Nanalal Zaver & Anr V. Bombay Life
Assurance Co. Ltd. & Ors [1950] Insc 7 (4 May 1950)
FAZAL ALI, SAIYID SASTRI, M. PATANJALI
MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN MUKHERJEA, B.K.
CITATION: 1950 AIR 172 1950 SCR 391
CITATOR INFO :
R 1964 SC 136 (11) E&R 1981 SC1298
(64,109,110,111)
ACT:
MUKHERJEA and DAs, JJ.] $ Indian Companies
Act (VII of 1913), s. 105-C--Company--Outsider trying to get control of
management by purchasing shares --Issue of further shares--Offer of new shares
to existing share holders--Validity of resolution and offer--Company in need of
funds--Additional motive to prevent outsider getting control--Bona fides of
resolution--Scope of 8. 105-C.
HEADNOTE:
A company was incorporated with a capital
divided into 10,000 shares. After 5,404 shares had been subscribed, the
directors of the company, finding that a businessman who had several other
businesses and who was likely to use the funds of this company for his own
businesses, was trying to get control of this company by purchasing its shares,
resolved to issue the remaining 4,596 shares and offered these shares to the
existing shareholders in the proportion of four new shares for every five
shares held by them. Two of the shareholders of the company instituted a suit
against the company and the directors for the following reliefs: (i) a declaration
that the resolution of the directors and the offer of shares contravened the
provisions of section 105-C of the Indian Companies Act, 1913, and was
therefore ultra vires and illegal; (ii) a declaration that the offer of shares
was not made bona fide or in the interests of the company and was therefore
illegal; and (iii) to restrain the defendants from allotting any shares in
pursuance of their offer:
Held per KANIA CI.J., MAHAJAN, MUKHERJEA and
DAS JJ.that inasmuch as the shares resolved to be issued were offered to the
existing shareholders only, and not to any outsider and these shares were also
offered to the existing shareholders in proportion to the shares held by each
member without making any discrimination between them the two requirements of
section 105-C were complied with and the resolution and offer did not
contravene that section even though 272 shares remained undistributed as a
result of the offer of four new shares for every five shares.
49-A 392 Held also per KANIA C.,J. MAHAJAN,
MUKHERJEA and DAS JJ.--that the fact that one of the motives of the directors
in issuing further shares was to prevent an outsider who had not yet become a
shareholder, from getting control of the company did not render the resolution
or the offer illegal inasmuch such a motive could not in itself be said to be
not in the interests of the company and even assuming that such a motive was bad
this additional motive could not render the resolution and offer illegal as the
company was in fact in need of further funds and it was necessary in the
interests of the company to issue further shares.
Judgment of the Bombay High Court affirmed.
APPEAL from the High Court of Judicature at Bombay:
(Civil Appeal No. LXIX of 1949).
This was an appeal from the judgment and
decree of the High Court of Bombay dated 11th March, 1949, (Chagla C.J. and
Tendolkar J.) in Appeal No. 85 of 1947, confirming a decree of the said High
Court in its Original Jurisdiction dated 10th November, 1947. The facts of the
case and arguments of the counsel arc set out in the judgment.
N.P. Engineer (M.M. Desai and H.J. Umrigar
with him) for the appellants.
M.C. Setalvad (G. N. Joshi with him) for
respondents Nos. 1 to 6 and 8 and 9.
1950. May 4. The Court delivered the
following Judgments:
KANIA C.J.--This is an appeal from the
decision of the High Court of Judicature at Bombay. The respondent company was
incorporated in 1908 with an authorised capital of Rs. 10 lakhs divided into
10,000 shares of Rs. 100 each. By 1945, 5,404 shares were subscribed and Rs. 25
per share were called on each of them. Four thousand five hundred and ninetysix
shares out of the authorised capital thus remained unissued. From about July,
1944, Mr. Padampat Singhania, a businessman interested in many companies, began
to purchase shares of the company from the holders thereof on a large scale.
This naturally 393 put up the price of the shares considerably. On the 18th
September, 1944, at a board meeting of the directors the chairman drew
attention of his co-directors to the attempt thus made by an outsider to corner
the shares of the company. In pursuance of a resolution passed at the meeting, the
chairman issued a circular to the existing shareholders acquainting them of the
true position and suggesting that if they wanted to part with the shares they
might get in touch with the chairman. A circular was accordingly issued with
the result that two rival groups were thus offering to buy shares from those
who were desirous of selling them. The shares on which about Rs. 12 or 14 were
paid per annum as dividend began to be quoted in the market at about Rs. 2,000
per share in March, 1945. Mr. Singhania had not submitted to the company for
registration of the transfers to his name the shares purchased by him. In the
meantime on the 8th January, 1945, an application was submitted by the company
to the Examiner of Capital Issues for sanction of a fresh issue of capital.
Several reasons were mentioned in that application to show why the company
required additional capital. Such application had become necessary owing to war
regulations. The Government granted the sanction on the 16th February, 1945,
and the communication was received by the company on the 20th of February. On
the next day a board meeting was held at which the directors decided to issue
the remaining 4,596 shares at a premium of Rs. 75 per share and to call Rs. 25
per share on them. Pursuant to this resolution a circular was issued to the
shareholders on the same day with copies of the form of application and renunciation
referred to in the resolution and in the circular.
The shares were offered to the shareholders
shown on the register of members in the 'proportion of four further shares for
every five shares held by them. The last date for submission of the application
and payment was 10th March, 1945. The directors and their friends in the next
few days applied and were allotted 1,648 shares. By the 6th, of March, 1945,
2,204 shares were allotted to shareholders who had applied for the same.
394 The appellants are two shareholders of
the company.
They filed the suit, out of which this
present appeal has arisen, "for themselves and all other aggrieved
shareholders of the company." The defendants are the company and eight
directors. It is contended in the plaint that the whole issue of these further
shares and the idea of increasing the capital of the company was mala fide and
with the object of retaining the control and management of the company in the
hands of defendants 2 to 9. It is further contended that the resolution of the
directors and the offer of shares contained in the circuluar letter were in
contravention of section 105-C of the Indian Companies Act. There were further
prayers restraining the company and directors from proceeding with the
allotment of shares. It was contended that the company was not in need of
capital and the issue of further shares was not made bona fide for the benefit
or in the interest of the company but had been made "merely with the
object of retaining or securing the second defendant and his friends the
control of the first defendant company." Considerable evidence was led in
the trial Court on the question of bona fides. The trial Court held that the
issue of new shares was bona fide and the appellate Court has also come to the
conclusion that the object of the directors in issuing the new shares was not
merely with the object of retaining or securing to the second defendant and his
friends the control of the first defendant company. They held that the company
was in need of capital. The suit was consequently dismissed and that decision
was affirmed by the High Court on appeal.
The decision of the appellate Court has been
challenged before us on both grounds. The learned counsel appearing for the
appellants did not contest the concurrent finding of fact of both the lower
Courts to the effect that the company was in need of capital. It was however
urged on their behalf that as the issue of these shares, although not admitted
in the written 395 statement but admitted in the course of evidence, was for
the purpose of preventing the control of the company going in the hands of Mr.
Singhania, the directors had not acted bonn' fide and solely in the interest of
the company. I have read the judgment prepared by Das J. and I agree with his
conclusion and line of reasoning on this part of the case. In my opinion, the
contention of the appellants on this point was rightly rejected by both the
lower Courts and that contention must fail.
That leaves the question whether the issue of
these shares was in contravention of section 105-C of the Indian Companies Act.
That section runs as follows:" Where the directors decide to increase the
capital of the company by the issue of further shares such shares shall be
offered to the members in proportion to the existing shares held by each member
(irrespective of class) and such offer shall be made by notice specifying the
number of shares to which the member is entitled and limiting a time within
which the offer if not accepted, will be deemed to be declined; and after the
expiration of such time, or on receipt of an intimation from the member to
whom, such notice is given that he declines to accept the shares offered, the
directors may dispose of the same in such manner as they think most beneficial
to the company." On behalf of the respondents three answers were submitted.
