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Section 126: Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of transfer of shares

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Act 2013
Section 125 All 470 Sections of Companies Act Section 127
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Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 126

Section 126 of the Companies Act, 2013 safeguards the proprietary entitlements attached to transferred shares during the transitional period prior to registration, mandating that dividends, rights share offers, and bonus shares be placed in statutory abeyance to protect the prospective transferee.

  • Trigger Condition Precedent: Applies where a valid, executed instrument of transfer of shares has been delivered to the company for registration, but the transfer has not yet been registered in the register of members.
  • Quarantining of Dividend to Unpaid Dividend Account: The company is legally prohibited from paying dividend to the transferor, and must transfer the declared dividend to the Unpaid Dividend Account under Section 124, unless the registered holder provides written authorization directing payment to the transferee.
  • Statutory Abeyance of Rights and Bonus Issues: The company must hold in abeyance any offer of rights shares under Section 62(1)(a) and any allotment of fully paid-up bonus shares under Section 63 until the share transfer is registered or rejected.
Key Landmark Precedents:
  • LIC of India v. Escorts Ltd., (1986) 1 SCC 264: The Supreme Court explained that until registration of transfer occurs, the transferee is not a member; the statutory abeyance provisions (formerly Section 206A) were enacted precisely to freeze dividends and corporate distributions so that neither party wrongfully captures the accretions.
  • Mathalone v. Bombay Life Assurance Co. Ltd., AIR 1953 SC 385: The Supreme Court established that during the interim period between transfer execution and registration, the transferor stands in the position of a constructive trustee for the transferee regarding all dividend accretions and rights benefits.
  • Claude-Lila Parulekar v. Sakal Papers (P) Ltd., (2005) 11 SCC 73: The Supreme Court held that corporate management cannot defeat the equitable rights of a transferee through deliberate delays in registration, affirming the statutory duty to quarantine corporate benefits under Section 126.
Courtroom Practice & Strategic Litigation Guidance:

When filing a petition for rectification of the register of members under Section 58 before the NCLT, always seek an urgent interim direction under Section 126 restraining the company from distributing dividends or allotting rights and bonus shares to the transferor on record, demanding that all corporate benefits be preserved in statutory abeyance pending final adjudication of title.

Section 125 All 470 Sections of Companies Act Section 127