Introduction:
Shares may be defined as units of ownership representing an equal proportion of a company’s capital. In nature, they are like any other goods. They can also be described as indivisible units of a pre-determined amount, of the capital of a company. The holder of a share is entitled to an equal claim on the profits of the company as well as equal obligations for the losses and debts incurred. Hence, a purchaser of a share gets an equal title to it as the seller. In the case of CIT v Standard Vacuum Oil Co.[1], it was observed by the Supreme Court that a share is an interest that is measurable by a sum of money and that it is made up of diverse rights.
The transfer of shares implies the voluntary transfer of the title of shares from one party to another. A stamp duty based on the market value of shares needs to be paid for the transfer. Shareholders in a private or public company have a right to dispose of the property in their shares subject to restrictions. Transmission of shares, on the other hand, implies the transfer of title of shares by the operation of law. In transmission, no stamp duty needs to be paid. Transmission is a process where shares pass automatically to the personal representatives of a person or are vested in a trustee (when a member is bankrupt). Shares in private companies are not transferable freely and are restricted by articles of the company as provided by Section 2(68) of the Companies act. On the other hand, shares in a public company can be transferred freely as under Section 58(2) of the Act, except when transferability is enforced by the terms of an arrangement or contract.
Section 56 of the Companies Act, 2013
Section 56 prescribes the procedure and requirements for transmission and transfer of securities which must be adhered to by the transferor for a valid transfer. Shares of a company are movable property and can be freely transferred. However, certain restrictions may be applicable to ensure the protection of the rights of shareholders or investors. It provides for the following:
- A transfer of securities cannot be registered except when an instrument of transfer is produced after being stamped, dated, executed and delivered within sixty days along with a certificate relating to securities.
- If an instrument is lost, the transfer may be registered by the company in terms of indemnity.
- Every company needs to deliver certificates of securities allotted, transmitted or transferred within a specific time period.
- Transfer of security or interest in a company which is made by a legal representative of a deceased person is valid even if he is not a holder thereof.
- When a transferor alone makes an application relating to partly paid-up shares, a transfer cannot be registered unless a notice (as under Form no. SH5) is given to the transferee who in turn gives a ‘no objection’ to the transfer within a period of two weeks from receipt of the above notice.
- A company along with defaulting officers are punishable with a fine if registration of transfer or transmission of security is not done in consonance with the provisions of this section.
- If a depository or depository participant transfers shares intending to defraud someone, they are liable for fraud which is punishable under Section 447.
Fraud, Forgery and Fabrication of Documents
It is observed that several private limited companies and public companies which are closely held still function as proprietorship concerns. There also tend to be groupism and issues of one dominating another in such public and private companies. Due to this, there are hostile actions among shareholders or between groups. In many cases, it has been alleged that shares have been transferred without the shareholders’ knowledge and in other cases, it has also been alleged by shareholders that the documents are fabricated and their signatures forged to prove the transfer of shares. Such actions by the controlling people in the company result in applications being filed under Sections 397 or 398 of the Companies Act alleging mismanagement and oppression.
Fraud
The Companies Act, 2013 provides for issues relating to corporate frauds. Section 447 of the Act describes fraud committed concerning the affairs of any corporate body and encompasses within itself any concealment of fact, act, omission or abuse of position committed by a person with a purpose to gain undue advantage, deceive or injure the interests of a company or shareholders or creditors or any other person. However, the provision does not define the term “fraud” and the definition has to be inferred from the explanation provided to the section. A fraud vitiating a contract must have a nexus with the acts of parties who entered into the contract. Section 447 makes fraud a penal offence. However, being a criminal provision, it is a constitutional requirement that it should be made more specific, precise and unambiguous. It has also been legally established that there cannot be blurred signposts to criminality.[2]Before the introduction of this Section, provisions of the Indian Penal Code (such as Sections 406, 420, 465, 477-A) would be made applicable but taking into account the impact and complexity of corporate frauds, and the need to investigate and penalise them adequately, this provision was the need of the hour.
Recently, in the case of Economou v Koutsokoumni[3], the Supreme Court upheld the first-instance decision against the fraudulent transfer of shares. The debtor had attempted to transfer shares to his son and acted fraudulently to prevent the creditor from executing a judgement that had been issued by the Court in the creditor’s favour. The Apex Court annulled the transfer of shares to the son and also observed that for enforcing the decision against the debtor a decree on the sale of shares could also be issued. Furthermore, it opined that the court of the first instance was correct in holding that shares were movable property that was subject to enforcement by the creditor and Sections 14, 16 and 19 of the Civil Procedure Code allowed a seizure and sale order to be passed. Consequently, the Court also repudiated the contention of the debtor that the shares of the company were transferred to his son bona fide to obtain tax exemption.
