1950_0008_NANALAL_ZAVER_AND_ANOTHER_v_BOMBAY_LIFE_ASSURANCE_CO_LTDAND_OTHERS_04-05-1950

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IN SUPREME COURT OF INDIA Page 1 of 27

PETITIONER:
NANALAL ZAVER AND ANOTHER
Vs.
RESPONDENT:
BOMBAY LIFE ASSURANCE CO. LTD.AND OTHERS
DATE OF JUDGMENT:
04/05/1950
BENCH:
KANIA, HIRALAL J. (CJ)
BENCH:
KANIA, HIRALAL J. (CJ)
FAZAL ALI, SAIYID
SASTRI, M. PATANJALI
MAHAJAN, MEHR CHAND
DAS, SUDHI RANJAN
MUKHERJEA, B.K.
CITATION:
1950 AIR 172 1950 SCR 391
CITATOR INFO :
R 1964 SC 136 (11)
E&R 1981 SC1298 (64,109,110,111)
ACT:
MUKHERJEA and DAs, JJ.]
$
Indian Companies Act (VII of 1913), s.
105-C--Company--Outsider trying to get control of management
by purchasing shares --Issue of further shares--Offer of new
shares to existing share holders--Validity of resolution and
offer--Company in need of funds--Additional motive to
prevent outsider getting control--Bona fides of
resolution--Scope of 8. 105-C.
HEADNOTE:
A company was incorporated with a capital divided into
10,000 shares. After 5,404 shares had been subscribed, the
directors of the company, finding that a businessman who had
several other businesses and who was likely to use the funds
of this company for his own businesses, was trying to get
control of this company by purchasing its shares, resolved
to issue the remaining 4,596 shares and offered these shares
to the existing shareholders in the proportion of four new
shares for every five shares held by them. Two of the share-
holders of the company instituted a suit against the company
and the directors for the following reliefs: (i) a declara-
tion that the resolution of the directors and the offer of
shares contravened the provisions of section 105-C of the
Indian Companies Act, 1913, and was therefore ultra vires
and illegal; (ii) a declaration that the offer of shares
was not made bona fide or in the interests of the company
and was therefore illegal; and (iii) to restrain the defend-
ants from allotting any shares in pursuance of their offer:
Held per KANIA CI.J., MAHAJAN, MUKHERJEA and DAS JJ.-
that inasmuch as the shares resolved to be issued were
offered to the existing shareholders only, and not to any
outsider and these shares were also offered to the existing
shareholders in proportion to the shares held by each member
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without making any discrimination between them the two
requirements of section 105-C were complied with and the
resolution and offer did not contravene that section even
though 272 shares remained undistributed as a result of the
offer of four new shares for every five shares.
49-A
392
Held also per KANIA C.,J. MAHAJAN, MUKHERJEA and
DAS JJ.--that the fact that one of the motives of the direc-
tors in issuing further shares was to prevent an outsider
who had not yet become a shareholder, from getting
control of the company did not render the resolution or
the offer illegal inasmuch such a motive could not in
itself be said to be not in the interests of the company and
even assuming that such a motive was bad this additional
motive could not render the resolution and offer illegal as
the company was in fact in need of further funds and it was
necessary in the interests of the company to issue further
shares.
Judgment of the Bombay High Court affirmed.
JUDGMENT:
APPEAL from the High Court of Judicature at Bombay:
(Civil Appeal No. LXIX of 1949).
This was an appeal from the judgment and decree of the
High Court of Bombay dated 11th March, 1949, (Chagla C.J.
and Tendolkar J.) in Appeal No. 85 of 1947, confirming a
decree of the said High Court in its Original Jurisdiction
dated 10th November, 1947. The facts of the case and argu-
ments of the counsel arc set out in the judgment.
N.P. Engineer (M.M. Desai and H.J. Umrigar with him) for
the appellants.
M.C. Setalvad (G. N. Joshi with him) for respondents
Nos. 1 to 6 and 8 and 9.
1950. May 4. The Court delivered the following Judg-
ments:
KANIA C.J.--This is an appeal from the decision of the
High Court of Judicature at Bombay. The respondent company
was incorporated in 1908 with an authorised capital of Rs.