The first was that the section deals with the case of increase of capital by
the directors beyond the authorised limit and as in the present case the new
shares were issued within the authorized limit of capital, the section has no
application. The second was that the terms of the section should be construed
in a practical way and there was no difference between Regulation 42 in Table A
of the Companies Act and section 105-C in respect of the scheme to offer the
proportion of shares to the existing shareholders. It was argued that so long
as they were offered "as nearly as circumstances admit" the directors
had complied with the requirements of the section and therefore their action
was not illegal. The third answer was that in fact the directors had not
committed any 50 396 breach of the terms of section 105-C up to now and
therefore their action cannot be held to be illegal. In view of my conclusion
on the third point it is not necessary to express any opinion on the first two
answers submitted on behalf of the respondents. It seems to me that section
105-C, interpreted strictly as contended by the appellants, casts on the
directors two obligations. They have to offer the shares issued to the
shareholders on the register of the company and not to anyone else, and
secondly, the offer must be in the same proportion to all the shareholders and
there should be no discrimination amongst them. It is not contended that by the
offer made by the directors to the shareholders there has been any
discrimination amongst the shareholders on the register of the company. It was
contended on behalf of the appellant that the directors had failed to offer all
the shares resolved to be issued by them to the existing shareholders and
therefore the requirements of the section had not been complied with. It was
argued that the directors having resolved to issue 4,596 shares, they had to
offer that whole lot at once to the shareholders on the register and the result
of the offer made by them was to retain in their hands 272-4/5 shares. In my
opinion, this contention is unsound. By their resolution of the 21st February,
1945, the directors resolved to issue 4,596 shares out of the authorized
capital of the company. They have offered shares to the existing shareholders
in the proportion of four new shares to five shares held by them. Inasmuch as
the offer does not absorb the whole lot of 4,596 shares I am unable to construe
the offer as an offer of the whole lot at once to the existing shareholders.
Unless the whole lot of shares in pursuance of the. offer could be accepted and
taken up I am unable to consider the offer contained in the circular as an
offer of the 4,596 shares.
That however does not establish the
contention of the appellants. I find nothing in the section to justify the
conclusion that the directors must offer all the shares resolved to be issued
in one lot to the shareholders. I can Conceive of. numerous cases where a
limited company with a growing business does not 397 require its capital to be
called up at once. For instance, soon after a company is formed it may issue
shares of, say a lakh of rupees required for the construction of the buildings,
and after a year when it requires further capital for payment of machinery etc.
it can issue further shares. I do not think the section as worded prevents the
directors from issuing shares to existing shareholders from time to time in
that way. As noticed before, the object of the section is to prevent
discrimination amongst shareholders and prevent the directors from offering
shares to outsiders before -they are offered to the shareholders. So long as
these two requirements are complied with, the action of the directors in
selecting the time when they will issue the shares as also the proportion in
which they should be issued is a matter left to their discretion and it is not
the province of the Court to interfere with the exercise of that discretion.
This is of course subject to the general exception that the directors are not
to act against the interest of the company or mala fide. No such question
arises in this case and therefore it is unnecessary to discuss that aspect of
the situation. In my opinion therefore on this third ground this contention of
the appellants should be rejected.
The appeal therefore fails and is dismissed
with costs.
MAHAJAN J.--This is an appeal by special
leave from the judgment and decree of the High Court of Judicature at Bombay
(Chagla C.J. and Tendolkar J.) dated 11th March, 1948, confirming the judgment
of the said High Court in its Original Jurisdiction (Bhagwati J.) dated 10th
November, 1947.
The two questions canvassed in this appeal
are: (1) whether the issue of further shares by the directors was in
contravention of the provisions of section 105-C of the Indian Companies Act,
and (2) whether this issue was not made bona fide. Both these questions were
answered in favour of the respondents by the High Court.
The Bombay Life Assurance Co. Ltd., the first
defendant in the case, was incorporated in the year 398 1908 as a limited
company with an authorized capital of ten lakhs. Five thousand four hundred and
four shares had been issued till the year 1945 and they were paid up to Rs. 25
each. The second defendant is the chairman of the board of directors which is
comprised of defendants 2 to 9. The company has a life fund of Rs. 230 lakhs.
In the year 1944 Sir Padampat Singhania, an
industrialist of Kanpur, attracted by the soundness of this concern, began
purchasing the shares of the company with a view to acquiring a controlling
interest in its management. Soon after competition started for the purchase of
the shares of the company between the Singhania group and the Maneklal
Premchand group who were in management of this company. The result of this
competition was that shares which were ordinarily quoted at 250 went up as much
as to 2,000 in March, 1945. A circular was issued by the directors to the shareholders
apprising them of the activities of the Singhania party and suggesting that
those who wanted to sell their shares should sell them in the first instance to
the chairman. This circular does not seem to have had much effect as the
shareholders wanted to reap the maximum benefit which would come to them as a
result of this competition between two rich parties. By the end of December,
1944, the Singhania group had purchased 2,517 shares as against 2,397 held by
Maneklal Premchand's party. The Singhania group had thus acquired a majority of
the shares in the company though these had not yet been transferred in their
name. On 8th January, 1945, the chairman at his own instance and after
consulting some of the directors made an application to the Examiner of Capital
Issues for permission for a fresh issue of capital. This was allowed on 20th
February, 1945. As soon as sanction of the Examiner of Capital Issues was
obtained for increasing the capital of the company, a meeting of the directors
was held on 21st February, 1945, and it adopted the following resolution :-
1. That the capital of the company be
increased from Rs. 5,40,400 to Rs. 10,00,000 by the issue of the 399 remaining
4,596 ordinary shares of Rs. lOO each at a premium of Rs. 75 per share.
2. That as on the existing shares of Rs. 100
each Rs.
25 is paid up, to call Rs. 22 per, share on
these new shares also.
3. That these new.shares shall rank pari
passu in all respects with the existing shares of the company, but they shall
be entitled to rank for dividend as from 1st April, 1945.
4. That these new shares shall be offered in
the first instance by a circular to the shareholders of the company as shown on
the register of members on 20th February, 1945, in the proportion of four new
shares to every five shares held by them in the capital of the company on that
date.
5. That in the case of any shareholder
holding less than five shares or whose holding of shares shall not be complete
multiples of five shares, then fractional certificates shall be issued to such
shareholders in respect of their rights for fraction of a share, each
fractional certificate representing one-fifth of a share.
6. That a sum of Rs. 100 per share (Rs. 25
towards capital and Rs. 75 for premium) shall be payable along with application
for these new shares.
7. That all applications for shares in
accordance with this offer (including applications for shares made in respect
of and accompanied by fractional certificates and applications for shares
accompanied by a renunciation) must be presented to and payment made at the
registered office of the company in Bombay on or before the 10th March, 1945.
Any shareholder or person in whose favour a
renunciation has been signed not applying on or before the 10th March,, 1945,
in terms of the offer shall be deemed to have declined to participate in this
new issue and all fractional certificates not presented as required on or before
10th March, 1945, will cease to have any validity and will not entitle the
holder to any rights.
8. That any balance of the shares remaining
out of this issue not applied for by the: 10th March, 1945, shall be disposed
of by the directors as they may consider best in the interests of the company.
400 That the draft circular to the
shareholders with the enclosures (form A being the form of application, form B
form of renunciation and form. of fractional certificates with application
form) placed on the table by the manager and actuary be approved and initialled
by the chairman.
10. That the manager and actuary be and is
hereby directed to issue forthwith the necessary circulars to the shareholders.
11. That a committee consisting of the
chairman and any one of the directors or the chairman and any two of the
directors be and are hereby appointed to scrutinise the application for the new
shares which may be received and to make allotment of these new
shares.................." It is the validity of this resolution 'that is
the subject matter of the present dispute. The plaintiffs, who are two
shareholders of the company owing allegiance to the Singhania group, filed the
suit out of which this appeal arises challenging this issue of further shares,
principally on two grounds, viz. (1) that the new issue contravenes the
provisions of section 105-C of the Indian Companies Act, and (2) that the issue
of shareswas not bona fide made in the interests or for the benefit of the
first defendant company, but was resolved upon merely with the object of
retaining or securing to the second defendant and his friends control of the
first defendant company. As already stated, both these contentions were
negatived by the trial Judge and the suit was dismissed and this decision was
affirmed on appeal.
The answer to the first question depends on
the meaning to be given to the words used in section 105-C of the Indian
Companies Act as to its scope. The section was introduced in the Indian
Companies Act in the year 1936. Antecedent to this period the question of issue
of new shares by the directors was dealt with by article 42 of the Articles of
Association given in the schedule to the Indian Companies Act, 1913. The
article was in these terms :-"Subject to any directions to the contrary
that. may be given by the resolution sanctioning the 401 increase of share
capital, all new shares shall, before issue, be offered to such persons as at
the date of the offer are entitled to receive notice from the company of
general meetings in proportion, as nearly as the circumstances admit, to the
amount of the existing shares to which they are entitled." As its language
indicates, the article only applied to cases where the capital of the company
was increased by a resolution of the company. It had no application to cases
where the directors issued further shares within the authorised limits. The new
section introduced in 1936 is in these terms :-"Where the directors decide
to increase the capital of the company by the issue of further shares such
shares shall be offered to the members in proportion to the existing shares
held by each member (irrespective of class) and such offer shall be made by
notice specifying the number 'of shares to which the member is entitled, and
limiting a time within which the offer, if not accepted will be deemed to be
declined, and after the expiration of such time or on receipt of an intimation
from the member to whom such notice is given that 'he declines to accept the
shares offered, the directors may dispose of the :same in such manner as they
think most beneficial to the company." It qualifies the discretion of the
directors in the matter of issue of capital by enjoining on them that if they
decide to issue further shares, the existing shareholders should be given the
first option to buy' them. The language employed in the section admits of three
possible interpretations: (1) that its scope is limited to cases where there is
an increase in the capital of the company according to the provisions of
section 50; (2) that the section covers within its ambit all issue of further
capital whether made by increasing the nominal capital or by issuing further
shares within the authorised capital; (3) that the section has application only
to cases where the directors issue further shares within the authorized limit.
