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TMI Blog1962 (3) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ed company. It was, however, converted into a public limited company in 1944. At the time of the original incorporation of the company a promoters' agreement was arrived at whereby the company agreed during its existence to pay a sum equal to 3⅛ % every year of its net profits to each of the four promoters. As a result of this agreement, the aggregate consideration payable every year to the promoters came to 12½% of the net profits of the company. Article 3 of the articles of association of the company justified the making of this agreement. In 1941, the company came into financial difficulties and in consequence, on the 22nd April, 1941, a tripartite agreement was arrived at between the company, M/s. Ardeshir Hormusji Bhiwandiwalla & Co., and the promoters. Under this agreement, it was agreed, inter alia, to appoint the said firm of Bhiwandiwalla & Co. or its nominee as the managing agents of the company for 10 years with an option to the company to extend the said period upon certain terms. At this time, the earlier agreement as to the payment of the promoters' commission was modified and the said commission payable to the promoters was reduced to 6¼ % and art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried the suit held that the defence raised by respondent No. 1 was well founded and that the agreement in question having become void and unenforceable under the relevant provisions of the Act, no declaration could be granted or no injunction could be issued in favour of the appellant as claimed by him. In the result, the appellant's suit was dismissed with costs. The appellant then preferred an appeal challenging the correctness of the decision of the trial court. The court of appeal, however, agreed with the view taken by the learned trial judge and dismissed the appeal preferred by the appellant. The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that he has come to this court by his present appeal. That is how the principal point which has been raised for our decision in the present appeal is about the construction of section 76(1) and (2). Mr. Sastri contends that in coming to the conclusion that the appellant's claim to enforce the agreement in question in respect of the profits made by respondent No. 1 is affected by section 76, the courts below have misconstrued the provisions of the said section. It is concede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the document in support of his argument that the latter agreement was not in consideration for the purchase of shares by the promoters. These recitals refer to the fact that the promoters had resigned their office and surrendered and renounced their rights to act as the managing director or managing directors of respondent No. 1 and it was in consideration of this fact that the agreement was made. We are not impressed by this argument. It is true that before this agreement was made, the new managing agents were appointed and that was no doubt the occasion for the making of the agreement. But the essential part of the new agreement was the reduction made in the commission payable to the promoters; for the rest, the earlier agreement continued and so, in determining the scope and nature of this latter agreement, we have inevitably to go back to the first agreement. As we have just pointed out, the operative clause in the agreement, in terms, refers to the earlier agreements between the respective parties and avers that instead of 12½% as provided by the said agreements, 6¼ % would hereafter be paid. Therefore, we are satisfied that the payment claimed by the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w is set by the English company law and the principles enunciated by English decisions in dealing with the corresponding provisions of the English company law should be followed when we are interpreting the provisions of the Indian company law. This argument proceeds on the assumption that the corresponding provision of the English company law permits the payment of commission for subscribing for shares out of the profits of the company without any limitation. It is, therefore, necessary to examine briefly this argument. The provision in the company law in regard to the payment of commission for subscribing for any shares was introduced in the English Companies Act in the form of an enabling provision in 1900 and it became necessary to make the said enabling provision because of an earlier decision of the House of Lords in Ooregum Gold Mining Co. of India Ltd. v . George Roper and Charles Henry Wallroth [1892] AC 125. In that case, the House of Lords had held that a company limited by shares, formed and registered under the Act of 1862, had no power to issue shares as fully paid up for a money consideration less than their nominal value. It appears that the memorandum of associati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any shares in the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the company, if the payment of the commission and the amount or rate per cent, of the commission paid or agreed to be paid are respectively authorised by the articles of association and disclosed in the prospectus, and the commission paid or agreed to be paid does not exceed the amount or rate so authorised." Sub-section (2) provided that: "Save as aforesaid no company shall apply for any of its shares or capital money either directly or indirectly in payment of any commission, discount, or allowance, to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the company, whether the shares or money be so applied by being added to the purchase money of any property acquired by the company or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase money or contract price, or otherwise." Sub-section (3) adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some other persons with an option to take further shares at par within a certain time. The appellant subscribed for shares, and the market price having risen to a premium, desired to take up the further shares. It was held: "that this was not an application of shares of capital money directly or indirectly in payment of commission, discount, or allowance within the meaning of the Companies Act, 1900, section 8, sub-section 2, and (the transaction being otherwise