the transfer of 14,120 shares to Bhagwati in terms of the Settlement Agreement.
Now, the Settlement Agreement and the agreement of 1986-1987 are two completely separate agreements and cannot be connected with each other for the limited purpose of determining whether the present case involves a spot delivery contract or not. Therefore, the reasoning adopted by the Court that the sum of Rs. 10 lakhs paid to Tuhin in 1994 as consideration for settling the suit was actually a part of consideration for the shares transferred by Tuhin to Bhagwati in 1987 and that since there was a gap of seven years between the share transfer and the payment of part consideration, the transaction was not a spot delivery contract, in my view, appears to be unacceptable.
CONTRARIAN ECHOES ESCHEWING THE BHAGWATI VERDICT
Qua the first issue, Professor Umakanth also by delving deep into the merits of the case seeks to suggest[16] that the shares of a public limited company to come within the definition of securities under the Regulation Act, 1956 must be marketable and for that purpose be necessarily enlisted in the Stock Exchange.
Let us summarise two important arguments arising out of the above premise that contain some force- Firstly, if one may peruse through the legislative history of the Regulation Act, 1956 beginning from the Bombay Securities Contract Control Act, 1925[17], the Gorwalla Committee Report[18] and the subsequent speeches[19] by the then Finance Minister C.D. Deshmukh in the year 1955 pellucidly reflected the intention behind enacting the Regulation Act, 1956 which was to primarily curb speculation (pre-supposing the existence of market price), establish a Stock Exchange (u/s 2(j) of Regulation Act, 1956) for dealing in securities (u/s 2 (h) of Regulation Act, 1956) and so on.
Now, to allow a public unlisted company to fall under section 2(h) of Regulation Act, 1956 is indeed a surprising proposition as this would mean that the shares of company without the latter being listed must be dealt with by the stock exchange. Many courts have sought to reject such premise and equated ‘marketability’ with ‘free transferability’. However, in the Bhagwati Developers[20] case, by allowing the Regulation Act, 1956 to cover unlisted securities of Public Limited Company seems to suggest that section 13 of the Regulation Act, 1956 also shall apply to such companies even if section 2(h) does not. Moreover, coming to the issue surrounding the ‘spot delivery contract’, Professor Umakanth avers that the premise that a sum of 10 lakhs paid by Bhagwati to Tuhin in November, 1994 as consideration for settling the suit (as per the settlement agreement) was basically the price paid for shares transferred by Tuhin to Bhagwati in October, 1987 and that some seven years had elapsed in between for it to get excluded from definition of spot delivery contracts, is also inherently questionable with three fundamental objections towards the same.
Neither Tuhin nor Bhagwati could have known in 1987 that a future dispute would arise between the parties and Bhagwati would be compelled to pay Rs. 10 lakhs to Tuhin around seven years later. Both the parties entered into the transaction with the plain mindset of transferring the shares in 1987 in lieu of consideration to be paid in the form of discharge of loan vide transfer of shares. Now, it is axiomatic that once a contract is already concluded, no consideration will arise for the same. Therefore, nothing that Bhagwati promised or paid after conclusion of contract in 1987 could be qualified as consideration for sale of shares as Bhagwati had already acquired the title.
There is strong agreement with the line of thought of Professor Umakanth and it is reiterated that payment of Rs. 10 lakhs by Bhagwati to Tuhin post 1987 was a consideration for a separate agreement with the sole purpose to the settle the suit. Moreover, to even assume for a moment that payment of 10 lakhs by Bhagwati was a consideration for transfer of shares, it cannot be denied that the same holds no importance in view of the concluded contract in the year 1987 itself. On perusing the settlement agreement, it is clear that Tuhin lawfully sold the original shares on 30th October, 1987 and thereafter, ceased to have any beneficial interest. Thus, it is apparent that Rs. 10 lakhs is consideration for the fresh agreement to settle Tuhin’s claims. Further, if one may examine the purpose of paying Rs. 10 lakhs by Bhagwati, it is clear that the same was only in pursuance of a compromise agreement generating its own consideration. The transaction was, therefore, a spot delivery contract.
CONCLUSION: GENESIS OF LABYRINTHINE COMPLEXITIES?
Paradoxically, while this judgment will be of immense precedential value for application of Regulation Act, 1956 to Public Unlisted Companies, it is the analysis of the
last issue qua exclusion as spot delivery contract that is likely to be more debatable. To our opinion, it is a herculean task to comprehend as to how any settlement agreement filed for the purpose of declaring the title to the shares of Public Unlisted Company will be governed by this verdict and the consequence will be that a contract for the
sale of shares will be qualified as a spot delivery contract if it is performed in accordance
with its terms, but not a spot delivery contract if one of the parties commit a
contractual breach, and the buyer settles the dispute by paying the seller a fresh sum of
money.
In other words, the judgment is in line with its precedent pertaining to the conclusion that Regulation Act, 1956 is applicable to the listed as well as the unlisted public companies. However, it is the reasoning with regards to the issue of spot delivery contract, that will lead to a whirlpool of bigger issues requiring the intervention of the Supreme Court of India.
* University School of Law and Legal Studies, GGSIPU, Delhi
** Symbiosis Law School, Pune
[1] Bhagwati Developers Private Limited vs. Peerless General Finance & Investment Company and Anr. (2013) 9 SCC 584 (India).
[2] See Supra note 3.
[3] See Supra note 3.
[4] See Supra note 4.
[5] See Supra note 3.
[6] 1 GEOFFREY MORSE, PALMER’S COMPANY LAW 393(22nd ed., Sweet & Maxwell 1976) (1980).
[7] FRANCIS GORE BROWNE, GORE-BROWNE ON COMPANIES (Michael Todd & Lord Millett, Jordan Publishing 2004) (1873).
[8] See Supra note 4.
[9] See Supra note 8.
[10] See Supra note 7.
[11] See Supra note 13.
[12] Sahara v. SEBI, (2013) 1 SCC (Civ) 1 (India).
[13] See Supra note 1.
[14] Fazaladdin Mandai v. Panchanan Das, AIR 1957 Cal 92 (India).
[15] Board of Revenue Madras v. Annamalai & Company, AIR 1968 Mad 50 (India).
[16] Umakanth Varottil, Investment Agreements in India: Is there an Option?, 4 NUJS Law Review, 467 (2011).
[17] Bombay Securities Contract Control Act, 1925, Act of Parliament (1925).
[18] A.D. GORWALLA, REPORT ON EFFICIENT CONDUCT OF STATE ENTERPRISE (1951).
[19] Introduction of Interim Budget, INDIA BUDGET (1955-1956), https://www.indiabudget.gov.in/doc/bspeech/bs195556.pdf.
[20] See Supra note 1.