Refusal of registration and appeal against refusal.
Updated: Mar 10
Section 58 of the companies act dealing with Refusal to Registration and Appeal states that-
(1) If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal.
(2) Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
(3) The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company.
(4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal.
(5) The Tribunal, while dealing with an appeal made under sub-section (3) or sub-section (4), may, after hearing the parties, either dismiss the appeal, or by order—
(a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved.
(6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
Section 58 of the Companies Act of 2013 requires the company to send a reply stating the reasons for non-registration of the transfer or transmission within 30 days of the delivery of the instrument of transfer or intimation of transmission, as the case may be, and provides a consequential relief to the transferee by way of appeal if the reply is not received. A private corporation is required to restrict the transfer of its shares through its Articles of Association ("AoA") under the rules of Section 2(68) of the Companies Act, 2013. As a result, any restriction on share transfer agreed to under the shareholders agreement and legally incorporated in its AoA shall be lawful and binding on such a private business and may be enforced against its owners. However, if a private company refuses to register the transfer of a member's stocks or interest, whether as a result of a power granted by the company under its AoA or otherwise, the transferor and transferee must be notified within the specified time limit. As a result, in the case of a Private Company, even if the restriction contained in the AoA has a "Constructive Notice," the company is required to respond with reasons for refusal.
By nature, private companies in India are closely held, and Section 58(1) of the Companies Act, 2013 ('the Act') gives a private company the legal authority to include a 'Right of Refusal' clause in its bylaws. Section 58(2), on the other hand, declares categorically that the provisions of Section 58(1) do not apply to public companies with freely transferable shares. It is also important to analyze the term "freely transferable" which was not defined in the 2013 CA. The term "freely transferable" is the appointment of a director to register the transfer of a given share, and such term should be given a broader interpretation. Mutual agreements / contracts governing restrictions on the transfer of shares or preemptive rights related to the transfer of shares should not be construed as a breach of freely transferable terms. If this was not the intention of the Legislature, Section 58 (2) of CA 2013 would not have explicitly included a warning, and CA 2013 had set appropriate restrictions on the transfer of shares by mutual agreement. Probably. However, such language does not limit the authority of the public company's board of directors to refuse to register such a transfer of shares for "reasonable reasons." Directors may refuse to register for the transfer of shares for "reasonable reasons". The term "reasonable cause" in Article 58 (4) includes not only the contingencies intended in paragraph (3), but also the circumstances in which the Company is obliged to refuse the registration of the transfer of shares. The reason is also included. Therefore, there are many possible reasons, but not all of them can be enumerated, and depending on the facts of the case, it may be a "reasonable reason" for the company to refuse to register for the transfer of shares .