unobjectionable) that the appellant was entitled to exercise the option." It would be noticed that what the House of Lords was called upon to consider was whether an application made by the appellant for further shares offended against the provisions of section 8(2) of the English Act and the House of Lords held that it did not. It is true that the shareholder would have been able to sell his shares at a premium and thereby obtain a benefit, but the said benefit cannot be said to have been obtained by him at the expense of the company's capital. Thus, the application made by the appellant was outside the prohibition contained in section 8(2). In other words, this decision is directly a decision on the construction of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expressly forbidden by the section," It: is clear that this statement is somewhat cautious and not as unqualified as the statement in Gore-Browne's Handbook. In Palmer's Company Precedents it is observed that the provisions of section 53(2) of the Act of 1948 "leave a company at liberty to apply any of its 'profits' in paying commissions in accordance with the practice above referred to as existing before the Act of 1900" (page 179). In Palmer's Company Law, however, the position is stated somewhat differently. Referring to section 53(2), it is observed that: "if the words used are intended to restrict sub-section (1) so as to make it only lawful to pay commission out of the newly issued shares or capital money received for them, the payment of commission out of profits would appear to be prohibited by section 54 which prohibits a company to give any financial assistance in connection with, inter alia, the subscription of its own shares. If, on the other hand, sub-section (2) does not intend to restrict sub-section (1) but contains a separate and independent provision, the application of profits of the company within the limits of sub-section (1)(b) of section 53 would be permiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, if the payment of the commission is authorised by the articles and the commission paid for or agreed to be paid does not exceed the amount or rate so authorised and if the amount or rate per cent, of the commission paid or agreed to be paid is- (a)in the case of shares offered to the public for subscription, disclosed in the prospectus; or (b)in the case of shares not offered to the public for subscription, disclosed in the statement in lieu of prospectus, or in a statement in the prescribed form signed in like manner as a statement in lieu of prospectus and filed with the Registrar and, where a circular or notice, not being a prospectus inviting subscription for the shares is issued, also disclosed in that circular or notice. (2) Save as aforesaid and save as provided in section 105A, no company shall apply any of its shares or capital money either directly or indirectly in payment of any commission, discount or allowance, to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of the company, or procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procuring or agreeing to procure subscriptions, whether absolute or conditional, for any shares in, or debentures of, the company, whether the shares, debentures or money be so allotted or applied by being added to the puchase money of any property acquired by the company or to the contract price of any work to be executed for the company, or the money be paid out of the nominal purchase money or contract price, or otherwise." A comparison of the two sections will show that section 76 has made three departures from section 105 ; first, it begins by saying that "a company may pay a commission" and this expression has substituted the earlier expression "it shall be lawful for a company to pay commission." It is true that this change is not very significant; but it cannot be treated as of no significance at all and it may be that by adopting the present expression, the legislature wanted to indicate that section 76, unlike its predecessor section 105, was not intended to be merely an enabling provision- Then it would be noticed that the substantial part of section 105(1) has now been put more categorically and definitely in the form of conditions in section 76 and that may suggest t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (2) and it is to that problem that we must now turn. In construing section 76(1) and (2), it would be necessary to bear in mind the relevant rules of construction. The first rule of construction, which is elementary, is that the words used in the section must be given their plain grammatical meaning. Since we are dealing with two sub-sections of section 76, it is necessary that the said two sub-sections must be construed as a whole "each portion throwing light, if need be, on the rest." The two sub-sections must be read as parts of an integral whole and as being inter-dependent; an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy. If repugnancy cannot possibly be avoided, then a question may arise as to which of the two should prevail. But that question can arise only if repugnancy cannot be avoided. The important part in section 76(1) with which we are directly concerned is the one that provides that the commission paid or agreed to be paid does not exceed the limit therein prescribed. One of the conditions which has to be satisfied in the matter of payment of commission to a person subscribing for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a statement in lieu of prospectus and filed before the payment of the commission with the Registrar. In construing this clause, it may be useful to refer to section in of the Act of 1913. Under that section, particulars in case of commission on debentures had to be filed and it cannot be disputed that the said particulars would also refer to particulars of commission paid out of profits. Now that debentures have been brought under section 76, would it be unreasonable to assume that under the particulars required to be filed under condition (iii), particulars in regard to commission payable out of profits are also required to be filed ? In other words, the word "commission" used in clauses (i) and (iii) seems to refer to commission paid not only out of capital but also out of profits in relation to debentures. That incidentally supports the construction that the word "commission" used in