High Court Of Judicature At Madras

Thenappa Chettiar V. Indian Overseas Bank Limited

Civil Suit No. 83 Of 1942. 02-03-1943


The plaintiff Thenappa Chettiar is the son of Lakshmanan Chettiar, who was for some time one of the directors of the Indian Overseas Bank, Ltd., the defendant. Lakshmanan Chettiar held 402 shares in the defendant Bank. He died on 1st December, 1940, leaving a registered will dated 28th November, 19

40. This will is Exhibit P-1 and has been proved by its writer, P.W. 1. Under the will, it is provided that the plaintiff Thenappa should get the Bank shares transferred in his own name and manage all the family properties as guardian for the other male children will they attain majority; he was to collect the outstanding and pay the debts due and was also to sell, purchase or transfer all movable and immovable properties at Karaikudi as he considered proper

On 30th December, 1940, the plaintiff applied to the Bank for transfer of the 402 shares in his name, relying on the will, a registration copy of which he enclosed. This letter is Exhibit P-2. The defendant Bank recorded the copy of the will in their books and returned it to the plaintiff. As the transfer of the share was not effected, the plaintiff, who had by that time gone to Burma and the Federated Malay States, wrote Exhibit P-5 on 12th April, 1941, to the Bank asking for the transfer and the return of the share certificates. This was followed up by a telegram on 22nd April, 1941, Exhibit P-

6. The Bank sent a reply, Exhibit P-7, on 24th April, 1941, stating that the directors had postponed consideration of the transfer of the shares pending the plaintiff's return

By their letter of the 12th of May, 1941 (Exhibit P-10) the Bank intimated to the plaintiff, who was then at Klang, Federated Malay States, that the share would be transferred in the joint names of himself and the minor sons of Lakshmanan Chettiar, but that, if the shares were to be transferred in the plaintiff's sole name, probate of the will was necessary. In the meantime, the plaintiff was asked to make arrangements for paying the further call of Rs. 30 per share due on 1st June, 1941. The plaintiff wrote Exhibit P-11 stating that he was not able to take out probate then as he was otherwise engaged in Klang and that he would arrange to get the shares transferred as soon as he came over to India, which he expected to be within six months' time. On 3rd October, 1941, the plaintiff's agent M. S. Ganesa Aiyar wrote to the defendant Bank sending a sum of Rs. 12, 060, being the call money in respect of certain new shares issued, and pointing out that the delay in transfer of the shares from the name of Lakshmanan Chettiar to the name of the plaintiff was entirely due to the Bank. The Bank wrote on the same date Exhibit P-15 acknowledging the receipt of the amount Rs. 12, 060 and stating that the question of transfer would be placed before the Board of Directors as it was a case where no succession certificate or probate has been produced. The plaintiff's agent wanted the scrips for obtaining succession certificate and there were sent to him only on 10th November, 1941, as would be seen from Exhibit P-19Succession certificate was obtained by the plaintiff on 19th December, 1941, from the District Munsiff's Court of Devakottah in I.A. No. 905 of 1941 in O.P. No. 20 of 1941 and the plaintiff's lawyer wrote to the defendant Bank Exhibit P-22 on 19th January, 1942, sending the succession certificate and the share scrips and pointing out the enormous delay in effecting the transfer of the shares and asking that it should be effected within 24 hours. The reply that the Bank wrote is Exhibit P-23 dated 22nd January, 1942. They say that the matter was receiving their attention but they would like to know in the meanwhile what arrangements were being made for liquidating a debt of 14, 969 and odd dollars which the plaintiff's father Lakshmanan Chettiar owed the Bank in their Kualalampur branch. Mr. T. L. Venkatarama Aiyar, the plaintiff's advocate, sent a reply on 26th January, 1942, Exhibit P-24, pointing out that the question of transfer of the shares in the name of the plaintiff had little to do with the discharge of the obligations of Lakshmanan Chettiar by which the plaintiff was necessarily bound. Exhibit P-25 is the Bank's reply in which they raise another new objection, namely, that the agent should procure and forward to the Bank a letter from the plaintiff, who was then in the Federated Malay States overrun by Japan, recognising the Bank's lien for the amount due by Lakshmanan Chettiar and consenting to be treated as a member of the Bank and to be entered in the register of its members as such. They pointed out that the power of attorney, which the agent had, did not confer his power on him. Mr. T. L. Venkatarama Aiyar urged in his reply, Exhibit P-26, the difficulties in getting a letter from the plaintiff Thenappa, that his agent was prepared to give a letter if the Bank would be satisfied with it and stating that as the shares were not proposed to be transferred to third parties and as it was only a case of the name of the legal representative being substituted in place of the deceased, there was no necessity for any such letter. But the Bank would not accept the position thus taken and they said definitely in Exhibit P-27 dated 19th February, 1942, that