The learned counsel for the respondents
contended that the Who1e intent an d purpose of 'the section was to limit the
discretion of directors in regard to the issue 402 of further shares in those cases
alone where there was an increase in the nominal capital of the company by
recourse to the provisions of section 50 of the Indian Companies Act.
It was argued that the phrase "increase
of capital" has been employed by the legislature in section 50 and some
other sections preceding section 105-C with reference only to the nominal
capital of a company and that this expression had not been used with reference
to the subscribed capital anywhere in the Act and therefore the scope of
section 105-C should be limited to cases where the increase in the capital is.
brought about under section 50 of the Act and new shares are created and issued
by the directors. In Sircar and Sen's Indian Companies Act, 1937 Edn. at page
309 the learned authors observe as follows :-"The words 'further shares'
must be read in conjunction with the words 'decide to increase the capital of
the company.' They must mean shares which are issued for the purpose of
Increasing the capital beyond the authorized capital." Mr. Ghosh on Indian
Company Law, 8th Edn. at page 263 has stated as follows :-"The object of
this new section appears to be to make the salient provisions of Regulation 42
in Table A. , compulsory. The section as drafted is liable to the construction
that whenever the directors decide to increase the capital of the company by
the issue of further shares, even if it be a part of the authorized capital,
the new shares must be first offered to the existing shareholders. But this
section should be read in conjunction with clause (a) of section 50 under
subsection (2) of which the directors have no power to increase the share
capital of the company.
Therefore it seems that the words 'further
shares' mean shares. beyond the authorized capital of the company."
Whatever might be the opinion expressed by these commentators, the matter has
to be decided on the language of the Act itself. As already pointed out,. the
learned counsel for the respondents contended that the above was the correct
view as to the scope of the. section. The learned counsel for the appellants
however urged that on a proper interpretation of the. 403 section its scope
could not be limited only to cases of issue of further shares by creation of
new shares by increasing the nominal capital of the company, but that the
language employed in the section also included within its ambit cases where
there was a further issue of shares by the directors, within the authorized
capital. The learned counsel laid considerable emphasis on the expression
"further shares" used in the section and suggested that these words
have been used advisedly instead of the expression "new shares" in
order to bring within the scope of the section increases in the capital of a
company whether within the authorised limit or outside it.
The third interpretation of the section finds
support from the language employed by the legislature in the opening part of
the section, wherein it is said: "Where the directors decide to increase
the capital of the company by the issue of further shares....... "The
directors can only decide to increase the capital at their own initiative when
they issue further shares out of the authorised capital. In no other case can
the directors themselves decide as to the increase in the capital of a company.
Under section 50 the capital can only be increased by a resolution of the company.
Once the company has increased the nominal capital, then the directors can
issue shares within the new limit.
Therefore the authority of the directors,
strictly speaking, in respect to the increase of capital is limited to an
increase within the authorised limit. They cannot by their own decision
increase the nominal capital of the company.
In view of this language the third
interpretation of the section seems more plausible.
The expression "capital of a
company" is an ambiguous phrase and may mean either issued capital or
authorized capital according to the context. It has been used in different
senses in various parts of the Act. In what sense it has been used in this section
is by no means an easy matter to decide, particularly in view Of the fact that
in spite of the introduction of this section in the Indian Companies Act in the
year 1936, article42 still remains as one of the articles to be adopted by
companies if they do not choose otherwise 404 and this refers to cases of
increase in the nominal capital of a company. In my opinion, for the purpose of
deciding the present case it is not necessary to pronounce on the question as
to the precise scope of the section because I consider that on any
interpretation of it the appellants' contention has to be negatived. If the
interpretation suggested by the learned counsel for the respondents is accepted,
then the plaintiffs' contention on the first question fails, because here there
has been no increase in the capital of the company under section 50. Conceding
however for the sake of argument (but not deciding) that the scope of the
section is as it has been contended for by Sir Noshirwan, the question still
remains "To what extent has there been a contravention of its provisions
by the directors in the present case." So far as I have been able to see,
the resolution passed by the directors is in accordance with the provisions of
the section and does not injuriously affect the shareholders or the company,
and they cannot be said to have any cause of grievance against it. In other
words, in my opinion, the resolution substantially complies with the provisions
of section 105-C of the Indian Companies Act.
The directors offered all the new shares to
the shareholders in the ratio of 4 to 5, as the shares of the company were held
in multiples of five to a larger extent than in any other multiple. The result
of fixing this ratio is that 272 shares remain outside the offer. In whatever
other proportion the shares were offered, still a few shares were bound to
remain unoffered. If a liberal interpretation is placed on the section, then it
has to be held that the directors' resolution substantially complies with its
provisions. On the other hand, if a technical and literal interpretation is
placed on the section, then the directors were bound to offer the shares in the
ratio of 4596/5404 in spite of the practical difficulties that might result in
the actual working out of such a proportion, and irrespective also of whatever
absurdities or anomalies might thus result. I am of the opinion that the
section has to be given a workable construction and a construction that is
businesslike in preference to a literal construction which might lead to a
deadlock. In each 405 case it should be seen whether the directors have substantially
complied with the provisions of the section or not.
The basic idea underlying the section is that
whatever is given, is given to all the existing shareholders and is distributed
equally and equitably between them. It cannot be denied that all the
shareholders were offered the further shares and that they were offered equally
and equitably.
Whatever is the balance remains with the
company with the result that the capital remains unincreased to this extent.
In such a situation it is difficult to hold
that the resolution passed by the directors has contravened the provisions of
section 105-C and has caused any detriment or injury either to the company or
to the shareholders. Even if the resolution passed by the directors is held to
be in technical breach of the section, as it has caused no injury to anybody,
the resolution cannot be held to be void. Under the law as it existed prior to
1936, if a company incorporated in its Articles of Association article 42
mentioned in the schedule to the Indian Companies Act, then in the case of
issue of new shares the directors' discretion was curtailed inasmuch as they
were bound to offer these shares in the first instance in proportion as nearly
as the circumstances admitted to the amount of the existing shares to the
existing shareholders but in all other cases their discretion remained
unfettered. It was open to a company not to adopt article 42 and thus fetter
the discretion of the directors even in the case of the issue of new capital.
After 1936 it has been made obligatory on the
directors to give the first option to buy further shares to the existing
shareholders and without any favour to anyone. That being the intent and
purpose of the section, it has been fully carried out by the directors in the
present instance and has been carried out in a businesslike way because the
ratio in which they offered the shares is the ratio which works to the
convenience of the largest number of shareholders as the shares of the company
are held mostly in multiples of five.
If the shares were issued in any other ratio,
that would have created some difficulty in the way of shareholders who held
shares in multiples of five and who owned 2,110 406 shares. They would have
been obliged to collect fractions before they could claim a whole share and
thus make an application within the time allowed to exercise the option.
Where the language of a statute in its
Ordinary meaning and grammatical construction leads manifest contradiction of
the apparent purpose of the enactment, or to some inconvenience or absurdity,
hardship or injustice, presumably not intended, a construction may be put upon
it which modifies the meaning of the words, and even the structure of the
sencence. In my opinion, the section when it says "such shares shall be
offered to the members" should be construed liberally and not literally,
as such an interpretation would make the section workable and would not in any
way affect its intent and purpose, the phrase "such shares" meaning
those shares which admit of being so offered in a businesslike way.
It was argued that a liberal interpretation
of the section would result in the directors allotting the balance of shares
remaining out of the further shares unoffered to their own friends and
relations and it would operate to the detriment of the other shareholders. In
this connection reference was made to para 8 of the resolution above mentioned.
In my opinion this paragraph does not bear out the contention of the appellants
because it has reference only to shares not applied for, obviously shares not
offered and which could not be taken up by the shareholders cannot fall under
that description. That paragraph applies only to cases where the shares could
be applied for and then no application was made in respect of them. It was not
disputed that the directors in the present case had not sold these shares to
any one and that these have remained unissued. It was urged strongly by the
learned counsel for the appellants that the section being imperative and its
language being unambiguous, the Court was bound to place a literal interpretation
on it and the argument of hardship or inconvenience should not weigh with it.
