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Second Appeal No. 75 of 1963, decided on 12th October 1965.
S. 34‑Transfer of shares without complying with provisions of section‑Ultra vices and of no effect irrespective of any fraud to which, transferor may be particeps criminis.
Kerr on Fraud and Mistakes. 1952 Edn., p. 658 ; "Fraud" by Dhodi 2nd Edn., p. 63 ; Taylor v. Chester (1869) 4 L R Q B 309 ; Muthuraman Chetty v. Krishan Pillai I L R 29 Mad. 72 ; Sidlingappa v. Hirasa I L R 31 Bom. 405 ; Subba Rao v. Veeranjaneyaswami 126 I E 279 ; Venkatarayundu v. Chinna A I R 1930 Mad. 263 ; Nonagiri Sreeramula v. Karumuri Venkatanarasimham (1939) 179 1 C 466 ; Verechures Creameries v. Hull and Netherlands Steamship Co. (1921) 2 K B 608 ; The Queen v. The Inhabitants of Dukinfteld (1848) 17 L J (Q B) 183 and Madhava v. Canara Banking Corporation A I R 1941 Mad. 354 ref.
S. 23‑‑Contract violating any term of Foreign Exchange Regulation Act, 1947‑Not ex facie or ab initio void or violative of S. 23, Contract Act, 1872‑‑Ex post facto permission can be granted under Foreign Exchange Regulation Act, 1947 to such contract‑Foreign Exchange Regulation Act (VII of 1947), S. 21.
Manzoor Husain v. Wali Mohd. P L D 1965 S C 425 ref.
Ishaq Ahmed for Appellant.
M. M. Kotwal for Respondent.
Dates of hearing : 28th April, 14th and 18th May 1965.
This is a Second Appeal in which the judgment of Mr. Hamza Khan Qureshi, an Additional District Judge, Karachi, dated the 14th of July 1962 is in question.
2. The facts which form the background briefly stated are that the respondent was the holder of 21383 shares in the appel lant‑company and was registered as such in the register of share holders with its address of Bombay. Dividend warrants for these shares were issued in favour of the respondent for the year 1948, 49 and 50. No dividend was declared for 1951 and 1952. For 1953 dividend warrants were issued in respect of 427 shares in the name of ‑the respondent but in respect of 20,835 shares they were issued in the name of the Karachi branch of the respondent. In the meantime a direction was issued by the State Bank of Pakistan vide its notification dated the 29th of December, 1952 under the Foreign Exchange Regulation Act, 1947 that dividends were not to be remitted to foreign countries in respect of those shares which were held by the residents of Pakistan. The result was that the dividends with respect to 20,835 shares were not allowed by the State Bank of Pakistan to be remitted to the respondent at Bombay.
3. The above facts are not in dispute. The case of the respondent further is that inquiries were made by it to find out as to why it (the respondent) was treated as a resident of Pakistan and not of India and was informed that it was shown as such by the appellant in its returns to the State Bank of Pakistan. It was further informed that the register of members had been altered by the appellant in 1950 so as to show in it the address of the respondent to be of Karachi. The effect of this change was that the Karachi branch of the respondent was treated as a member of the appellant and the owner of the shares, instead of the respon dent itself.
4. The case of the appellant on the contrary is that the address of the respondent was changed, with the knowledge and consent of the respondent in 1950 at the time when inquiries were made by the Custodian's Department to find out as to how many shareholders of the appellant were the residents of Pakistan and how many were not the residents of Pakistan. Muhammad Misbah D. W. 3, Assistant Incharge Share Department of the appellant who was in the service of the appellant from 1947 to 1950 has stated the relevant facts on behalf of the appellant as follows :----
"In 1950 there was an inquiry from the Custodian Evacuee Property, Karachi asking the defendant (the. present appellant) to submit a list of resident and non‑resident share‑holders as well as those shareholders who had "migrated from Pakistan to India . . . Mr. McNulty (the secretary of the appellant) asked me to submit ail the transfer deeds and registers in respect of non‑resident shareholders before him ; which I did. He scrutinized all the transfer deeds, and after 2 or 3 days called the is his office and told me that he had found that the transfer deeds in respect of Bank of India Limited Bombay (the present respondent were of two kinds. He asked me to scrutinize them again and again to submit to him two separated accounts for the Bank of India Limited Karachi and Bank of India Limited Bombay. . . Mr. McNulty then told me that he had consulted the manger and the Bank of India Limited, Karachi that these accounts were to be kept separately from that time. I asked Nazar Mohammad to make all necessary corrections in the mem bers register which he did and took the register to Mr. McNulty for initials. I do not know the nature of the consultation which Mr. McNulty had with the manager. After these corrections the dividends were sent to Bombay and the Karachi Branch according to the shareholdings in the register . . . . To Court :
We had not endorsed any copy to the plaintiff (the present respondent) at Bombay and Karachi. The returns were not sent to the members. These "were sent only to Government Departments".