10 lakhs divided into 10,000 shares of Rs. 100 each. By
1945, 5,404 shares were subscribed and Rs. 25 per share were
called on each of them. Four thousand five hundred and
ninetysix shares out of the authorised capital thus remained
unissued. From about July, 1944, Mr. Padampat Singhania,
a businessman interested in many companies, began to
purchase shares of the company from the holders thereof on a
large scale. This naturally
393
put up the price of the shares considerably. On the 18th
September, 1944, at a board meeting of the directors the
chairman drew attention of his co-directors to the attempt
thus made by an outsider to corner the shares of the compa-
ny. In pursuance of a resolution passed at the meeting, the
chairman issued a circular to the existing shareholders
acquainting them of the true position and suggesting that if
they wanted to part with the shares they might get in touch
with the chairman. A circular was accordingly issued with
the result that two rival groups were thus offering to buy
shares from those who were desirous of selling them. The
shares on which about Rs. 12 or 14 were paid per annum as
dividend began to be quoted in the market at about Rs. 2,000
per share in March, 1945. Mr. Singhania had not submitted
to the company for registration of the transfers to his
name the shares purchased by him. In the meantime on the
8th January, 1945, an application was submitted by the
company to the Examiner of Capital Issues for sanction of a
fresh issue of capital. Several reasons were mentioned in
that application to show why the company required additional
capital. Such application had become necessary owing to war
regulations. The Government granted the sanction on the
16th February, 1945, and the communication was received by
the company on the 20th of February. On the next day a
board meeting was held at which the directors decided to
issue the remaining 4,596 shares at a premium of Rs. 75 per
share and to call Rs. 25 per share on them. Pursuant to this
resolution a circular was issued to the shareholders on the
same day with copies of the form of application and renunci-
ation referred to in the resolution and in the circular.
The shares were offered to the shareholders shown on the
register of members in the ’proportion of four further
shares for every five shares held by them. The last date
for submission of the application and payment was 10th
March, 1945. The directors and their friends in the next few
days applied and were allotted 1,648 shares. By the 6th, of
March, 1945, 2,204 shares were allotted to shareholders who
had applied for the same.
394
The appellants are two shareholders of the company.
They filed the suit, out of which this present appeal has
arisen, "for themselves and all other aggrieved sharehold-
ers of the company." The defendants are the company and
eight directors. It is contended in the plaint that the
whole issue of these further shares and the idea of increas-
ing the capital of the company was mala fide and with the
object of retaining the control and management of the compa-
ny in the hands of defendants 2 to 9. It is further con-
tended that the resolution of the directors and the offer of
shares contained in the circuluar letter were in contraven-
tion 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 con-
tended that the company was not in need of capital and the
issue of further shares was not made bona fide for the
benefit or in the interest of the company but had been made
"merely with the object of retaining or securing the second
defendant and his friends the control of the first defendant
company."
Considerable evidence was led in the trial Court on the
question of bona fides. The trial Court held that the issue
of new shares was bona fide and the appellate Court has also
come to the conclusion that the object of the directors in
issuing the new shares was not merely with the object of
retaining or securing to the second defendant and his
friends the control of the first defendant company. They
held that the company was in need of capital. The suit was
consequently dismissed and that decision was affirmed by the
High Court on appeal.
The decision of the appellate Court has been challenged
before us on both grounds. The learned counsel appearing
for the appellants did not contest the concurrent finding of
fact of both the lower Courts to the effect that the company
was in need of capital. It was however urged on their behalf
that as the issue of these shares, although not admitted in
the written
395
statement but admitted in the course of evidence, was for
the purpose of preventing the control of the company going
in the hands of Mr. Singhania, the directors had not acted
bonn’ fide and solely in the interest of the company. I
have read the judgment prepared by Das J. and I agree with
his conclusion and line of reasoning on this part of the
case. In my opinion, the contention of the appellants on
this point was rightly rejected by both the lower Courts and
that contention must fail.
That leaves the question whether the issue of these
shares was in contravention of section 105-C of the Indian
Companies Act. That section runs as follows:-
" Where the directors decide to increase the capital
of the company by the issue of further shares such shares
shall be offered to the members in proportion to the exist-
ing 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 of-
fered, the directors may dispose of the same in such manner
as they think most beneficial to the company."