clause (ii) cannot be confined only to the commission payable out of capital. Indeed, if section 76(1) is read by itself, there can be no doubt or difficulty in coming to the conclusion that commission there contemplated is commission payable both out of capital as well as profits. The argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 76(1) and subject to its provision. In other words, in order to clarify the position in regard to the devices which may be adopted to defeat the limit imposed by section 76(1), the legislature has provided by section 76(2) that these devices are also subject to section 76(1) and payments can be made under those garbs or devices, provided they do not exceed the limit prescribed by section 76(1). In our opinion, therefore, far from there being any conflict or repugnancy between section 76(1) and section 76(2) they constitute one integrated provision, one of the objects of which is to impose a limit on the payment of commission either in respect of shares or in respect of debentures. The anxiety to save the profits of the company is as much in evidence in section 76(1) as it is in other sections to which we have already referred. Mr. Sastri, however, contends that the proper way to read section 76(1) and (2) would be to treat section 76(2) as the main provision and section 76(1) as a proviso to it. His argument was that section 76(2) puts a blanket ban on the allotment of any shares or debentures or the application of any capital moneys and section 76(1) relaxes the ban by allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se contentions. Before we part with this subject, it would be relevant to state that in 1960, section 76(2) has been amended by section 22 of the Amending Act (No. 65 of 1960) and as a result of this amendment, the word "capital" has been deleted. It is common ground that after this amendment was effected, section 76(1) and (2) both refer to payment of commission out of profits as well as out of capital. As we have already seen, the whole of the argument urged by the appellant on the construction of section 76(2) was substantially based on the use of the expression "any of its capital moneys". The word "capital" having been deleted, the provision of section 76(2) is wide enough to include profits. Therefore, there can be no doubt that after 1960, the limit imposed on the payment of commission in respect of shares and debentures applies as much to commissions out of capital as to those which are paid out of profits. It may be permissible to assume that by the amendment made in 1960, the legislature has attempted to remove doubt that may have arisen owing to the use of the word "capital" in section 76(2) and has now made its intentions clear beyond any doubt. This amendment along wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Article 3 of the articles of association of the respondent company provided that it would enter into the aforesaid agreements with the promoters. In 1941, the respondent company was involved in financial difficulties and on April 22, 1941, a tripartite agreement was made between it and a firm called Ardeshir Harmusji Bhiwandiwalla and Co. and the promoters under which it was provided that the firm or its nominee would become the managing agent of the respondent company and the promoters all together would receive "6¼ percent, as promoters' commission instead of 12½ per cent, as provided in our respective agreements with the company", that is to say, the agreements of December 18, 1939. In terms of this agreement article 3 of the articles of association of the company was duly amended. An agreement was also specifically entered into by the respondent company with each of the promoters. In 1944, the respondent company was converted into a public limited company. On June 10, 1944, Kasturchand Srikrishan died and his interest under the agreements is now represented by respondents Nos. 7 to 10. Presumably, respondent No. 3 had taken the shares and entered into the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76 of the Companies Act of 1956 prohibited payment of commission for subscribing for shares beyond the limit specified out of capital only and as the agreements provided for payment of the commission out of profits, they were not affected by that section at all. The suit was contested by the respondent company but the other defendants supported the appellant's case. The respondent company contended that the section applied to payment of commission both out of capital as well as out of profits. The suit was heard in the first instance by S. T. Desai J. and was dismissed. An appeal to an appellate bench of the High Court was also dismissed. The present appeal is against the judgment of the appellate bench by special leave granted by this court. I shall have presently to refer to the provisions of section 76 but before doing so I think it necessary to refer to the previous state of the law. In England, prior to the Companies Act of 1900, there was no statutory provision concerning payment of commission for subscribing for shares and such a provision was first enacted by section 8 of that Companies Act. Even before the Act of 1900, however, the law was that anybody subscribing for s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2] AC 474,481. There a company had in consideration of a person taking up some of its shares entered into an agreement with him that he would have an option to take further shares at par within a certain time. A little later the price of the shares went up and the person then exercised his option. An action was thereupon brought by a shareholder to test the validity of this agreement, and it was held by the House of Lords that the agreement was valid. Lord Davey observed : "In this case the question is as to the powers of the company itself, and not as to the due exercise of the directors' powers. I have come to the conclusion from a consideration of the language of section 8, sub-section 2, that the prohibition therein contained extends only to the application, direct or indirect, of the company's capital in payment of a commission by the company, and the transaction impeached in this case is not within it. It is satisfactory to find that the conclusion to which I have come will not have the effect of extending the prohibition to transactions which were legitimate before the Act, and not, so