It was further suggested that the directors could always give effect to the
provisions of the section by increasing the capital in a manner and to the
extent that the further shares 407 could be offered to the shareholders in such
a proportion that all the shares offered could be taken up them. In other
words, it was contended that the section not only fetters the powers of the
directors in the matter of sale of shares but it also restricts their
discretion in the matter of increase of capital and as to the number of further
shares.
This contention, if accepted, would mean that
the legislature by enacting section 105-C indirectly enjoined on the directors
that whenever they decide to increase capital by issue of further shares they
should make the increase only to such an extent and in a manner as to enable
the existing shareholders to take the whole of it. If that was the intention of
the section, there was nothing easier for the legislature to say so. The
section, on the other hand, recognizes that the directors have a discretion in
the matter of the increase of capital when it says, "when the directors
decide to increase the capital of a company." It means that it is within
their absolute discretion to take the decision whether to increase the capital
or not. It is also within their discretion to say to what limit and to what
extent they will increase the capital. It is also for them to decide how many
shares and of what value they will issue. Once they have taken their decision,
it is then and then only that section 105-C comes into operation. At that stage
they have to offer the new shares to the shareholders and at that stage they
can offer them in a businesslike manner to all of them equitably and equally
and if out of the shares offered some cannot be taken up by the shareholders as
they do not fit in the ratio in which the offer has been made, the only result
is that those shares remain unoffered and thus unissued. I am therefore of the
opinion that the learned Judges of the Court of appeal were right when they
held that under section 105-C the shares have to be offered to the existing
shareholders as nearly as the circumstances would admit and that the section
has to be given a businesslike construction and should be construed liberally
and that the charge of contravention of section 105-C cannot be levelled
against the directors so long as they have not disposed of the unoffered
balance contrary to 408 the provisions of the section. The result is that the
first contention of the learned counsel stands negatived.
The next question whether the action of the
directors in passing the resolution was not bona fide seems to be concluded by
concurrent findings of fact of the Courts below to the effect that the
resolution was passed because the company needed additional funds at the moment
when the new issue was decided upon and that the issue of shares was not due
solely to the desire on the part of the directors to keep themselves in the
saddle.
It is not the practice of this Court
ordinarily to interfere with concurrent conclusions on questions of fact
reached in the Courts below unless those conclusions have been reached on
extraneous considerations or by violating rules of procedure or by committing
any breach of some provision of law: vide Srimati Bibhabati Devi v. Kumar
Ramendra Narayan Roy (1) The learned counsel for the appellants while
conceding. that it was not open to him to challenge concurrent findings of fact
of the Courts below, urged that the whole case has been looked at by them from
an erroneous angle. It was contended that the Courts below had misdirected
themselves in their approach to the decision of the issue of bona fides. In
this connection emphasis was laid on the following observations in the judgment
of the learned Chief Justice and on similar observations occurring elsewhere :-"In
this particular case it is urged and urged with considerable force that the
reason which actuated the' directors on the 21st February, 1945, in resolving
to issue new shares was the fear that the Singhsnia group, would capture the
company and oust the present directors from their vantage point and take
control of the company itself.
It may be that one of the factors that
weighed with the directors was that consideration. It may even be that it
weighed with them a great deal. It may also be that the directors selected this
particular time viz. the 21st February, 1945, for the issue of' these shares
because of the impending danger of the--' 73 I.A-. 246.
409 majority of shares going into the hands
of the Singhania group with the necessary consequences. If, with all that, it
is established before the Court that in fact on the 21st February, 1945, the
company was in need of funds, that the funds were required for the working of
the company, then the Court will not interfere with the discretion exercised by
the directors, because the principle is obvious that if the new shares have
been issued because the company needs funds, then it cannot be said that the
discretion vested in the directors has been exercised not in the interests of
the company or for the purpose of the company. It is only when that discretion
is exercised solely for the personal ends of directors, for their personal aggrandizement,
for keeping themselves in power, then undoubtedly that discretion cannot be
said to have been exercised for the purpose of or in the interests of the
company." Reference was also made to the concluding part of the same
judgment which runs thus :-"Undoubtedly this is a case of high finance and
we have been given a glimpse of what high finance can be and there is great
justification in what Mr. Amin has said as to the manner in which some of the
things were done with regard to the affairs of this company. But ultimately we
must come down to the one short and simple question, was the company in need of
funds at the time when the directors decided upon the issue of new shares, and
in my opinion there can be no doubt on the evidence led this case that the
answer to that question must be in the affirmative. If that be the position all
other considerations can be of no avail or of very little avail as against this
central fact in this case and as I am satisfied as to the central fact, I would
agree with the learned Judge who took the same view and came to the conclusion
that the plaintiffs have failed to discharge the burden which lay upon them of
establishing that the issue of new shares was not bona fide and not in the
interests of and for the benefit of the company." It was argued that the
learned Judges were not right in thinking that all other considerations were of
410 no avail and should be practically kept out of consideration once it was
established that the company needed funds. It was said that it having been
found that at the time of the aforesaid resolution the directors were
considerably influenced by the consideration of keeping out the Singhania group
from capturing the company, and by the consideration of keeping themselves in
the saddle, it should have been held that they were acting with an ulterior
motive, and that their decision as to the need of the company for further funds
was vitiated by reason of the ulterior motive.
It is convenient here to state what the true
approach should be to a question of this nature when it arises in a case. It is
well settled that in exercising their powers whether general or special, the
directors, must always bear in mind that they hold a fiduciary position and
must exercise their powers for the benefit of the company and for that alone
and that the Court can intervene to prevent the abuse of a power whenever such
abuse is held proved, but it is equally settled that where directors have a
discretion and are bona fide acting in the exercise of it, it is not the habit
of the Court to interfere with them. When the company is in no need of further
capital, directors are not entitled to use their power of issuing shares merely
for the purpose of maintaining themselves and their friends in management over
the affairs of the company, or merely for the purpose of defeating the wishes
of the existing majority of shareholders.
It appears to me that the learned Judges in
the Court below approached the decision of this question in the light of the
principles stated above and the contention of the learned counsel therefore
does not seem right. Where the directors are not chargeable for breach of trust
so far as the company is concerned and where their action is for the benefit of
the company, then merely because in promoting the interests of the company they
also promote their own interests. it cannot be held that they have not acted
bona )fide.
As it has been said in Hirsche v. Sims (1),
if the true effect of the whole evidence is that the defendants truly' (1)
(1894) A.C. 654.
411 and reasonably believed at the time that
what they did was for the interest of the company, they are not chargeable with
dolus malus or breach of trust merely because in promoting the interest of the
company they were also promoting their own, or because they afterwards sold
shares at prices which gave them large profits.
Both the Courts below have as fact that to a
certain extent in resolving to issue new shares the directors were actuated by
a fear that the Singhania group would capture the company and oust the present
directors from their vantage point and take control of the company itself. It
was argued that this motive was an ulterior motive and the exercise of power by
the directors to achieve this objective by the issue of further shares was an
exercise of power for the purpose for which it was not conferred. This argument
would have had force if this was the main purpose of the directors in issuing
the further shares, but this is not the case here. As found by the High Court,
the central fact working in the mind of the directors was the necessity of
further funds for the company at the moment they passed the resolution. That
being so, it seems to me that the existence of the other motive does not make
the action of the directors in respect of the issue of further shares mala fide.
Moreover, in the present case it seems to me
that the directors were on the defensive. They felt that the attempt of the
Singhanias to capture the controlling interest in the company by paying high
prices for its shares must have been with a purpose, i.e., to make use of the
funds of the company in their own concerns. Some evidence of this exists on the
record. They thought that it was their duty as directors to protect the company
from such an attack and they felt that it was beneficial to the company to
protect it from such an attack. They did not keep the matter in secret but
informed all the shareholders about it. They first attempted to enter into the
field of competition with the Singhanias but it seems that they were not wholly
successful in their objective. They then decided to issue further capital by
taking into consideration the 53 412 interest and the needs of the company and
ifs requirements in respect of capital at the moment. They also thought that by
this action they would also be able to keep out the Singhanias from capturing
the company. They were under no obligation to Singhanias who had not yet even
been entered as shareholders on the register of shareholders. There was no
dolus malus in their mind as directors of the company, as affecting the company
or its shareholders. On the other hand, they honestly considered it to be in
the best interests of the company to meet such an attack. The resulttherefore
is that it cannot be held that this is one of those unusual cases where this
Court should not give weight to the concurrent findings of fact by the Courts
below, or that it is a case where it can be held that the High Court in
arriving at its findings has committed a breach of any rule of procedure or law
and that there is no evidence to support the findings that have been arrived
at.
The result therefore is that this appeal
fails and is dismissed with costs.