5. On coming to know, by reason of the non‑remittance of the dividends of 1953, of the alteration that was made in the register of members the respondent protested to the appellant in 1954 and desired that the register be rectified so as to show the respondent as a non‑resident shareholder of all the shares.
6. The above demand of the respondent was not accepted by the appellant; therefore, the respondent filed the suit from which this appeal has arisen. The suit was for a declaration that the respondent with its address of Bombay, and not its branch of Karachi, was the registered shareholder ; and for a mandatory injunction compelling the appellant to enter in the register of members the respondent's address of Bombay as well as to classify the respondent in its returns to the State Bank of Pakistan as a non‑resident shareholder. The suit was resisted by the present appellant on various grounds.
7. Eleven issues were framed on the pleadings of the parties but most of the issues have now lost their importance. The two issues which are still important are as follows:‑
"(5) Whether the plaintiff‑bank (the present respondent) is estopped from alleging that the share register was changed without its consent and without its knowledge
(l0) Whether the suit has been filed in order to circumvent and defeat "the provisions of the Foreign Exchange Regulation Act " The suit was dismissed by the trial Court mainly on the ground that the alteration was made. in the register of members with the knowledge of the plaintiff (the present respondent) and that the suit was instituted to defeat the Foreign Exchange Regulation Act. The plaintiff‑respondent went in First Appeal which was accepted. The evidence of the defendant‑appellant to the effect that the consent of the plaintiff respondent was obtained has been disbelieved by the First Appellate Court. The reasons for the conclusion are contained in paragraph 6 of its judgment. It has further held in paragraph 7 that the defendant‑appellant wanted to retain the c6titrol of the company by making the alteration in the register of members for otherwise the whole company would have been declared an evacuee concern. In paragraphs 8 and 9 of the judgment reasons are set out is support of the conclusion that the plaintiff‑respondent was not estopped from questioning the alteration.
8. I may note here that the parties to these proceedings are only two‑namely, the Bank of India Limited, Bombay and the Karachi Electric Supply Corporation Limited, Karachi. The State Bank of Pakistan has not been impleaded as a party. A notice was issued by the District Judge, Karachi during the pendency of the First Appeal to the parties as well as to the State Bank of Pakistan to find out whether the State Bank of Pakistan ought to be impleaded as a party to these proceedings. The notice was opposed by the State Bank of Pakistan as well as by the plaintiff respondent; accordingly it was discharged by the learned District Judge. As the State Bank of Pakistan is not a party to these proceedings, no decision given in these proceedings is binding on it. In other words the State Bank of Pakistan aced not recognise the plaintiff‑respondent to be ‑a non‑resident shareholder merely on the ground of its success in these proceedings.
9. In the above view of the situation the resistance offered by the appellant to the suit of the respondent could not have been actuated by an anxiety to save Foreign Exchange for the State. If this was not the object then the question arises as to why the appellant has resisted the suit of the respondent There was apparently no monetary advantage to it in doing so because it would make little difference to it whether the shares were held by the Bank of India Limited, Karachi or the Bank of India Limited, Bombay. I felt for sometime during the arguments of counsel for the appellant that the suit was resisted to disprove .he imputation of dishonesty to the appellant. But that impression has been dispelled by the stand taken by Mr. Ishaq Ahmed. He bas argued that even if fraud had been played by the appellant on the Custodian's Department by effecting the alteration, it was at the instance of the respondent to save the appellant from becoming an evacuee property, because the respon dent would have suffered alone or mostly if the appellant was declared to be an evacuee concern. Moreover, according to counsel, the respondent having acquiesced in the commission of the fraud is estopped from pleading that the fraudulent act be now rectified.
10. Mr. Ishaq Ahmed has summarised the above stand of his client in his written arguments as follows :‑
"If the 20,835 shares would not have been changed in the name of Karachi (branch) the K. E. S. C. (that is, the appellant) would have been declared an 'Evacuee' in view of section 2(e) of the Pakistan Administration of Evacuee Property Ordinance XV of 1949. Bombay (that is, the respondent) did not wish the K.E.S.C. to be declared an evacuee as the position of the non‑resident members had not crystallised and the laws in that respect were being changed. The correction (that is, the alteration) saved the K.E.S.C. from being declared an Evacuee'. Let us for purposes of argument, concede that the change in the register was fraud upon law. But such a fraud is no one's case; neither the pleadings are based on such fraud nor (on) any issue ; nor it is the plaintiff's case. On the contrary Bombay consented and/or at least accepted this change and/or not having raised any objection to the said charge for four years from November, 1950 to 10th November, 1954, allowed the contravention of the provisions of the Evacuee Property Ordinance XV of 1949.