On behalf of the respondents three answers were submit-
ted. The first was that the section deals with the case of
increase of capital by the directors beyond the authorised
limit and as in the present case the new shares were issued
within the authorized limit of capital, the section has no
application. The second was that the terms of the section
should be construed in a practical way and there was no
difference between Regulation 42 in Table A of the Companies
Act and section 105-C in respect of the scheme to offer the
proportion of shares to the existing shareholders. It was
argued that so long as they were offered "as nearly as
circumstances admit" the directors had complied with the
requirements of the section and therefore their action was
not illegal. The third answer was that in fact the direc-
tors had not committed any
50
396
breach of the terms of section 105-C up to now and therefore
their action cannot be held to be illegal. In view of my
conclusion on the third point it is not necessary to ex-
press any opinion on the first two answers submitted on
behalf of the respondents. It seems to me that section
105-C, interpreted strictly as contended by the appellants,
casts on the directors two obligations. They have to offer
the shares issued to the shareholders on the register of the
company and not to anyone else, and secondly, the offer must
be in the same proportion to all the shareholders and there
should be no discrimination amongst them. It is not con-
tended that by the offer made by the directors to the share-
holders there has been any discrimination amongst the share-
holders on the register of the company. It was contended on
behalf of the appellant that the directors had failed to
offer all the shares resolved to be issued by them to the
existing shareholders and therefore the requirements of the
section had not been complied with. It was argued that the
directors having resolved to issue 4,596 shares, they had to
offer that whole lot at once to the shareholders on the
register and the result of the offer made by them was to
retain in their hands 272-4/5 shares. In my opinion, this
contention is unsound. By their resolution of the 21st
February, 1945, the directors resolved to issue 4,596 shares
out of the authorized capital of the company. They have
offered shares to the existing shareholders in the propor-
tion of four new shares to five shares held by them. Inas-
much 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 appel-
lants. I find nothing in the section to justify the conclu-
sion that the directors must offer all the shares resolved
to be issued in one lot to the shareholders. I can Conceive
of. numerous cases where a limited company with a growing
business does not
397
require its capital to be called up at once. For instance,
soon after a company is formed it may issue shares of, say a
lakh of rupees required for the construction of the build-
ings, and after a year when it requires further capital for
payment of machinery etc. it can issue further shares. I
do not think the section as worded prevents the directors
from issuing shares to existing shareholders from time to
time in that way. As noticed before, the object of the
section is to prevent discrimination amongst shareholders
and prevent the directors from offering shares to outsiders
before -they are offered to the shareholders. So long as
these two requirements are complied with, the action of
the directors in selecting the time when they will issue the
shares as also the proportion in which they should be issued
is a matter left to their discretion and it is not the
province.of the Court to interfere with the exercise of that
discretion. This is of course subject to the general excep-
tion that the directors are not to act against the interest
of the company or mala fide. No such question arises in this
case and therefore it is unnecessary to discuss that aspect
of the situation. In my opinion therefore on this third
ground this contention of the appellants should be rejected.
The appeal therefore fails and is dismissed with costs.
MAHAJAN J.--This is an appeal by special leave from the
judgment and decree of the High Court of Judicature at
Bombay (Chagla C.J. and Tendolkar J.) dated 11th March,
1948, confirming the judgment of the said High Court in
its Original Jurisdiction (Bhagwati J.) dated 10th November,
1947.
The two questions canvassed in this appeal are: (1)
whether the issue of further shares by the directors was in
contravention of the provisions of section 105-C of the
Indian Companies Act, and (2) whether this issue was not
made bona fide. Both these questions were answered in
favour of the respondents by the High Court.
The Bombay Life Assurance Co. Ltd., the first defendant
in the case, was incorporated in the year
398
1908 as a limited company with an authorized capital of ten
lakhs. Five thousand four hundred and four shares had been
issued till the year 1945 and they were paid up to Rs. 25
each. The second defendant is the chairman of the board of
directors which is comprised of defendants 2 to 9. The
company has a life fund of Rs. 230 lakhs.
