Shareholders' Agreements and Restrictions on Share Transfer

Under the Companies Act, 2013, shares are movable property that can be transferred "in the manner provided by the articles of the company" (section 44), so the articles of association are the first and main place where a restriction on transfer must appear. A shareholders' agreement can still bind the shareholders who sign it as a contract, but the Supreme Court has held that a restriction which is not in the articles does not bind the company. For a public company, section 58(2) says securities are freely transferable, while its proviso keeps private contracts on transfer enforceable as contracts.

This explainer is for B.A. LL.B. and LL.B. students preparing for Company Law papers, and for anyone who holds shares in a family business. Picture two brothers in Nagercoil who run a small private limited company and agree, over tea, that neither will sell to an outsider. Whether that promise holds up depends on where it is written and who signed it.

What does the Companies Act, 2013 actually say?

Four provisions do most of the work:

• Section 2(68): a private company is one whose articles, among other things, restrict the right to transfer its shares. So a transfer restriction is part of what makes a company private.
• Section 44: shares, debentures or other interest of a member are movable property, transferable in the manner provided by the articles.
• Section 56: a company shall not register a transfer unless a proper instrument of transfer, duly stamped, dated and executed by or on behalf of both transferor and transferee, is delivered within sixty days from the date of execution, along with the certificate. This does not apply where both parties hold through a depository. On a transfer, the company must deliver certificates within one month of receiving the instrument.
• Section 58: deals with refusal of registration and appeals. It treats private and public companies differently.

Section 6 also matters. It says the Act overrides anything to the contrary in the memorandum, articles or any agreement, and such a provision is void to the extent it is repugnant to the Act.

How does section 58 work for private and public companies?

For a private company limited by shares, if it refuses to register a transfer, it must send a notice of refusal with reasons to the transferor and transferee within thirty days of receiving the instrument. The transferee can appeal to the Tribunal (the National Company Law Tribunal) within thirty days of receiving that notice, or within sixty days of delivering the instrument if no notice was sent.

For a public company, section 58(2) states that securities shall be freely transferable. The proviso adds that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. If a public company refuses registration without sufficient cause within thirty days, the transferee may appeal to the Tribunal within sixty days of the refusal, or within ninety days of delivery if no intimation was received.

Under section 58(5), the Tribunal may dismiss the appeal or direct registration (to be done within ten days of the order) or rectification of the register, with damages if needed. Section 58(6) makes contravention of the Tribunal's order punishable with imprisonment of one to three years and a fine of one lakh to five lakh rupees. This is a company law offence under the Act itself, so the BNS and BNSS questions that arise in other topics do not normally come up here.

What did the Supreme Court decide in V.B. Rangaraj?

V.B. Rangaraj v. V.B. Gopalakrishnan, decided on 28 November 1991 and reported as (1992) 1 SCC 160 and AIR 1992 SC 453, is the starting point. A private company was held equally by two branches of one family. The brothers had an oral understanding that a member wishing to sell would offer his shares only within his own branch. The articles did not say this. When one member sold to the other branch, his relatives sued.

The Supreme Court (P.B. Sawant and B.P. Jeevan Reddy, JJ.) held that shares are movable property and their transfer is governed by the articles. A restriction not found in the articles binds neither the company nor the shareholders. The suit was dismissed.

Did later cases soften Rangaraj?

Yes, on one point. In M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd., decided on 1 August 2003 and reported as (2004) 9 SCC 204 and AIR 2004 SC 909, a bench of Ruma Pal and B.N. Srikrishna, JJ. enforced a family agreement (a Karar dated 16 January 1986) under which named family members agreed how identified shares would be divided. The Court said the company need not be a party to such an agreement for it to be enforced between the parties to the transfer. It also held that shares of a private company can be the subject of specific performance under section 10 of the Specific Relief Act, 1963, because they are not easily obtainable in the market. Rangaraj was distinguished: there, the family understanding was a blanket restriction on all shareholders, present and future, which the articles did not contain.

The working rule that emerges: an agreement between particular shareholders about particular shares can be enforced against those shareholders, but a general restriction outside the articles cannot be pressed against the company.

How has the Madras High Court applied this?

In Crompton Greaves Ltd. v. Sky Cell Communication Ltd. (27 March 2001, reported at (2003) 115 Comp Cas 832), the Madras High Court considered a joint venture agreement that required other shareholders' written consent before a transfer. The consent clause was not in the company's articles. Relying on Rangaraj, the Court took the prima facie view that this restriction could not be used to block registration, and noted that a company has no inherent power to refuse a transfer. It left the contractual dispute between the partners to arbitration. The Delhi High Court took a similar line on an affirmative vote clause in World Phone India Pvt. Ltd. v. WPI Group Inc. (15 March 2013), holding that a clause not carried into the articles did not bind the company.

How should you write this in an exam?

1. Start with section 44 and section 2(68): transfer follows the articles, and private companies must restrict transfer.
2. Explain section 58, separating private and public companies, and quote the proviso to section 58(2).
3. State Rangaraj, then Madhusoodhanan, and show how the second limits the first.
4. Add a High Court example such as Crompton Greaves or World Phone.
5. Close with practical advice: anyone drafting a shareholders' agreement should carry key transfer clauses into the articles so they bind the company as well.

Students who want to see such drafting problems in real disputes can volunteer with the college legal aid clinic.

Sources

• The Companies Act, 2013 (Indian Kanoon): full text, including section 2(68) and section 6.
• Section 44, Companies Act, 2013 (Indian Kanoon): nature of shares as movable property.
• Section 58, Companies Act, 2013 (Indian Kanoon): refusal of registration and appeal against refusal.
• Section 56, Companies Act, 2013 (Indian Kanoon): transfer and transmission of securities.
• V.B. Rangaraj v. V.B. Gopalakrishnan (1991): Supreme Court judgment text.
• M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd. (2003): Supreme Court judgment text.
• Crompton Greaves Ltd. v. Sky Cell Communication Ltd. (2001): Madras High Court judgment text.
• World Phone India Pvt. Ltd. v. WPI Group Inc. (2013): Delhi High Court judgment text.