Section 56: Transfer and Transmission of Securities

Section 56 of Companies Act, 2013 part of chapter IV dealing with share capital and debentures, lays down the provision for transfer and transmission of securities. This section lays down the requirements and procedure of transfer and transmission of securities. The shares of a company are movable property and are generally freely transferable. Though there might be certain restrictions on transfer of shares of private companies provided in the articles of a company, the aim of such restriction to give added protection to the rights of investors or the shareholders. However, according to the act, 2013 the shares of a public company are always freely transferable. Under section 56 of the Companies Act, 2013 various requirements and procedures are laid down which must be adhered by transferor for a valid transfer and transmission. This analysis will provide clarity on the above-mentioned requirements and procedures.

Purpose of Section 56

The scope of the section is widened to include transfer and transmission of securities (earlier it was limited to only shares and debentures). This section under the act, 2013 lays down the following briefly:

The section provides that transfer of securities/interest of a member shall not to be registered except on production of instrument of transfer duly stamped, dated and executed and has been delivered to the company by the transferor or the transferee within a period of sixty days (irrespective of the nature of the company, whether listed or unlisted) from the date of execution, along with the certificate relating to the securities, or if no such certificate is in existence, along with the letter of allotment of securities.
Under the Act of 1956, there was a time limit specified for delivery of instrument of transfer to the company. (a) In the case of listed companies, at any time before the date on which the register of members is closed for the first time after the date of presentation of transfer form to the prescribed authority or within 12 months from the date of such presentation, whichever is later. (b) In the case of unlisted companies, within 2 months from the date of such endorsement by the prescribed authority. It may be noted that for the validity of the instrument of transfer, presentation to the prescribed authority, for its endorsement has now been dispensed with.
In case of loss of the instrument, the company may register the transfer in terms of indemnity.
Where transfer is based upon acts of parties, transmission on the other hand is the result of the operation of law. Transmission takes place instantly and there is no requirement to submit a transfer form for the transmission of shares. However, in certain cases succession certificates may be required to prove the claim.
Where transfer is based upon acts of parties, transmission on the other hand is the result of the operation of law. Transmission takes place instantly and there is no requirement to submit a transfer form for the transmission of shares. However, in certain cases succession certificates may be required to prove the claim.
Where an application is made by the transferor alone and relates to partly paid-up shares, the transfer shall not be registered unless a notice in Form no. SH.5 is issued to the transferee and the transferee gives ‘No objection’ to the transfer within two weeks from the receipt of the notice.
Every company shall deliver the certificates of all securities allotted, transferred or transmitted (i) within a period of two months from the date of incorporation, in the case of subscribers to the memorandum (ii) within a period of two months from the date of allotment, in the case of shares (iii) within a period of one month in case of transfer or transmission of securities (iv) within a period of six months from the date of allotment in the case of any allotment of debenture.
The transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.
Where any depository or depository participant, with an intention to defraud a person, has transferred shares, it shall be liable for action under section 447. This liability is without prejudice to any liability under the Depositories Act, 1996.
Where a company registers transfer or transmission of security not in accordance with the provisions of this section, the company will be punishable with fine and every officer in default shall also be punishable with fine. Where any depository or depository participant transfers shares, with an intent to defraud a person, it shall be held guilty of fraud punishable under section 447.

Situation Before Enactment of Section 56

This section corresponds to section 108 (Transfer not to be registered except on production of instrument of transfer), section 109 (Transfer by legal representative), section 109B (Nomination of shares), section 110 (Application for transfer) and section 113 (Limitation of time for issue of certificates) of the 1956 act.
The scope of the said section has been considerably enhanced as the section now covers transfer and transmission of securities as compared to only transfer of shares/ debentures, which is specified under the old act, 1956. In case of transfer of securities, the time period for submitting the prescribed instrument of transfer to the company has been changed. The new act, 2013 provides that the proper instrument of transfer in the form no. SH.4 should be delivered to the company within a period of sixty days from the date of execution. Further, the concept of validity of the instrument of transfer in relation to its submission (such as 2 months in case of unlisted company and 12 months in case of listed company) and the related power of the registrar to re-validate the said instrument has been done away with.
However, MCA vide its notification dated, 12.06.2014 has clarified that since transaction relating to transfer of shares is a contract between two or more persons/ shareholders, any share transfer form executed before 1st April, 2014 and submitted to the company concerned within the period prescribed under relevant sections of the Old Act needs to be accepted by the companies for registration of transfers. In case any such share transfer forms, executed prior to 1st April 2014, is not submitted within the prescribed period under the old act, 1956 the concerned company may get itself satisfied suitably with regard to justification of delay in submission, etc. In case a company decides not to accept the share transfer form, it shall convey the reasons for such non-acceptance within time provided under section 56(4)(c) of the new act, 2013.
There were some exceptions to the applicability of the time limits and manner of execution of transfer deed, such exceptions are not prescribed in the new act, 2013. Time limits for the issuance of certificates in relation to securities have been altered/ introduced.

Application of Section 56

This section basically comes into application, whenever security is transferred and transmitted. It lay down the basic requirements that need to be followed for a valid transaction.

Also Read Doctrine of Ultra Vires under Company Law

Cases at a Glance

Following are the cases pertaining to this section:

3A Capital Services Ltd. v. HMG Industries Ltd[3]: In this casethe court held that inadequacy of monetary consideration couldn’t be a ground for rejection of registration of transfer. Shares are always transferable. No restrictions can be imposed regarding the marketability of shares, save and except as provided in law. Thus, alleged inadequacy of monetary consideration with respect to transfer of shares cannot be ground for rejection for transfer.
Pranlal Jayanand Thakar v. VR Shelat [4]: Here the court held that an instrument of transfer, which carries no entry except the signature of the transferor, is a valid instrument. A person to whom such an instrument is delivered along with share scripts gets an implied authority to complete the instrument and the transferee acquires good title to the shares if he has received documents in good faith and for consideration. This case laid down the above basic principles and restated the position of a blank transfer form.
Mannalal Khetan v. Kedar Nath Khetan[5: In this case the court emphasized upon the words “shall not register” as used in this section and stated it leaves no doubt about the mandatory nature of the section. The mandatory nature is strengthened by the negative legalese used in the section. This negative language emphasizes the prohibition against transfer without following or complying with this provision. The negative language is worded to emphasize the insistence on compliance with the provisions of the act. This case helps one understand the mandatory nature of this provision.
LIC v. Escort[6]: In this case the court held and emphasized that once the necessary formalities have been complied with the transferee gets the right to be put on the register.

Concluding Summary

This section lays down the conditions that need to be fulfilled before a company can lawfully register a transfer. The conditions laid down in this section are very important and these need to be adhered to for a valid transfer. This analysis gives a holistic perspective of this section and shows the importance of this section.

References:

[1] Companies (Share Capital and Debentures) Rules, 2014, r. 11(1) (MCA).

[2] Companies (Share Capital and Debentures) Rules, 2014, r. 11(3) (MCA).

[3] 3A Capital Services Ltd. v. HMG Industries Ltd. (2015) 127 CLA 518 (CLB).

[4] Pranlal Jayanand Thakar v.VR Shelat (1973) 43 CompCas 203 (Guj).

[5] Mannalal Khetan v. Kedar Nath Khetan (1977) 2 SCC 424.

[6] LIC v. Escort (1986) 1 SCC 264.