"the question of transfer cannot be proceeded with unless Thenappa Chettiar should agree to being registered as a member subject to the Memorandum and Articles of Association of the Bank and for the registration being effected without prejudice to the lien over the shares in our favour for the amount due to us. The question of transfer is therefore awaiting further consideration by the Board pending receipt of the undertakings." *

This was followed by the suit notice, Exhibit P-28 dated 24th March, 1942, in which for the first time it was mentioned that the plaintiff had entered into an agreement with another Chettiar to sell the shares at advantageous rates and, that by reason of the default of the Bank to transfer the shares in his name, he lost the benefit of this bargain and had thereby sustained damages to the extent of Rs. 17, 000 and odd. The reply notice to this is Exhibit P-30

The suit is to compel the defendant Bank to register the 402 shares i the name of the plaintiff and to recover a sum of Rs. 20, 000 as and by way of damages. Several defences have been raised. One is that the plaintiff is an alien enemy and could not maintain the suit. The will under which the plaintiff claims is not admitted and the plaintiff's title to get a transfer of the shares under the will or otherwise is repudiated. It is pleaded that the succession certificate is not of the same force as a probate or letters of administration. The Bank also urges that it was justified in asking for a letter from the plaintiff expressly recognising the subsistence of the lien. The Bank had no notice of the contract to sell the shares to a third party and therefore no special damages could be claimed; as a matter of fact, no damages were sustained by the plaintiff; any way, the amount if highly exaggeratedMost of the objections raised by the Bank to the transfer of the shares appear to me to be captious and untenable. The will was executed at Karaikudi and registered. The provisions in the will, conferring on the plaintiff power to collect outstanding, pay debts and manage the properties, clearly constitute the plaintiff an executor by implication, as even a tyro in the profession would have told the Bank, and yet we find the objection that the plaint has not stated whether any executor has been appointed under the will. The will mentions Karaikudi as the place where it was executed. But objection is raised that the plaint does not disclose by what law the will is governed. The Bank state in their letter of the 3rd October, 1941, that a succession certificate would do. But when this was produced, they took no notice of it and raised other obstacles to the transfer. The plaintiff himself wrote to the Bank two letters Exhibits P-2 and P-5, wanting the shares to be transferred in his name and he also sent the telegram Exhibit P-

13. Still, the Bank wanted a letter of request from him consenting to be treated as a member and to be entered in the register of members as such. The conduct of the Bank cannot but be described as evasive and dilatory right through and raises a suspicion about its bona fides

It was strenuously contended by Mr. V. V. Srinivasa Aiyangar the learned advocate for the Bank, that under Article 42 of the articles of association of the Bank,

"the executor or administrator of a deceased member shall be the only person recognised by the company as having any title his share and the company is not bound to recognise the executor or administrator unless he shall have obtained probate or letters of administration." *

I have pointed out already that the will, a registration copy of which was sent to the Bank, makes it perfectly clear that the plaintiff was an executor. As it is a mofussal will executed at Karaikudy, probate is not compulsory, Article 42 contemplates "probate or letters of administration or other legal representation from a duly constituted Court in British India." A succession certificate is such "other legal representation." It is futile to contend that it enables only the collection of debts and has nothing to do with the transfer of securities. A succession certificate can be granted, not merely in respect of a debt but also in respect of a security, which is defined in Section 370 of the Succession Act to include a share in a company. The application for a certificate has to set out the right in which the petitioner claims and also the debts and securities in respect of which it is applied for. The grant of the certificate, specifying the debts and the securities, empowers the person to whom it is granted, not merely to receive the interest or the dividends on the securities, but also to negotiate or transfer them. Such a certificate was granted to the plaintiff under Exhibit P-20 and the grant was after security was taken from the him for the shares of his minor brothers and in respect of the claim that the widow of the deceased Lakshmanan Chettiar set up as an heir to her husband's estate. This certificate, Exhibit P-20, was forwarded to the Bank on 19th January, 1942. When this objection was thus met, the Bank started another objection altogether, namely, the existence of an overdraft account against Lakshmanan Chettiar in their Kaulalampur branch to the extent of nearly 15, 000 dollars. Reference was made in the course of the argument to the notice, Exhibit D-2, that the Bank got from the widow's lawyer on 21st June, 1941. The Bank must have known perfectly well, if it has only cared to consult its legal adviser, that any objection, on this score was not tenable after the issue of a succession certificate on security taken from the plaintiff in connection with this very objection, which grant entitled him to deal with the shares. As a matter of fact the General Manager of the Bank admitted that transfers were made by the Bank on the basis of succession certificates. This answer also covers the point that the will is not valid as it deals with joint family property. Section 381 of the Succession Act lays down that the grant of a certificate gives to the granted a good title to recover the debt or the security and affords full indemnity to all persons dealing with himEqually unfounded was the objection to the transfer of shares in the absence of an express letter from the plaintiff as regards the subsistence of the company's lien for the Kaulalampur overdraft. Apart from the fact that the objection was raised for the first time only on 2nd February, 1942, in Exhibit P-25 - almost at the fag-end of the controversy between the parties which itself suggests that it was more or less an after-thought - there does not appear to be any legal basis for the belief that the transfer of the shares in the name of the plaintiff in place of his deceased father would destroy the lien in the absence of any such express affirmation. Article 29 which was referred to in this connection provides no doubt, that "unless otherwise agreed, the registration of a transfer of shares shall operate as a waiver of the company's lien, if, any, on such shares." But this articles deals with transfer as distinguished from transmission which is dealt with in article 43. Transfer and transmission are quite distinct from each other. The former is based upon the act of parties; the latter is the result of the operation of law. In the case of a transmission of shares, they continue to be subject to the original liabilities, and if there was any lien on the shares for any sums due, the lien would subsist notwithstanding the devolution of the shares. On Lakshmanan Chettiar's death, leaving the plaintiff and two minor children behind, the plaintiff became entitled to have the shares transferred in his name, and the will recognizes this right. The lien, if any, would attach to the shares in the hands of the plaintiff

