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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 ..... tors 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 Rs. 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntly 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 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 bona 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 of 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 li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tle 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 conisder best in the interests of the company. (9)That the draft circular to the shareholders with the enclosures (Form A being the form of application, Form B form of renunciation, 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 chellenging this issue of further shares, principally on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 whole intent and purpose of the section was to limit the discretion of directors in regard to the issue 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section increases in the capital of a company whether within the authorized 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 authorized 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 authorized 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 issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 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 cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 anyone 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rai [1946] 73 IA 246. 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 lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 come 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 19th September, 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 8th January, 1945, an application was submitted by the company to the Examiner of Capital Issues for sanction for a fresh issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares 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: (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 105C 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 for registration so as to get their names put upon the register of members. It is clear that until the Singhania group get their names entered in the register of members, they are not shareholders but are complete strangers to the company. It has been held in Percival v. Wright [1902] 2 Ch. 421 that ordinarily the directors are not trustees for individual shareholders. Even if the directors owe some duty to the existing shareholders on the footing of there bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought to be founded were urged before the appeal Court by learned counsel for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the third sub-head 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 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 aggrandisement 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 [1864] 2 H. & M. 10. 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, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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, 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 [1903] 2 Ch. 506 was a motion for an interim injunction to restrain the holding of a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry 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 [1864] 2 H. & M. 10 and Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have pointed out, the Court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely the company and possibly the existing shareholders. If as between the directors and the company and existing shareholders there is no breach of trust or bad faith there can be 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 [1894] AC 654 at 660-661: "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 mains 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the company. It is said that section 105C 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 105C 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 105C was introduced in the Indian Act in 1936. As regards the increase of capital beyond the authorised limit it could only be done by the company. The shareholders c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 43 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 intelligible 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 3 shares to every 4 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decide 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, upto 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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