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TMI Blog1948 (3) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... sult of his wanting to purchase shares was to shoot up the price of the shares considerably and the shares which were ordinarily quoted at ₹ 250 went up as much as to ₹ 2,000 in March 1945. The result at the end of December 1944 was that as against defendant No. 2's group, viz. Manecklal Premchand's group holding 2,397 shares, the Singhania group-and that is how I propose to call Sir Padampat Singhania's party-had 2,517 shares. 2. On September 18, 1944, a meeting of the board of directors was convened and the chairman drew attention to the serious situation that had arisen owing to the attempt of a group of persons to purchase the company's shares with a view to get the control of the management of the company and this board meeting decided to issue a circular to the company's shareholders acquainting them with the real facts. It was also decided to authorise the chairman to sign the circular and on the next day, September 19, a circular was issued to various shareholders drawing their attention to what was happening and requesting them to offer their shares if they wanted to sell them, in the first instance, to the chairman. On Januarys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The learned Judge who heard the suit decided against the plaintiffs on both these points and dismissed the suit. Hence this appeal. 4. The first question we have to consider is whether the issue of further shares by the first defendant company contravenes the provisions of Section 105(c) of the Indian Companies Act. The scheme of that section is fairly clear. It is left to the discretion of the directors to decide whether an increase in the capital of the company is necessary or not. It is also left to their discretion to determine at what particular point of time the capital should be increased. The only obligation cast upon the directors is that if new shares are issued, then they should be offered to the members in proportion to the existing shares held by each shareholder. The object obviously of the section there should be an equitable distribution of shares and that the holding of shares by each shareholder should not be affected by the issue of new shares. The section al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But whatever doubt there might be on the subject is entirely eliminated when one looks at Regulation 42 which forms part of sell. I of the Indian Companies Act. As is well-known, under Section 17 of the Act this schedule forms part of the articles of the company unless a company chooses to have its own set of articles. Certain regulations are compulsory and they are deemed to be included in the articles of a company whether in fact a company includes them or not, and one of the regulations which is not of a compulsory character is Regulation 42 and that regulation says: 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 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. Therefore, when the Legislature enacted a standard form of articles in order to provide for the regulation of a company, it enacted that in offering shares the proportion had to be maintained as near ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held by a shareholder. That is a totally wrong approach to the subject. It is not for the Court to decide how many new shares should be issued and to what extent the capital of a company should be increased. That is a matter entirely left to the discretion of the directors. As I said earlier, it is only when the issue has been resolved upon that the obligation is cast upon the directors to offer those shares in the particular manner indicated in Section 105(c). 9. It is then urged by Mr. Amin that the issue is illegal and invalid on the ground that the circular issued to the shareholders reserved the right to the directors to refuse to register any, nominee in whose favour a share or a fractional certificate offered might be renounced by the shareholder. Article 34 of the company's articles of association empowers the directors at any time in their absolute and uncontrolled discretion and without assigning any reason to decline to register any proposed transfer of shares, and Mr. Amin says that that power does not cover the case of a nominee applying to have his name registered as a shareholder of the company and Mr. Amin relies on a decision reported in Pool Shi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of maintaining their own control or retaining their own majority, then the Court would interfere and prevent the issue of new shares on the ground that the directors were guilty of a breach of faith towards the company of which they were the directors. But, if it was once established that the company was in need of additional funds and that the fresh issue was decided upon in order to make good those funds, then, whatever other motives might have actuated the directors, the Court will not interfere with the discretion exercised by the directors. However mixed the motives might be, if it is established that in fact the company was in need of funds, then it could not be said that the exercise of their fiduciary powers by the directors was not a bona fide exercise. 12. In this particular case it is urged and urged with considerable force that the reason which actuated the directors on February 21, 1945, in resolving to issue new shades was the 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 may be that one of the factors that weighed with the directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said earlier, once it is established that the company is in need of funds, then any extraneous consideration which might have weighed with the directors, even any selfish motive that might have weighed with them, is really irrelevant and cannot tilt the balance against the Court holding that the company being in need of funds the issue of new shares was fully justified. 13. Therefore, addressing myself to the main and only question, whether the company was in need of funds or not, it appears that when the company applied to the Examiner of Capital Issues on January 8, 1945, it gave seriatim the reasons which necessitated the issue of fresh capital. Four reasons were given for which the proposed issue was to be made. One was to promote and form, and to be interested in, and take hold and dispose of shares in other companies having objects similar to those of this company or doing insurance business of any kind or nature whatsoever, such as fire, marine, aerial, transit, accident, or any other kind of insurance. The second was for the purpose of operating the House Purchase Scheme specially for the benefit of the policy-holders of the company, and the third was to exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 18. A literal interpretation of that section would have required the directors in this case to offer to every shareholder 4596/5404th share for each share held by him. In order to avoid this result, it was urged by Mr. Amin for the appellants that the directors should have decided only to issue such a number of shares as would bear a convenient ratio to the shares already held. That argument to my mind is wholly untenable. Section 105(c) of the Indian Companies Act does not fetter the discretion of the directors with regard to the decision to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is not applicable to the first defendant company. They have in their own articles, Article 45, which provides for a similar contingency. But it does not follow therefrom that for the purpose of determining what is the true interpretation to be placed on Section 105(c) of the Companies Act the Court is not entitled to look at Article 42 in Table A. There may be cases in which both Section 105(c) and Article 42 in Table A apply; and the interpretation placed by this Court on Section 105(c) cannot be any different in those cases from the interpretation that we put upon it in this particular case. We have, therefore, to read Section 105(c) and Article 42 in Table A of the first schedule together; and it is our duty to reconcile them in so far as it may be possible. There is quite obviously one simple method of reconciling them; and that is that where Section 105(c) provides that the new shares shall be offered to the members in proportion to the existing shares held by each member, it contemplates that they shall be so offered as nearly as the circumstances admit, which are the words used in Article 42. If we read Section 105(c) in that manner, then no question of any inconvenience ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of these shares, if at all, vested under Article 45 in the company and not in the directors. That being so, there is no ground for holding that the directors acted mala fide in offering the shares to the existing shareholders in the proportion of 4:5, and we cannot interfere with their discretion in this matter. 21. Turning next to the second question which has been argued before us, the whole of this contention is based upon a decision of the Court of Chancery in Piercy v. S. Mills and Co. [1920] 1 Ch. 77. That was a somewhat gross case. The directors of a company there came to know that a majority of the shares of that company had been purchased by their manager and that the manager desired to become one of their co-directors. Thereupon the directors proceeded to allot certain shares to themselves and their friends with a view to convert the majority of the manager into a minority and thereby prevent him from becoming a director of the company. Under those circumstances, the Court of Chancery held that the power given to the directors enabling them to raise the capital was a fiduciary power and was to be exercised bona fide for the advantage of the company. The ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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