DAS J.--I agree that this appeal must be
dismissed. As, however, my decision rests on slightly different reasons, I desire
to state them in my judgment.
For the purpose of appreciating the questions
involved in this appeal which has been brought by the plaintiffs it will
suffice to set out the following facts.
The Bombay Life Assurance Company, Ltd.
(hereinafter referred to as "the company")was incorporated in 1908
with an authorised capital of Rs. 10,00,000 divided into 10,000 shares of Rs.
100 each. By 1945, 5,404 shares in all were subscribed, and Rs. 25 per share
had been paid on them.
This left 4,596 shares out of the total
authorised capital yet to be issued. The plaintiffs are two of the shareholders
of the company. Respondents 2 to 9 are the directors of the company of whom
respondent 2 is the chairman of the board of directors. It appears that 413
from July, 1944, shares in the company began to be purchased from the holders
thereof by or in the interest of Sri Padampat Singhania. This attempt to buy up
the shares on a large scale naturally resulted in a sudden rise in the price of
the shares. This abnormal rise in the price could not but attract the attention
of the board of directors. On September 18, 1944, a board meeting was held at
which the chairman drew the attention of his co-directors to the serious
implications of the attempt of an outsider group to corner the shares of the
company. It was decided at that meeting that a circular should be issued to the
Shareholders acquainting them of the true position and the chairman was
authorised to sign the circular. Accordingly, on September 19, 1944, a circular
was issued to the shareholders drawing their attention to what was happening
and exhorting them, in case they -wanted to dispose of their holdings, to offer
them to the chairman. The result of the chairman and other directors entering
the arena was a race for purchase of shares of the company which inevitably led
to a phenomenal rise in the price of the shares. The shares which in 1944 were
quoted at Rs. 250 per share went up to Rs. 2,000 per share in March, 1945. It
may be noted here that the shares purchased by the Singhania group were not
submitted for registration of the transfers with the result that their names
have not yet been entered on the register of members.
In the meantime, on January 8, 19,15, an
application was submitted by the company to the Examiner of Capital Issues for
sanction for a fresh issue of capital, setting forth several reasons for which
such capital was required by the company. The required sanction dated February
16, 1945, was received by the company on February 20, 1945, and on the next day
(,February 21, 1945) a board meeting was held at which the directors decided to
issue the remaining 4,596 shares at a premium of Rs. 75 per share and to call
up Rs. 25 per share on them. The minutes of the board meeting (Ex. O) are
printed at pages 301-2 of the Paper Book. Pursuant to this resolution of the
board a circular (Ex. q) was issued to the shareholders on the same day with
copies 414 of the form of application and form of renunciation referred to in
the resolution and in the circular. These further shares were offered to the
shareholders shown on the register of members in the proportion of four further
shares to every five shares then held by them. The last date for submission of
the applications and necessary payments for the shares so offered was fixed for
March 10, 1945. It is said that on the very next day after the board meeting
1,648 shares were allotted and that between February 22, and March 6, 1945,
2,204 shares were allotted to the shareholders who had applied for the same. The
suit out of which the present appeal has arisen was filed on March 5, 1945.
The plaintiffs are two of the members of the
company suing" for themselves and all other aggrieved shareholders"
of the company. The defendants are the company and the eight directors. The
reliefs prayed for are as follows, inter alia:
(a) That it may be declared that the
resolution of the directors and the offer referred to in para 6 hereof contravenes
the provisions of section 105-C of Indian Companies Act and was and is ultra
vires, and illegal;
(b) That it may be declared that the said
offer of shares referred to in para 6 hereof is not bona fide or in the
interest of the defendant company and is ultra vires and illegal;
(c) That the defendants 2 to 9 may be
restrained by an injunction from allotting any shares or doing any further act
in pursuance of the said offer." It will be noticed that none of the
shareholders other than the directors to whom further shares had been allotted
before the filing of the suit has been made a party to the suit. Further, even
as against the defendants 2 to 9 the consequential relief by way, of
cancellation of the allotments of further shares to them and the rectification
of the register in respect thereof has not been prayed for by the plaintiffs.
The contentions of the plaintiffs as set
forth in the plaint on which the above prayers were founded may be summarised
shortly as follows:
415 (i) the company was not in need of
capital, (ii) the issue of further shares was not made bona fide for the
benefit or in the interest of the company but had been made "merely with.
the object of retaining or securing to the second defendant and his friends the
control of the first defendant company," and (iii) the issue and offer of
further shares are illegal and void for contravention of the provisions of
section 105-C of the Indian Companies Act. It is necessary to examine each of
these contentions and to ascertain their effect.
Re (i): Both the Courts below.have found it
as a fact that at the time the directors resolved upon the issue of further
shares the company was in need of capital for the purposes mentioned in the
company's application to the Examiner of Capital Issues referred to above. This
concurrent finding of fact has not been contested before us and the next
contention of the appellants will have to be examined in that light.
Re (ii): It is not disputed that the
company's need for funds standing by itself will afford a good motive to the
directors to issue further shares. The contention, however, is that if that
motive was not the sole motive but was mixed up with any other motive, it was
an abuse of the powers of the directors to issue further shares. This plea is
clearly a departure from the case made in the plaint.
There-the case was that there was no need for
funds at all and the sole motive of the directors was merely to retain their
own control over the affairs of the company. It will, however, be a hyper technicality
to shut out this plea altogether. The plea of mixed motive raises three
questions, namely(a) whether apart from the motive of finding further capital
for the company, there was any, and, if so, what other motive, (b) was that
other motive vitiated by bad faith, and (c) if it was so vitiated, whether the
presence of it nullified the good motive and rendered the issue of further
shares illegal and void.
116 The contention of the plaintiffs before
Bhagwati J. as before us, was that the company was not in need any further
capital in February, 1945, and that the directors of the company decided to
issue the further capitalmerely With a view to retain control of the management
of the company in their hands. On the evidence before him, Bhagwati J. found
that the motive of the directors was rather to keep the Singhania group out of
the control of the company than to retain their own control. The race for the
purpose of purchasing the shares was not merely for the purpose of increasing
their holdings for holdings' sake but was really with a view to prevent the
Singhania group from obtaining a majority of shares which would give them the
control of the management of the company and enable them to utilise the life
funds of the company for the purposes of the various industrial concerns of the
Singhania group. The result of keeping out the Singhania group might well be to
strengthen the position of the directors and to keep them in the saddle, but
the proximate motive was to exclude the Singhanias.
The distinction is real and quite
understandable. The appeal Court does not appear to have dissented from this
view of the matter and I do not see any reason to take a different view. It
follows, therefore, that apart from the motive of raising fresh capital for the
purposes and benefit of the company, the directors also had another motive,
namely, to prevent the Singhania group, who are strangers to the company, from
intruding into its affairs so as to be able to assume a controlling hand in its
management for their own purposes rather than for the benefit of the company.
On the evidence on record the existence of this motive side by side with the
motive of raising further capital cannot be denied.
The question then arises whether in acting up
to it the directors were actuated by bad faith. In coming to a conclusion on
this point it has to be borne in mind that the Singhania group had only
purchased some shares from various existing shareholders but did not submit the
transfers of registration so as to get their names put upon the register of
members. It is clear that until the Singhania group get their names.
417 entered in the register of members, they
are not share :1950-9501 holders but are complete strangers to the company ,.
It has been held in Percival v. Wright(1)
that ordinarily the directors are not trustees for individual share ;holders.
Even if the directors owe some duty to the existing shareholders on the footing
of there being some fiduciary relationship between them as stated in some cases
[see for example In re Gresham Life Assurance Society] (,2), I see no cogent
reason for extending this principle and.
imputing any kind of fiduciary relationship
between the directors and persons who are complete strangers to the company. In
my judgment, therefore, the conduct of the respondents 2 to 9 cannot be judged
on the basis of any assumed fiduciary relationship existing between them and
the Singhania group. In my opinion, the respondents 2 to 9 owed] no duty to the
Singhania group and, therefore, the motive to exclude them cannot be said to be
mala fide per se. In North-West Transportation Company, Ltd. v. Beatty (3) the
Judicial Committee observed atp. 601:
"But the constitution of the company
enabled the defendant J.H. Beatty to acquire this voting power; there was no
limit upon the number of shares which a shareholder might hold, and for every
share so held he was entitled to vote, the charter itself recognised the
defendant as a holder of 200 shares, one-third of the aggregate number; he had
a perfect right to acquire further shares, and to exercise his voting power in
such a manner as to secure the election of directors whose views upon policy
agreed with his own, and to support those views at any shareholders'
meeting." Beatty referred to in the above passage was a director. It
follows therefore, that the fact of the directors entering into a competition
with the Singhania group in purchasing the shares of the company was quite
legitimate and was not mala fide. It was urged, however, that the issuing of
further shares, although the company required further capital, was, in the
circumstances, evidence of bad faith.