In the year 1944 Sir Padampat Singhania, an industrial-
ist 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 ordi-
narily quoted at 250 went up as much as to 2,000 in March,
1945. A circular was issued by the directors to the share-
holders 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 chair-
man. 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 Singha-
nia group had purchased 2,517 shares as against 2,397 held
by Maneklal Premchand’s party. The Singhania group had thus
acquired a majority of the shares in the company though
these had not yet been transferred in their name. On 8th
January, 1945, the chairman at his own instance and after
consulting some of the directors made an application to the
Examiner of Capital Issues for permission for a fresh issue
of capital. This was allowed on 20th February, 1945. As
soon as sanction of the Examiner of Capital Issues was
obtained for increasing the capital of the company, a meet-
ing of the directors was held on 21st February, 1945, and it
adopted the following resolution :--
1. That the capital of the company be increased from
Rs. 5,40,400 to Rs. 10,00,000 by the issue of the
399
remaining 4,596 ordinary shares of Rs. lOO each at a premium
of Rs. 75 per share.
2. That as on the existing shares of Rs. 100 each Rs.
25 is paid up, to call Rs. 22 per, share on these new shares
also.
3. That these new.shares shall rank pari passu in all
respects with the existing shares of the company, but they
shall be entitled to rank for dividend as from 1st April,
1945.
4. That these new shares shall be offered in the first
instance by a circular to the shareholders of the company as
shown on the register of members on 20th February, 1945, in
the proportion of four new shares to every five shares held
by them in the capital of the company on that date.
5. That in the case of any shareholder holding less
than five shares or whose holding of shares shall not be
complete multiples of five shares, then fractional certifi-
cates shall be issued to such shareholders in respect of
their rights for fraction of a share, each fractional cer-
tificate representing one-fifth of a share.
6. That a sum of Rs. 100 per share (Rs. 25 towards
capital and Rs. 75 for premium) shall be payable along with
application for these new shares.
7. That all applications for shares in accordance with
this offer (including applications for shares made in re-
spect 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 certifi-
cates not presented as required on or before
10th March, 1945, will cease to have any validity and will
not entitle the holder to any rights.
8. That any balance of the shares remaining out of this
issue not applied for by the: 10th March, 1945, shall be
disposed of by the directors as they may consider best in
the interests of the company.
400
That the draft circular to the shareholders with the
enclosures (form A being the form of application, form B
form of renunciation and form. of fractional certificates
with application form) placed on the table by the manager
and actuary be approved and initialled by the chairman.
10. That the manager and actuary be and is hereby
directed to issue forthwith the necessary circulars to the
shareholders.
11. That a committee consisting of the chairman and any
one of the directors or the chairman and any two of the
directors be and are hereby appointed to scrutinise the
application for the new shares which may be received and to
make allotment of these new shares.................."
It is the validity of this resolution ’that is the sub-
ject matter of the present dispute. The plaintiffs, who are
two shareholders of the company owing allegiance to the
Singhania group, filed the suit out of which this appeal
arises challenging this issue of further shares, principally
on two grounds, viz. (1) that the new issue contravenes the
provisions of section 105-C of the Indian Companies Act, and
(2) that the issue of shareswas not bona fide made in the
interests or for the benefit of the first defendant company,
but was resolved upon merely with the object of retaining or
securing to the second defendant and his friends control of
the first defendant company. As already stated, both these
contentions were negatived by the trial Judge and the suit
was dismissed and this decision was affirmed on appeal.
The answer to the first question depends on the meaning
to be given to the words used in section 105-C of the Indian
Companies Act as to its scope. The section was introduced in
the Indian Companies Act in the year 1936. Antecedent to
this period the question of issue of new shares by the
directors was dealt with by article 42 of the Articles of
Association given in the schedule to the Indian Companies
Act, 1913. The article was in these terms :--
"Subject to any directions to the contrary that. may be
given by the resolution sanctioning the
401
increase of share capital, all new shares shall, before
issue, be offered to such persons as at the date of the
offer are entitled to receive notice from the company of
general meetings in proportion, as nearly as the circum-
stances admit, to the amount of the existing shares to which
they are entitled."