Plaintiff being particeps criminis:
Where both parties equally are offenders against the law, the maxim Pober est conditio prevails. On the principle of public policy, the Court will not assist the plaintiff‑Vide Kerr on Fraud and Mistakes, 1952 Edit., p. 658 paragraph Plaintiff Particeps Criminis : Effect when fraud is effected. Vide Law of Fraud by Dhodi, 2nd edition at page 63 when plaintiffs is a person in pari delicto no help can be given to him."
The above stand of counsel has been legally supported by him by citing Taylor v. Chester (1869 IV L R Q B 309 at 312) Muthuraman Chetty v. Krishan Pillai (I L R 29 Mad. 72 at 74), Sidlingappa v. Hirasa (I L R 31 Bom. 405 at 411.), Subba Rao v. Veeranjaneyastrami (126 I E 279 at 281), Venkatarayundu v. Chinna (A I R 1930 Mad. 268 at 270), Nonagiri Sreeramula v. Karumuri Venkatanarasimhan ((1939) 179 I C 466 Mad.), Versehures Creameries v. Hull and Nether lands Steamship Co. ((1921) 2 K B 608), The Queen v. The Inhabitants of Dukinfield ((1848) 17 L J (Q B) 183). The emphasis that has been laid on the interest of the respond ent in the fraud and on its disentitlement to get the fraudulent act rectified, leaves no doubt that the object of the appellant is not to disprove dishonesty but to get the suit of the plaintiff‑respon dent defeated irrespective of whether the disputed act was dishonest or not. In this view of the situation, the 'appellant's resistence to the suit of the plaintiff‑respondent is not an idle pastime but in reality designed to protect itself from being taken over by the Custodian as an evacuee property or person.
11. The above quotation from the written arguments of Mr. Ishaq Ahmed shows that there are four pillars of his stand :
Firstly, that the appellant would have teen declared an evacuee concern if the alteration had not teen made in the register. The change was made for the benefit of the respon dent because it was apprehensive that, in future, laws might be made to the detriment of non‑residents.
Secondly, that as a result of the change the appellant has not been declared an evacuee concern, and if this achievement is the consequence of a fraud practised on the Custodian's Depart ment, then this aspect is immaterial in this case because nobody has pleaded fraud;
Thirdly, that the respondent cannot object to the alteration because it had initially consented to it or had subsequently accepted it by remaining silent for four years and receiving dividends at Karachi ;
Fourthly, that the respondent can take no advantage even if fraud was practised because the respondent was also a party to that fraud."
The above contentions do not touch the most important aspect of the case; namely, that irrespective of whether the alteration was a fraud on the Custodian's Department or not, the device did not amount to the transfer of the shares from the name of the respondent to that of its Karachi branch because admittedly no transfer was really intended; no instruments of transfer were executed; no stamp duty was paid and no attempt was made to bring the transfer proposed by Mr. McNulty and alleged to have been accepted on behalf of the respondent to the notice of the Board of Directors of the respondent for obtaining the Board's sanction to it. The share certificates of the plaintiff- respondent were never produced before the Board and no change was made in them pursuant to the alleged transfer. Thus the requirements of transfer were not complied with, and only false information was conveyed by the appellant to the Custodian Department, which felt content with it and did not further probe into the matter. Some of the requirements of the transfer of shares are contained in section 34 of the Companies Act, 1913 and companies are entitled to lay down their own procedure in their articles of association.. The articles of association of the appellant have not been placed on this record, but their absence is not very material because, as pointed out by the Madras High Court in Madhava v. Canara Banking Corporation (A I R 1941 Mad. 354) articles conferring upon the directors the power to transfer shares without an instrument of transfer are ultra wires of subsection (3) of section 34 of the Companies Act, 1913. Moreover,' the case of the appellant merely is that McNulty apprehended that the information relating to the skate register which was called for by the Custodian's Department would make the appellant an evacuee concern ; therefore, he set about to save the appellant from that consequence. The respondent is alleged to have agreed as a share holder to the alteration of the register of members because it was in its own interest to do so. The parties, it appears did not really intend that the shares be transferred; they merely aimed at hood winking the Custodian's Department. In this view of the situation there was neither any transfer nor any waiver of the formalities nor even estoppel against the parties inter se who had conveyed the false information of the transfer. There may or may not be estoppel against the Custodian's Department, the State Bank of Pakistan and the State; but they are not parties to these proceed ings; therefore, estoppel in respect of them is not relevant.