The plaintiff could not give any such letter stating the obvious, for the simple reason that he was then in territory occupied by the enemy, namely, the Federated Malay States. They would not accept any letter from the agent on the ground that the power of attorney did not authorise him to give any such consent. The plaintiff's advocate painted out the hollowness of the objection by his letters Exhibits P-26 and P-28 but the Bank, for reason not apparent, remained adamant. It is stated in Exhibit P-28

"I need hardly say that Thenappa Chettiar, as the heir of Lakshmanan Chettiar, would be liable to discharge whatever debtors were left by Lakshmanan Chettiar and likewise whatever rights the Bank might have in regard to the shares by way of lien would continue against those shares in the hands of the legal representative also." *

This position is unexceptionable and it was in my opinion wrong on the part of the Bank to have ignored it and to have insisted on a letter containing an express recognition of the lien, a letter which the plaintiff could not send, because he was in enemy occupied territory then. This objection is not so bad, as the demand for a letter of consent to be a number of the Bank after three communications from the plaintiff requesting the transfer of the shares in his name in the Bank's registers; but it is bad enough. If the money due on the further call has not been paid so far, the default is entirely due to the Bank, in not having made the transfer, as would be apparent from a perusal of Exhibits P-8, P-10, P-11 and P-12

Great stress was laid on the right of the company to refuse to admit any person as a member without assigning reasons and attention was drawn to articles 36 and 43 on this connection. Articles 36 deals with the power of the directors in their absolute and uncontrolled direction to refuse to register any proposed transfer of shares even in a case where the proposed transferee is already a member. Article 43 deals with the devolution or transmission of shares on the death or bankruptcy of any member, and even here, the person on whom the shares devolve cannot insist on any right to be registered as a member, the directors not being under any obligation to accord consent to the transfer. The law on the subject is found in Bede Steam Shipping Company, Ltd., In re, where the earlier decisions in Ex parte Penney, In re Coalport China Co. and In re Bell Brothers are all considered and discussed. The right of transfer is absolute as it is inherent in the ownership of the shares, but it can be restricted by contract, which has to be found in the articles of association. Even in a case where the power to refuse registration is conferred in absolute terms the refusal must not be arbitrary. Provided they act in a bona fide manner, the directors are not bound to give any reasons. But if they give reasons, the Court can examine them, but it will not overrule the decision of the directors merely on the ground that it would have reached a different conclusion. If the directors refuse registration on any wrong principle, their act can be rectified. The true legal position as regards this discretionary power of directors to refuse or reject transfers is thus stated in the 11th edition of Buckley on Companies at p. 139

"If the directors do give their reason, the Court will then consider whether they are legitimate or not, that is, whether the directors have proceeded on a right or wrong principle, and will overrule their decision, if their reason are not legitimate, but not, if they are legitimate, merely because the Court would not have come to the same conclusion. The Court will also overrule the directors decision where, although they have given no reasons, it is proved that they have acted on a wrong principle or otherwise than bona fide. The principles applicable are exactly the same whether the power of rejecting transfers is absolute or limited to particular grounds." *