Bhagwati J. dealt (1) L.R. (1902) 2 Ch. 421.
(2) L.R. 8 Oh. App. 446 at 0. 449. (3) L.R. 12 A.C. 589.
418 with the various acts of the directors
relied upon by the plaintiffs as indicating bad faith on the part of the directors
and on a consideration of all of them was 'unable to come to the conclusion
that the issue of new shares was decided upon by the directors not bona fide in
the interests of the company and merely with a view to keep the control of the
affairs of the company in their hands." The learned Judge, therefore, came
to the conclusion that the issue of further shares and the offer thereof made
on the 21st February, 1945, wasnot ultra vires and illegal.' Some of these
facts on which the charge of mala fide was sought to be founded were urged
before the appeal Court by learned counsel 'or the appellants. The learned
Chief Justice discussed the matters and concluded by saying that he agreed with
the trial Judge that the plaintiffs had failed to discharge the burden which
lay upon them of establishing that the issue of new shares was not bona fide
and not in the interests, and for the benefit, of the company.
I do not see any cogent reason for taking a
different view on the facts. The position, shortly put, was that the Singhania
group, who were outsiders and to whom the directors owed no duty, were out to
corner the shares of the company for their own ends. To thwart that object of
the Singhania group by making it more and more difficult for them to acquire
more shares the directors took advantage of the existing needs of the company
for further capital and decided upon to issue further shares. The issue of
further shares served two purposes, namely, the purpose of finding the necessary
finance, and to exclude the interlopers, both of which purposes, according to
the directors, were for the benefit of the company. Rightly or wrongly, the
directors felt that it was not in the interests of the company to allow the
Singhania group a controlling hand in the management of the affairs of the
company. Their apprehension evidently was that the Singhania group, if and when
they became shareholders, would use their voting power in their own interests
and to the detriment of the company by utilising the life fund of the company
for the purposes of their various other in-dustrial concerns. I find nothing in
the evidence on 419 record to doubt the honesty of the directors in holding
this view and, that being so, I see nothing improper if the directors in the
interests of the company and the existing shareholders tried to prevent what,
according to them, would be a catastrophe. Indeed, if the directors honestly
held that view---and as already stated I have no reason to think that they did
not--they would, in my opinion, have been guilty of dereliction of duty to the
company and to the existing shareholders if they did not exert themselves to
prevent such evil. In my judgment the motive to prevent the Singhania group,
who were outsiders, from acquiring a control over the company cannot, as
between the directors and the company and the existing shareholders, be
stigmatised as mala fide.
At two places in his judgment the learned
Acting Chief Justice expressed the view that if it were established before the
Court that the company needed further capital, all other considerations could
be of no avail or of very little avail as against that central fact. Tendolkar
J. did not consider it necessary to deal with the various acts of the directors
relied upon as evidence of their mnala fides, because he was of the view that
assuming that the directors did all those acts with the object of keeping the
Singhania group out of control of the company, the moment it was established
that the company was in need of further capital or legitimate purposes, the
fact that the directors utilised such need for the purpose of establishing
themselves more firmly in the saddle did not render the issue of further
capital either ultra vires or invalid. Learned counsel for the plaintiffs
contends that the learned Judges in the Courts below entirely overlooked the
point that the presence of such bad motive would nullify the good motive of
finding capital necessary for the company and this mixture of motives would
render the issue of further shares illegal and void. Tiffs leads me to a
consideration of the third subhead on the assumption that what I have called
the additional motive was a bad motive.
It is well established that directors of a
company are in a fiduciary position vis-a-vis the company and 53 420 must
exercise their power for the benefit of the company.
If the power to issue further shares is
exercised by the directors not for the benefit of the company but simply and
solely for their personal aggrandizement and to the detriment of the company,
the Court will interfere and prevent the directors from doing so. The very
basis of the Court's interference in such a case is the existence of the relationship
of a trustee and of cestui que trust as between the directors and the company.
The first case to be referred to is that of
Fraser v. Whalley(1). In that case a new company was incorporated in 1859 by an
Act of Parliament. By that Act also certain existing railway companies were
authorised "to acquire, take and hold shares in the undertaking of the
company, and for such purpose to create new shares in their undertakings."
The existing companies in 1861 passed resolutions authorising their directors
to exercise this power. The resolutions were, however, not acted upon and the
existing companies did not issue n ;w shares in their undertakings for the
purpose of taking up any share in the new company and all the shares of the new
company were issued to persons other than the existing companies. In short, the
shares which it was contemplated would be taken up by the existing companies
were no longer available. Subsequently, in 1862, another Act of Parliament was
passed authorising the new company to make a branch line and for that purpose
to raise fresh capital by the creation and issue of new shares. But this new
Act gave no fresh power to the existing companies to take up any of these new
shares to be issued by the new company. One Savin held the majority of shares
in the existing companies and there was dispute between him and the directors.
The general meeting of the company was shortly going to be held and the
directors knew that at the ensuing general meeting their policy would be
repudiated by the majority of shareholders and they would be turned out from
their office. It was in these circumstances that the directors purporting to
act on the resolutions of (1) (1864)2 H. & M. 10.
421 1861, resolved to issue new shares. Suit
was filed on behalf of the shareholders to restrain the directors from issuing
any new shares. On a motion for injunction Wood V.C. granted an interlocutory
injunction. In course of his judgment the learned Judge observed:
"The directors are informed that at the
next general meeting they are likely to be removed, and, therefore, on the very
verge of a general meeting, they, without giving notice to anyone, with this
indecent haste and scramble which is shewn by the times at which the meetings
were held, resolve that shares are, on the faith of this obsolete power
entrusted to them for a different purpose, to be issued for the very purpose of
controlling the ensuing general meeting.
I have no doubt that the Court will interfere
to prevent so gross a breach of trust. I say nothing on the question whether
the policy advocated by the directors, or that which I am told is to be pursued
by Savin, is the more for the interest of the company. That is a matter wholly
for the shareholders. I fully concur in the principle laid down in Foss v.
Harbortie (2 Hare, 461) as to that, but if the directors can clandestinely and
at the last moment use a stale resolution for the express purpose of preventing
the free action of the shareholders, this Court will take care that, when the
company cannot interfere, the Court will do so." It will be noticed that
this decision proceeds entirely on the grounds that the resolutions of 1861 on
which the directors purported to act were obsolete, for they had not so long
been acted upon and also because the shares contemplated by that resolution
were not available, and that even if the resolutions were still effective and
gave authority to the directors to issue new shares, the directors could only
do so for the purpose of acquiring shares in the new company and not for the
purpose of controlling the ensuing general meeting and preventing the free
action of the shareholders. There was no evidence whatever in that case that
the issue of shares was at all for the benefit of the company. The issue of
shares in that case was not for the purpose of taking up shares in the new company
for which purpose alone the power could be exercised, 422 but that it was being
exercised, wholly and solely for quite a different purpose, namely, of
maintaining themselves in office.
Punt v. Symons & Co. Limited (1) was a
motion for an interim injunction to restrain the holding of a meeting of the
defendant company for confirming the resolution for issue of shares. On the
evidence it was quite clear "that these shares were not issued bona fide
for the general advantage of the company, but that they were issued with the
immediate object of controlling the holders of the greater number of shares in
the company, and of obtaining the necessary statutory majority for passing a
special resolution while, at the same time, not conferring upon the minority
the power to demand a poll." Byrne J. granted an injunction restraining
the defendant from holding the confirmatory meeting and observed:
"1 am quite satisfied that the meaning,
object, and intention of the issue of these shares was to enable the shareholders
holding the smaller amount of shares to control the holders of a very
considerable majority. A power of the kind exercised by the directors in this
case, is one which must be exercised for the benefit of the company; primarily
it is given them for the purpose of enabling them to raise capital when
required for the purposes of the company.
There may be occasions when the directors may
fairly and properly issue shares in the case of a company constituted like the
present for other reasons. For instance, it would not be at all an unreasonable
thing to create a sufficient number of shareholders to enable statutory powers
to be exercised, but when I find a limited issue of shares to persons who are
obviously meant and intended to secure the necessary statutory majority in a
particular interest, I do not think that is a fair and bona fide exercise of
the power." The learned Judge concluded with the following words:
"If I find as I do that shares have been
issued under the general and fiduciary power of the directors for the express
purpose of acquiring an unfair majority (1) L.R. [1903] 2 Ch. 506.
423 for the purpose of altering the rights of
parties under the articles, I think I ought to interfere." Piercy v. S.