12. Mr. Kotwal has denied that the respondent ever desired or agreed to the alteration of the register because, according to him, the head office of the appellant was situated in India before the 15th of August, 1947, with the consequence that its property did not fall within the definition of evacuee property' in terms of section 2 (3) of the Pakistan (Administration of Evacuee Pro perty) Ordinance, 1949. There was thus no reason for his client to worry if it was classified as non‑resident member, of the appel lant‑company. According to him, the appellant was apprehen sive for itself lest it should be declared an evacuee concern and, therefore, had played the fraud all of its own accord by manipulat ing for ostensible purposes the entry of the respondent's name in the register of members. There are no signatures, no documents, no letters and no notices between the parties to establish the consent of the plaintiff‑respondent to the alteration. There was no delay on the part of the respondent in making a protest against the alteration because the respondent had no knowledge of the alteration until the dividends of 1953 were withheld. Mr. Ishaq Ahmed has tried to attribute to the respondent the knowledge of and even consent to the alteration by referring to the letters Exh. 67 and Exh. A6 written by the respondent from Bombay to its branch at Karachi and by the branch to the appellant on 25‑4‑51 and 12‑1‑52 respectively; but the short explanation given by Mr. Kotwal is that the branch admittedly acted as the agent of the respondent and handled the scripts on behalf of the respondent in the respondent's dealings with the appellant. I agree with the first appellate Court that the alteration was made without the knowledge and consent of the respondent.
13. Mr. Ishaq Ahmed's reply to ail the contentions of Mr. Kotwal merely was that the respondent was apprehensive of unfavourable amendments of the evacuee law owing to the attitude of the Governments of India and Pakistan towards each other; therefore, the respondent was expected to and did agree to the alteration. This was not a sound reply, because the alteration that was made in the register could not remove the apprehension. Moreover, at the time of making the alteration, the law was snore favourable to the respondent than to the appellant, and has remained so towards those joint stock companies whose head offices were situated in India before the fifteenth day of August 1947. Thus the argument that the alteration was favourable to the respondent is wrong.
14. The above discussion leads to the conclusion that there is no good reason for interfering with the decision that has been given by the First Appellate Court on issue No. 5 which has been reproduced in paragraph 7 above. Mr. Ishaq Ahmed has said practically nothing to support of issue No. 10 which too tans been reproduced above in the same paragraph. His entire argument consisted of the suggestion that the respondent now desires to get the proceeds of the shares at Bombay although they are held by a resident holder, namely a branch of the respondent, at Karachi. The declaration which has been sought will enable the respondent to get the remittance of the dividends as well as of the sale proceeds, if and when the shares are sold, outside Pakistan. This, according to counsel, will mean loss of Foreign Exchange to the country and will defeat the law of Foreign Exchange. But the argument is not well conceived because, as pointed out above, the State Bank of Pakistan is not bound by any declaration given in these proceedings. Moreover, the declaration of a status or situation which legitimately changes the legal consequences, does not defeat the law but ensures its correct enforcement. There can be no question of defeating the law in it. The Supreme Court has in this connection noted in Manzoor Husain v. Wali Mohd. (P L D 1965 S C 425 at 434) that ex post facto permissions can be granted under the Foreign Exchange Regulation Act, 1947; therefore, the contracts which may be made contrary to its provisions cannot be said to defeat the law by reason of that inconsistency only.
15. Before recording the final conclusion, I may note two more contentions of Mr. Ishaq Ahmed which were that the Court fees that was paid on the plaint by the respondent was deficient because the value of the shares which are in dispute was twenty lacs of rupees and that the respondent ought to have sued for their possession; secondly, that a copy of this judgment be sent to the Custodian. As to the first contention let me note that the scripts are admittedly in the possession of the respondent. Moreover, no relief is sought in the plaint in respect of them. The objection as to the Court‑fees is, therefore, misconceived. The second contention too is without any substance. Moreover, the appellant, or the respondent can itself send a certified copy of the judgment of this Court to the Custodian if it desires to do so for moving the Custodian to treat the shares of the appellant‑company, or the appellant‑company itself, as a concealed evacuee property or a concealed evacuee concern.
16. In final conclusion of all the foregoing discussion, the appeal is dismissed with costs.
K. B. A.
Appeal dismissed.
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