Forgery
On one hand, a company may not register a transfer if the provisions of Section 56 are not complied with. On the other hand, there may be cases of forgery wherein, the instrument of transfer may seem to be valid but is not so in reality. A forged transfer of shares is null, the original owner retains his right of ownership despite the transfer taking effect and the transferee does not get any title to such shares. The following precedents illustrate various aspects of a forged transfer of shares.
In the case of Barton v North Staffordshire Railway Co.[4], two executors were registered as the holders of shares of a testator. One of them executed a deed of transfer, forging the co-executors name. The transfer was registered by the company. However, when the fraud was exposed, an action was brought against the company, by the executor whose name was forged to restore his name in respect of the shares in the register. The Court held that he was entitled to this relief claimed.
In the case of Balkis Consolidated Co. v Tomkinson,[5] the principle illustrated was that it is not mandatory for a party making a representation to know it was false concerning the principle of estoppel in fraudulent transfer of cases.
In the case of Kaushalya Devi v National Insulated Cable Company of India[6], a stranger had transferred shares belonging to a shareholder of a company to a third party by forging the shareholder’s signature on the transfer deeds. The Court held that the transferee was liable to return the scripts to the person they belonged to and did not uphold the transfer despite the transferee being a bona fide purchaser for value. This also reiterated the principle that a holder of stolen property could not acquire a good title to it even if they had purchased it without notice and in good faith.
In the case of Yeung v Hongkong and Shanghai Banking Corporation[7], a stockbroker had forwarded a forged document to a company while innocently trusting his clients. The Court observed that when a person procured a registration of transfer and issue of a certificate based on a forged deed while acting in good faith was liable to indemnify the company against such untoward consequences or a person whose rights have been infringed.
In the case of Ashok Chaturvedi & Others v ShitulChanchani& Another[8], the Supreme Court discontinued criminal proceedings which were initiated against the appellants (directors, chairman and secretary of a public company) on a complaint that the company had transferred shares based on fabricated and forged signatures. The Apex Court observed that there was no material to indicate any or all of the appellants, the complaint was vague and there was no evidence except the bald allegation. Hence, when a shareholder files such a complaint, sufficient material must indicate how the directors or company were involved. If such evidence is unavailable, no offence can be made out.
Conclusion
Transferability of shares is an essential feature of shares in a company which is enshrined under Section 44 of the Companies Act, 2013. It gives rise to the perpetual succession of a company along with uninterrupted existence. Section 82 provides that shares can be transferred in methods that are laid down by articles of a company. It has been consistently laid down by the courts that articles cannot put unreasonable restrictions or complete bans on transfer. Though Section 56 of the Act provides a procedure to be followed for the transfer of securities, it can also be done in several unlawful ways. However, there are mechanisms and provisions in place to safeguard against and punish for contraventions and illegal transfers[9] as well. Section 57 of the Companies Act provides for punishment for the personation of a shareholder to attempt or obtain security or money due to such owner. Such an offence has been made non-compoundable. The Government too has cited mechanisms to prevent frauds under this Act. Section 211 enables the Central Government to establish a “Serious Fraud Investigation Office” for investigating frauds that relate to companies. Auditors need to report material frauds to the Government within a period of thirty days. Furthermore, immaterial frauds need to be reported to the auditor or board of the company. The audit committee is needed to monitor that all listed companies establish vigilance mechanisms for reporting genuine concerns. Additionally, independent directors need to report concerns of suspected or actual fraud and ensure that company has functional and adequate vigilance mechanisms. On being intimated of a special resolution passed by a company, or in the public interest, or on receiving the report of Registrar or inspector, the Central Government can also, order an investigation into the affairs of a company.
References:
[1]AIR 1966 SC 1393
[2]Bharat Chugh, Definition of “Fraud” under the Companies Act: A case of a blurred signpost to criminality, SCC ONLINE (Feb 8, 2021), https://www.scconline.com/blog/post/2021/02/08/definition-of-fraud-under-the-companies-act-a-case-of-a-blurred-signpost-to-criminality/
[3]Elias Neocleous & Co LLC , Cyprus: Supreme Court Upholds First-Instance Decision on Fraudulent Transfer Of Shares, MONDAQ (Nov 13, 2019), https://www.mondaq.com/cyprus/trials-appeals-compensation/857230/supreme-court-upholds-first-instance-decision-on-fraudulent-transfer-of-shares
[4]38 Ch D 456
[5](1893) A.C 396
[6][1977] Tax LR 1928
[7][1981] AC 787
[8]AIR 1998 SC 2796
[9]Sebi bans Sharepro, 15 others for illegal transfer for shares, INDIA TODAY, https://www.indiatoday.in/pti-feed/story/sebi-bans-sharepro-15-others-for-illegal-transfer-for-shares-577835-2016-03-23
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