Mi1Is & Co. Ltd. (1) was a witness action before Peterson J. It was indeed
a gross case. On the evidence Peterson J. found that it was manifest "that
the shares were allotted simply and solely for the purpose of retaining control
in the hands of the existing directors." After stating the facts, the
learned Judge said:
"The question is whether the directors
were justified in acting as they did, or whether their conduct was a breach of
the fiduciary powers which they possessed under the articles. What they did in
fact was to-override the wishes of the holders of the majority of the shares of
the company for the time being by the issue of fresh shares issued solely for
that purpose." Then after referring to Fraser v. Whalley and Punt v. Symons
& Co. Ltd. (supra), the learned Judge concluded:
"The basis of both cases is, as I
understand, that directors are not entitled to use their powers of issuing
shares merely' for the purpose of maintaining their control or the control of
themselves and their friends over the affairs of the company, or merely for the
purpose of defeating the wishes of the existing majority of shareholders. That
is however, exactly what has happened in the present case. With the merits of
the dispute as between the directors and the plaintiff I have no concern
whatever.
The plaintiff and his friends held a majority
of the shares of the company, and they were entitled, so long as that majority
remained, to have their views prevail in accordance with the regulations of the
company, and it was not, in my opinion, open to the directors, for the purpose
of converting a minority into a majority, and solely for the purpose of
defeating the wishes of the existing majority, to issue the shares which are in
dispute in the present action." In the result, the shares allotted to the
defendants were declared void.
(1) L.R. [1920] 1 Ch. 77.
424 It will be noticed that in each of the
three cases the act of the directors was not only not of advantage to the
company but was in essence to its detriment in that it was calculated to reduce
the existing majority into minority and to prevent the majority of the existing
shareholders from exercising their discretion with respect to what they conceived
to be in the best interests of the company. Those cases were not cases of mixed
motives at all. The only motive operating in those cases in the minds of the
directors was detrimental to the interests of existing shareholders and,
therefore, to the company itself. Our attention was drawn to Palmer's Company
Law, 18th Edition, p. 183, where it is stated that "in exercising their
powers, whether general or special, directors must always bear in mind that
they are in a fiduciary position, and must exercise their powers for the
benefit of the company, and for that alone." Relying on the words "and
for that alone," it is urged that the power to issue shares must be
exercised wholly and solely for the benefit of the company, that there must not
be any other motive whether or not that other motive is injurious to the
company and that if that power is exercised for that purpose and also for some
other purpose then irrespective of the nature of that other purpose the
directors would be guilty of an abuse of their power. I am not prepared to read
the passage in the way urged by learned counsel for the plaintiffs. None of the
cases cited on that point in Palmer's Company Law was concerned with mixed
motives at all. In none of them was there any motive beneficial to the company
or to the existing shareholders. In my view what that passage means is that the
power must be exercised for the benefit of the company and that as between the
directors and the company there must be no other motive which may operate to
the detriment of the company. If the directors exercise the power for the
benefit of the company and at the same time they have a subsidiary motive which
in no way affects the company or its interests or the existing shareholders
then the very basis of interference of the Court is absent, for, as I have
pointed out, the Court of equity only intervenes in order 425 to prevent a
breach of trust on the part of the directors and to protect the cestuique
trust, namely the company and possibly the existing shareholders. If as between
the directors and the company and the existing shareholders there is no breach
of trust or bad faith there can be no occasion for the exercise of the
equitable jurisdiction of the Court. I find support for my views in the
following observations of their Lordships of the Judicial Committee in Hirsche
v. Sims(1):
"If the true effect of the whole
evidence is, that the defendants truly and reasonably believed at the time that
what they did was for the interest of the company, they are not chargeable with
dolus malus or breach of trust merely because in promoting the interest of the
company they were also promoting their own, or because they afterwards sold
shares at prices which gave them large profits." On the facts of this case
the concurrent finding is that the company was in need of funds and, therefore,
the issue of further shares was clearly necessary and is referable to such
need. The further motive of keeping out the Singhania group, who are not yet
shareholders but are strangers, does not prejudicially affect the company or
the existing shareholders and the presence of such further motive cannot
vitiate the good motive of finding the necessary funds for the company. In my
judgment it is impossible to hold that the issue of fresh shares was, in the
circumstances, illegal or void.
Re (iii):--Learned counsel for the plaintiffs
contends that both the Courts below were in error in holding that there has
been no contravention of the provisions of section 105-C of the Indian
Companies Act. That section is in the following terms :-"Where the
directors decide to increase the capital of the company by the issue of further
shares such shares shall be offered to the members in proportion to the
existing shares held by each member (irrespective of class) and such offer
shall be made by notice specifying the number of shares to which the member is
entitled, and limiting a time within which the offer, if (1) [1894] A.C. 654,
at pp. 660-661.
426 not accepted, will be deemed to be
declined; and after the expiration of such time, or on receipt of an intimation
from the member to whom such notice is given that he declines to accept the
shares offered, the directors may dispose of the same in such manner as they
think most beneficial to the company." This section was added to the
Indian Companies Act in 1936.
The first question is whether the section
contemplates increase of capital above the authorised limit, or only below the
authorised limit. Learned Attorney General appearing for the company urges that
the words further shares" must be read in conjunction with the words
"decide to increase the capital of the company" and, so read, must
mean shares which are issued for the purpose of increasing the capital beyond
the authorised capital.
He contends that section 105-C has no
application to this case. Section 50 deals with, among other things, alteration
of the conditions of the Memorandum of Association of the company by increasing
its share capital by the issue of new shares. The very idea of alteration of
the memorandum by the issue of new shares clearly indicates that it
contemplates an increase of the share capital above the authorised capital with
which the company got itself registered. This increase can only be done by the
company in a general meeting as provided in sub-section (2) of section 50. This
increase above' the authorised limit cannot possibly be done by the directors
on their own responsibility. Section 105-C, however, speaks of increase of
capital by the issue of further shares. The words used are capital and not
share capital and further shares and not new shares. It speaks of increase by
the directors. Therefore, the section only contemplates such increase of
capital as is within the competence of the directors to decide upon. It clearly
follows from this that the section is intended to cover a case where the
directors decide to increase the capital by issuing further shares within the
authorised limit, for it is only within that limit that the directors can
decide to issue further shares, unless they are precluded from doing even that
by the regulations of 427 the company. It is said that section 105-C becomes
applicable after the company in a general meeting has decided upon altering its
memorandum by increasing its share capital by issuing new shares. If the
company at a general meeting has decided upon the increase of its share capital
by the issue of new shares, then it is wholly inappropriate to talk of the
directors deciding to increase capital, because the increase has already been
decided upon by the company itself. Further, after the company has at a general
meeting decided to increase its share capital by the issue of new shares, the
increased capital becomes its authorised capital and then ii the directors
under section 105-C decide to increase the capital by the issue of further
shares, then this decision is nothing more than a decision to raise capital
within the newly authorised limit. Finally, if section 105-C were to be held
applicable to the case of an increase of capital above the authorised limit
then such construction will lead to anomalous results so far as the companies
which have adopted Table A, for the section is not consonant with Regulation 42
of Table A which, as will be shown hereafter, applies to increase of capital
beyond the authorised limit. If the Legislature intended that section 105-C should
apply to all companies in the matter of increase of capital above the
authorised limit, then the simplest thing would have been to make Regulation 42
a compulsory regulation, instead of introducing a section which in its terms
differs from Regulation 42 and which therefore makes the position of companies
which have adopted Table A anomalous. It appears to me, therefore, for reasons
stated above, that section 105-C becomes applicable only when the directors
decide to increase capital within the authorised limit by the issue of further
shares. In this view of the matter that section is clearly applicable to the
facts of this case.
The next question is whether the directors
have, in the matter of issuing and offering further shares in the present case,
been guilty of any contravention of the provisions of this section. Learned
counsel for 54 428 the plaintiffs contends that they have, because they have
not offered the whole lot of shares to the shareholders in proportion to the
existing shares held by them. It is pointed out that although the directors
decided to issue 4,596 further shares they have only offered four shares to
every five shares held by the shareholders which works out at 4,323 1/5 shares
which leaves 272 4/5 shares in the hands of the directors which they have
reserved power unto themselves to dispose of in such manner as they think fit.
Learned Attorney-General appearing for the
company submits:
That section 105-C should be construed in the
light of Regulation 42 in Table A of the Indian Companies Act, 1913;
(b) That in order to prevent absurdity and to
give business efficacy to the section, the words "as nearly as
circumstances admit" should be read into the section; and (c) That in any
event the directors have not contravened the provisions of the section even if
the same be literally construed.
Each of these points requires serious
consideration.