far as I am aware, open to objection on any other ground." He also said referring to sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the right to pay commission for subscribing for shares by providing that the commission paid shall not exceed 10 per cent, of the price for which the shares were issued or the amount or rate authorised by the articles whichever was less. That restriction could not have effected a change in the law as it previously existed in England in regard to payment of commission out of profits. Now in our country section 105 of the Companies Act of 1913 for the first time introduced the provision corresponding to that contained in section 8 of the English Act of 1900. Both, therefore, on the general principles underlying company law, under which a company, except in cases where an express provision to the contrary is made, is free to deal with its profits in such manner as it likes and-on the authority of Hilder's case (supra) which in my view would be fully applicable to our Companies Act of 1913, a company in our country could enter into a valid agreement to pay any commission it liked out of its profits to any person for subscribing for shares in it. I may here add that section 105 of the Indian Companies Act, 1913, was in terms substantially the same as section 8 of the English Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law beyond what it explicitly declares, either in express terms or by clear implications, or, in other words, beyond the immediate scope and object of the statute. In all general matters outside those limits the law remains undisturbed. It is in the last degree improbable that the legislature would overthrow fundamental - principles, infringe rights, or depart from the general system of law, without expressing its intention with irresistible clearness, and to give any such effect to general words, simply because they have a meaning that would lead thereto when used in either their widest, their usual, or their natural sense, would be to give them a meaning other than that which was actually intended. General words and phrases, therefore, however wide and comprehensive they may be in their literal sense, must, usually, be construed as being limited to the actual objects of the Act." (Maxwell on Interpretation of Statutes, 10th edition, pages 81-82). I have earlier stated that under the Act of 1913 a company was free to pay any commission out of its profits it liked to persons subscribing for shares in it. I find nothing in sub-section (1) of section 76 to indicate that that rule of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was previously illegal. Payment of such commission out of profits had always been legal and there was no necessity for any statutory provision to make such payment legal or pass an enabling enactment in regard to it. It would follow that section 105 was not concerned with putting any restriction on a company's power to pay commission out of profits. Now sub-section (1) of section 76 of our Companies Act of 1956 uses instead of the words "it shall be lawful" the word "may". That however makes no difference. As has been stated in the passage in Craies which I have earlier read, both mean the same thing. They are both used in a statute to indicate that something may be done which prior to it could not be done. It would follow that section 76(1) of the Act of 1956 was intended to have the same effect as section 105(1) of the Act of 1913. namely, the legalising of a payment of commission out of capital which before the Act of 1913 was illegal and which became illegal on the repeal of that Act by the Act of 1956. That would be another reason for saying that section 76(1) of the Act of 1956 was not concerned with any payment of commission out of profits. I pass on now to sub-section (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not therefore seem to me to be well founded. Futhermore, the two sub-sections must be read together. Sub-section (2) contains a general prohibition of payment of commission out of capital and an exception to it is provided in sub-section (1). That seems to be the inevitable result of the words "save as aforesaid", that is, save as provided in sub-section (1), with which sub-section (3) opens. It necessarily follows that sub-section (1) contains an exception to the general prohibition of payment of commission out of the capital. It, therefore, has nothing to do with payment of commission out of profits. The other substantial feature in which section 76 of the Act of 1956 has departed from the provisions of section 105 of the Act of 1913, is by inclusion in the former of a provision for the payment of commission for subscribing for debentures. While section 105 dealt only with payment of commission for subscribing for shares, section 76 deals with payment of commission both for subscribing for shares as well as debentures. An argument was based on this innovation made in section 76. It was pointed out that in regard to debentures a company was before the Act of 1956 free to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment of commission for subscribing for shares freely out of profits. In regard to payment of commission out of capital for subscribing for shares, it was only an enabling section and not a restrictive one, though in regard to payment of commission for subscribing for debentures whether out of capital or out of profits, on the assumption that we have made, it would be a restrictive and exhaustive provision with no power to pay such commission except in accordance with its terms. In regard to payment of commission out of capital for subscribing for shares, the section being only an enabling provision, it cannot affect the pre-existing power to pay out of profits a commission for subscribing for shares. The fact that in regard to payment of commission for subscribing for debentures the section may have to be read as restrictive, that is, as containing exhaustively the power in regard thereto, is no reason for saying that it has the same effect in regard to payment of commission for subscribing for shares. The considerations applicable to the two cases are entirely different and the effect, therefore, of the section on them has to be different. For these reasons, in my opinion, secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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