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TMI Blog1950 (5) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... .A. 69 OF 1949 - - - Dated:- 4-5-1950 - KANIA, MAHAJAN, MUKHERJEA AND DAS, JJ. N.P. Engineer, M.M. Desai and H.J. Umrigar for the Appellant. M.C. Setalvad and G.N. Joshi for the Respondent. JUDGMENT Kania, CJ. 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 ninety-six 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 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 acquaintin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained in the circular 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 to the 2nd 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors had not committed any 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 any one 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 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 nth 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 1908 as a limited company with an authorized capital of ten lakhs. 5,404 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res 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 be 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 intimatiom 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 gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 authorized limit or outside it. The third interpretation of the section find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 resul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shareholders who held shares in multiples of five and who owned 2,110 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 to a 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 sentence. 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 detrimen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 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 fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcised not in the interest 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 aggrandisement, 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 in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it cannot be held that they have not acted bona fide. As it has been said in Hirche v. Sims [1894] AC 654 , 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. Both the courts below have found as a 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 authorized crpital 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 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 18th September, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 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 the 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital merely 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 of 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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, was not ultra vires and illegal. Some of these facts on which the charge of mala fides was sought to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mala 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 for legitimate purposes, the fact that the directors utilised such need for purpose the 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. This leads me to a consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 wolly for the shareholders. I fully concur in the principle laid down in Foss v. Harbottle 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 preventin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 for the purpose of altering the rights of parties under the articles, I think I ought to interfere." Piercy v. S . Mills Co., Ltd. [1920] 1 Ch. 77 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 motive 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 shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to whom such notice is given that he declines to accept the shares offered, the driectors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 105C 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 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 4 shares to every 5 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: ( a )That section 105C sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Capital" are to be found 3 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 circumstances 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 accept the shares offered, the directors may dispose 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 articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 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 4 shares to every 5 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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