As to the first point it should be remembered
that section 105-C was introduced in the Act only in 1936. There is no
counterpart of it in the English Act even now. Prior to 1936 there was no check
on the powers of the directors to issue blocks of shares, within the authorised
limit, to themselves or to their nominees, unless their powers were
circumscribed by the Articles of Association. One of the mischiefs of the
managing agency system which prevails in this country was that the managing
agents, who usually dominated the board of directors, could, to secure their
own position, induce the board to issue blocks of preference shares to the managing
agents or their nominees. To check this mischief section 105-C was introduced
in the Indian Act in 1936. As regards the increase of capital beyond 429 the
authorised limit it could only be done by the company.
The shareholders could, while sanctioning
such increase, protect themselves by giving special directions to the directors
as to the mode of disposal of the new shares.. In the model Regulations set
forth in Table A of the 1882 Act under the heading "Increase of
Capital" are grouped three Regulations 26 to 98. Regulation 27 was in the
following terms:
"(27) Subject to any directions to the
contrary that may be given by the meeting that sanctions the increase of
capital, all new shares shall be offered to the members in proportion to the
existing shares held by them, and such offer shall be made by notice specifying
the number of shares to which the member is entitled, and limiting a time
within which the offer, if not accepted, will be deemed to be declined, and
after the expiration of such time, or on the receipt of an intimation from the
member to whom such notice is given that he declines to accept the shares offered,
the directors may dispose of the same in such manner as they think most
beneficial to the company." In Table A of our present Act under the
heading "Alteration of Capital" are to be found three corresponding
Regulations 41 to 43. Regulation 42 is as follows:-"(42) Subject to any
direction to the contrary that may be given by the resolution sanctioning the
increase of share capital, all new shares shall, before issue, be offered to
such persons as at the date of the offer are entitled to receive notices from
the company of general meetings in proportion, as nearly as the circmustances
admit,. to the amount of the existing shares to which they are entitled.
The offer shall be made by notice specifying
the number of shares offered, and limiting a time within which the offer, if
not accepted, will be deemed to be declined, and after the expiration of that
time, or on the receipt of an intimation from the person to whom the offer is
made that he declines to acccpt the shares offered, the directors may dispose
430 of the same in such manner as they think most beneficial to the company.
The directors may likewise so dispose of any new shares which (by reason of the
ratio which the new shares bear to shares held by persons entitled to an offer
of new shares) cannot, in the opinion of the directors, be conveniently offered
under this article." The words underlined are new and are not to be found
in Regulation 27 of Table A of the 1882 Act. The scheme of the 1882 Act, as of
our present Act, and the language used in the two regulations quoted above
clearly indicate, to my mind, that they deal with that kind of increase of
share capital which involves an alteration of the conditions of the memorandum
which the company alone can do by issuing new shares. These Regulations do not
purport to deal with increase of capital which is within the competency of the
directors to decide upon. In that kind of increase of capital beyond the
authorised limits these regulations give the directors certain latitude,
subject, of course, to any directions to the contrary that may be given by the
resolution of the shareholders in general meeting sanctioning such increase.
The only difference between Regulation 27 of 1882 and Regulation 42 of our
present Act is that under the last mentioned Regulation, in the absence of any
direction to the contrary, the discretion of the directors has been widened by
the introduction of the words underlined above. This company was incorporated
in 1908 under the Act of 1882. It did not adopt the Regulations of Table A of
the 1882 Act but article 45 of its Articles of Association proceeds more or
less on the lines of Regulation 27 of Table A of the 1882 Act. The discretion
given to the directors under article 45 is, therefore, obviously narrower than
that left to the directors under Regulation 42 of Table A of the present Act.
Then came section 105C in 1936. As already
pointed out, that section deals with increase of capital within the authorised
limit which the directors can decide upon without reference to the shareholders
in a general meeting of the company. The legislature had before it both
Regulation 27 of Table 431 A of 1882 and Regulation 42 of Table A of the Act of
1913.
It chose to adopt the language of Regulation
27 in preference to that of Regulation 42. The absence in section 105-C of the
words I have underlined in Regulation 42 cannot but be regarded as deliberate.
And I can conceive of very good reasons for this departure. In the case of
increase beyond the authorised limit, that can be done only by the company in
general meeting and the shareholders can protect themselves by giving
directions to the contrary and, therefore, subject to such directions a wider
latitude may safely be given to the directors. But in the case of increase of
capital within the authorised limit which the directors may do without
reference to the shareholders the legislature did not think it safe to leave an
uncontrolled discretion to the directors. The mischief sought to be remedied
required this curtailing of the directors' discretion. In my judgment it is
impossible to construe section 105-C in the light of Regulation 42 for several reasons.
Regulation 42 and section 105-C do not cover the same field and cannot be said
to be in pari materia. The omission of the underlined words was obviously
deliberate. The difference in the language of the two provisions in the same
statute cannot be overlooked as merely accidental. And lastly the reading of
these words of Regulation 42 in section 105-C will frustrate what I conceive to
be the underlying reason for the introduction of the section. In my judgment
the first point urged by the learned Attorney-General which found favour with
the Courts below cannot be accepted.
The second point urged by the learned
Attorney General is founded on the supposed necessity of introducing the words
"as nearly as the circumstances admit" to avoid the absurdity which
may flow from a literal construction of section 105-C. It must be remembered
that the cardinal rule of interpretation of statutes is to construe its
provisions literally and grammatically giving the words their ordinary and
natural meaning. It is only when such a construction leads to an obvious
absurdity which. the legislature cannot be supposed to have intended that the
Court in 432 interpreting the section may introduce words to give effect to
what it conceives to be the true intention of the legislature. It is not any
and every inconvenience that justifies adoption of this extreme rule of
construction. The section literally construed is quite inteligible and may
easily be applied to many cases where the further shares issued bear a uniform
and round proportion. Merely because a literal construction of the section
leads to inconvenient result in a particular case cannot, in my opinion,
justify the application of such a drastic rule of construction as is urged by
the Attorney-General. Even in this case there would have been no inconvenience
if the directors decided for the issue of 4,053 shares which could have been
offered in the proportion of three shares to every four shares held by each
shareholder. It is true that ordinarily it is for the directors to judge as to
the exact amount of capital needed by the company but in arriving at their
decision they cannot overlook the limitations put upon their power by the
section with respect to the proportion in which the further shares are to be
offered by them to. the shareholders.
Further, the supposed inconvenience can be
easily avoided by a reference to the shareholders in a general meeting by
asking them to increase the share capital beyond the authorised limit to such
an amount as would permit proportionate disposal of the further and new shares.
In my opinion there is not sufficient force in the contention which should
induce the Court to depart from the ordinary and golden rule of interpretation
I have mentioned above.
The last point urged by the ]earned Attorney
General appears to me to be of substance. On a strictly literal construction of
the section the directors must perforce offer all the further shares to the
shareholders in proportion to their respective holdings. Section 105-C comes into
operation after the directors have decided to issue further shares. The section
does not in terms provide that such offer must be made all at once or at any
particular point of time and I see no reason to import any such requirement in
the section.
433 The underlying object of the section is
to effect equitable distribution of the further shares. Here the shares have
been offered in the proportion of four shares to every five shares. There can
be no suggestion of favouritism in this offer. Every shareholder will get his
proportion if he so desires. The majority will remain the majority if every one
takes up the shares offered to him. It is true that 272-4/5 shares remain in
hand. At best although issued they have not been offered to anyone. I dO not agree
that under clause 8 of the directors' resolution the directors can dispose of
those 272-4/5 shares in any manner they please before offering them
proportionately to the existing shareholders. That clause, on a true
construction of the resolution as a whole, covers only those shares which have
been actually issued but have not been applied for. In point of fact the
directors have not yet allotted any of these 272-4/5 shares. If and when the
directors allot these shares otherwise than in due course of law, i.e., without
offering them to the shareholders, the shareholders will then have cause for
complaint and may then come to Court for redress. It is said that 272-4/5
shares cannot in future be offered to so many shareholders in a reasonable
proportion. If it cannot be done, these odd shares will remain in hand until
the company at a general meeting decides to increase the share capital by
issuing new shares and then these odd shares together with new shares will be
easily capable of being offered to the shareholders proportionately. These
special considerations which arise in the case of this company by reason of its
own peculiar circumstances cannot, in my opinion, affect or alter the meaning
and effect of the section. From all that I can see, up to the present time,
there has been no contravention of the provisions of section 105-C. In my view
the directors have substantially complied with the requirements of the section
and the plaintiffs can have no grievance.
They rushed to Court prematurely.
For the reasons stated above, I am clearly of
opinion that the conclusions of the Courts below were 434 right and no ground
has been made out for interfering with the same. The result, therefore, is that
this appeal is dismissed with costs.
MUKHERJEA J.--I agree that this appeal should
be dismissed and I concur substantially in the reasons which have been given by
my learned brother Mr. Justice Das in his judgment.
Appear dismissed.
Agent for the Appellants: S.P. Varma.
Agent for the Respondents: Rajinder Narain.
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