As its language indicates, the article only applied to
cases where the capital of the company was increased by a
resolution of the company. It had no application to cases
where the directors issued further shares within the autho-
rised limits. The new section introduced in 1936 is in
these terms :--
"Where the directors decide to increase the capital of
the company by the issue of further shares such shares shall
be offered to the members in proportion to the existing
shares held by each member (irrespective of class) and such
offer shall be made by notice specifying the number ’of
shares to which the member is entitled, and limiting a time
within which the offer, if not accepted will be deemed to be
declined, and after the expiration of such time or on re-
ceipt of an intimation from the member to whom such notice
is given that ’he declines to accept the shares offered, the
directors may dispose of the :same in such manner as they
think most beneficial to the company."
It qualifies the discretion of the directors in the
matter of issue of capital by enjoining on them that if they
decide to issue further shares, the existing shareholders
should be given the first option to buy’ them. The language
employed in the section admits of three possible interpreta-
tions: (1) that its scope is limited to cases where there is
an increase in the capital of the company according to the
provisions of section 50; (2) that the section covers within
its ambit all issue of further capital whether made by
increasing the nominal capital or by issuing further shares
within the authorised capital; (3) that the section has
application only to cases where the directors issue further
shares within the authorized limit.
The learned counsel for the respondents contended that
the Who1e intent an d purpose of ’the section was to limit
the discretion of directors in regard to the issue
402
of further shares in those cases alone where there was an
increase in the nominal capital of the company by recourse
to the provisions of section 50 of the Indian Companies Act.
It was argued that the phrase "increase of capital" has been
employed by the legislature in section 50 and some other
sections preceding section 105-C with reference only to the
nominal capital of a company and that this expression had
not been used with reference to the subscribed capital
anywhere in the Act and therefore the scope of section 105-C
should be limited to cases where the increase in the capital
is. brought about under section 50 of the Act and new shares
are created and issued by the directors. In Sircar and
Sen’s Indian Companies Act, 1937 Edn. at page 309 the
learned authors observe as follows :--
"The words ’further shares’ must be read in conjunction
with the words ’decide to increase the capital of the compa-
ny.’ They must mean shares which are issued for the purpose
of Increasing the capital beyond the authorized capital."
Mr. Ghosh on Indian Company Law, 8th Edn. at page 263
has stated as follows :--
"The object of this new section appears to be to make
the salient provisions of Regulation 42 in Table A. , com-
pulsory. The section as drafted is liable to the construc-
tion that whenever the directors decide to increase the
capital of the company by the issue of further shares, even
if it be a part of the authorized capital, the new shares
must be first offered to theexisting shareholders. But this
section should be read in conjunction with clause (a) of
section 50 under subsection (2) of which the directors have
no power to increase the share capital of the company.
Therefore it seems that the words ’further shares’ mean
shares. beyond the authorized capital of the company."
Whatever might be the opinion expressed by these commen-
tators, 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 inter-
pretation of the.
403
section its scope could not be limited only to cases of
issue of further shares by creation of new shares by in-
creasing 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 "fur-
ther shares" used in the section and suggested that these
words have been used advisedly instead of the expression
"new shares" in order to bring within the scope of the
section increases in the capital of a company whether within
the authorised limit or outside it.
The third interpretation of the section finds support
from the language employed by the legislature in the opening
part of the section, wherein it is said: "Where the direc-
tors decide to increase the capital of the company by the
issue of further shares....... "The directors can only
decide to increase the capital at their own initiative when
they issue further shares out of the authorised capital. In
no other case can the directors themselves decide as to the
increase in the capital of a company. Under section 50 the
capital can only be increased by a resolution of the compa-
ny. Once the company has increased the nominal capital,
then the directors can issue shares within the new limit.
Therefore the authority of the directors, strictly speaking,
in respect to the increase of capital is limited to an
increase within the authorised limit. They cannot by their
own decision increase the nominal capital of the company.
In view of this language the third interpretation of the
section seems more plausible.