In the present case the directors have assigned reason none of which appears to me to be tenable or sound. The absolute and uncontrolled discretion referred to in article 36 is not repeated in article 43 where we find the transmission clause. It is doubtless true that the directors are not under an obligation to give their consent, but they cannot withhold it arbitrarily on wholly unreasonable or frivolous grounds. I am fully alive to the distinction between the right to a share or shares in the company and a right to be treated as a member of the company holding the share or shares. When consent is withheld for reasons which cannot stand scrutiny and no objection is raised of a personal kind against him on whom the shares have devolved by operation of law, to recognise a power in the directors to refuse the transfer is to countenance an abuse of powers vested in them for the due and efficient management of the company

Not satisfied with the objections they had raised prior to the institution of the suit, a fresh obstacle was sought to be thrown in the plaintiff's way by the plea that he could not maintain the suit, as he is an alien enemy. The plaintiff Thenappa went to the Federated Malay States somewhere in 1941 and is still there presumably. As the territory has been overrun by Japan after the outbreak of hostilities between Japan and Great Britain in December, 1941, the argument is raised that the plaintiff should be treated as an alien enemy within the meaning of the law and therefore disentitled from maintaining the suit either by himself or through this agent Ganesa Aiyar. Section 83 of the Code has no application as the Federated Malay States is not a foreign country the Government of which is at war with the United Kingdom of Great Britain and Ireland. Mere military occupation by an enemy is not enough. The lawful and recognised government of the foreign country must be at war. A Government based on military force is not the government contemplated by the Section. The Defence of India Act and Rules do not apply either. It is not enough that Klang which was the place where the plaintiff was last residing, is in the occupation of Japan. Before it can be described as enemy territory, we must also say that it was not an area in the occupation of His Majesty or of a State allied with His Majesty. There is no proof of any kind, and we cannot assume this in favour of the defendant, that the plaintiff has been carrying on any business in the place where he is now residing and can therefore he said to be trading with the enemy. Part 15 of the Rules makes it clear that what is prohibited and rendered penal is any commercial, financial or other intercourse, or dealings with, or for the benefit of the enemy. A very helpful case on this subject is found in In re An ArbitrationOn the question of damages, I rules at the commencement of the trial, that the plaintiff was not entitled to give any evidence of the special contract be entered into with a third party for the sale of the shares. The plaintiff called upon the Bank even as late as January, 1942, to transfer the shares in his name and gave them some time to do so. If the Bank had complied with this demand, they would have been under no obligation to pay any damages on the basis of the contract with a third party which was much earlier. When the plaintiff alternatively claimed general damages on the footing of difference in the then and present market rates of the shares, objection was raised that he could not do so as there was no such claim laid in the plaint on this basis. But I held in my order of the 5th February that it was open to the plaintiff on the allegations in the plaint to ask for general damages on the basis of a fall in the market prices of the shares between the date of the final refusal of the Bank to comply with the plaintiff's demand and now. The plaintiff has not succeeded in showing that there was any such fall in the value of the shares. D. Srinivasan, Manager of the Stock Exchange Association, merely stated that the Bank shares were quoted at Rs. 100 and Rs. 95 in January, 1942, and that the present quotation was Rs. 75 per share. The quotations were only national and prevailed only as between the members of the association. They were not based on any actual transactions. He admitted that there was no transaction of sale in the shares form 15th January, 1941, to 22nd February, 1942. His having heard of a transaction on 23rd February, 1942, at Rs. 81 per share dividend is no evidence. P.W. 3, Kuppuswami Aiyar, is a clerk in Swastik & Co., Stock-brokers, Madras. Fortnightly reports of prices of shares are published by his firm. The report, Ex. P-31, dated 23rd January, 1942, quotes the price of the share at Rs. 100 and the rate for February, 1943, is given as Rs. 78 as per Ex. P-32. But he had to admit that the quotation did not always represent actual transactions and that he did not personally know at there was any sale or purchase of the defendant-Bank's shares during the relevant period. Mr. Sadasivam, the General Manager of the defendant Bank, examined as D.W. 1, said that there were no transactions to his knowledge from 15th December, 1941, to 20th January, 1942, and that there was only a nominal market because of the war conditions that had come into existence. The plaintiff has not established any general damages representing a fall in the price of the shares how as compared with the prices prevalent in January, 1942The fact that the plaintiff has not been able to prove any loss sustained by him by reason of the refusal on the part of the Bank to transfer the shares to his name does not however destroy his right of action to have the wrong rectified and get some damages for the breach by the defendant Bank of its legal obligation to the plaintiff in the matter of the shares. He is entitled to nominal, if not substantial damages; and I award Rs. 250 under this head, besides decreeing the rectification the Register of Members as claimed in prayer (a) of paragraph 22 of the plaint. He will get costs only on this part of his claim and not on the claim at regards damages which he has grossly inflated. There will be no order as to costs in favour of the defendant

Decreed in part.

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