The expression "capital of a company" is an ambiguous
phrase and may mean either issued capital or authorized
capital according to the context. It has been used in
different senses in various parts of the Act. In what sense
it has been used in this section is by no means an easy
matter to decide, particularly in view Of the fact that in
spite of the introduction of this section in the Indian
Companies Act in the year 1936, article42 still remains as
one of the articles to be adopted by companies if they do
not choose otherwise
404
and this refers to cases of increase in the nominal capital
of a company. In my opinion, for the purpose of deciding
the present case it is not necessary to pronounce on the
question as to the precise scope of the section because I
consider that on any interpretation of it the appellants’
contention has to be negatived. If the interpretation sug-
gested by the learned counsel for the respondents is accept-
ed, then the plaintiffs’ contention on the first question
fails, because here there has been no increase in the capi-
tal of the company under section 50. Conceding however for
the sake of argument (but not deciding) that the scope of
the section is as it has been contended for by Sir Noshir-
wan, the question still remains "To what extent has there
been a contravention of its provisions by the directors in
the present case." So far as I have been able to see, the
resolution passed by the directors is in accordance with the
provisions of the section and does not injuriously affect
the shareholders or the company, and they cannot be said to
have any cause of grievance against it. In other words, in
my opinion, the resolution substantially complies with the
provisions of section 105-C of the Indian Companies Act.
The directors offered all the new shares to the shareholders
in the ratio of 4 to 5, as the shares of the company were
held in multiples of five to a larger extent than in any
other multiple. The result of fixing this ratio is that 272
shares remain outside the offer. In whatever other propor-
tion the shares were offered, still a few shares were bound
to remain unoffered. If a liberal interpretation is placed
on the section, then it has to be held that the directors’
resolution substantially complies with its provisions. On
the other hand, if a technical and literal interpretation is
placed on the section, then the directors were bound to
offer the shares in the ratio of 4596/5404 in spite of the
practical difficulties that might result in the actual
working out of such a proportion, and irrespective also of
whatever absurdities or anomalies might thus result. I am of
the opinion that the section has to be given a workable
construction and a construction that is businesslike in
preference to a literal construction which might lead to a
deadlock. In each
405
case it should be seen whether the directors have substan-
tially 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 reso-
lution passed by the directors has contravened the provi-
sions of section 105-C and has caused any detriment or
injury either to the company or to the shareholders. Even if
the resolution passed by the directors is held to be in
technical breach of the section, as it has caused no injury
to anybody, the resolution cannot be held to be void. Under
the law as it existed prior to 1936, if a company incorpo-
rated in its Articles of Association article 42 mentioned in
the schedule to the Indian Companies Act, then in the case
of issue of new shares the directors’ discretion was cur-
tailed inasmuch as they were bound to offer these shares in
the first instance in proportion as nearly as the circum-
stances admitted to the amount of the existing shares to the
existing shareholders but in all other cases their discre-
tion remained unfettered. It was open to a company not to
adopt article 42 and thus fetter the discretion of the
directors even in the case of the issue of new capital.
After 1936 it has been made obligatory on the directors to
give the first option to buy further shares to the existing
shareholders and without any favour to anyone. That being
the intent and purpose of the section, it has been fully
carried out by the directors in the present instance and has
been carried out in a businesslike way because the ratio in
which they offered the shares is the ratio which works to
the convenience of the largest number of shareholders as the
shares of the company are held mostly in multiples of five.
If the shares were issued in any other ratio, that would
have created some difficulty in the way of shareholders who
held shares in multiples of five and who owned 2,110
406
shares. They would have been obliged to collect fractions
before they could claim a whole share and thus make an
application within the time allowed to exercise the option.
Where the language of a statute in its Ordinary meaning and
grammatical construction leads manifest contradiction of
the apparent purpose of the enactment, or to some inconven-
ience or absurdity, hardship or injustice, presumably not
intended, a construction may be put upon it which modifies
the meaning of the words, and even the structure of the
sencence. In my opinion, the section when it says "such
shares shall be offered to the members" should be construed
liberally and not literally, as such an interpretation would
make the section workable and would not in any way affect
its intent and purpose, the phrase "such shares" meaning
those shares which admit of being so offered in a business-
like way.
It was argued that a liberal interpretation of the
section would result in the directors allotting the balance
of shares remaining out of the further shares unoffered to
their own friends and relations and it would operate to the
detriment of the other shareholders. In this connection
reference was made to para 8 of the resolution above men-
tioned. 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 applica-
tion was made in respect of them. It was not disputed that
the directors in the present case had not sold these shares
to any one and that these have remained unissued. It was
urged strongly by the learned counsel for the appellants
that the section being imperative and its language being
unambiguous, the Court was bound to place a literal inter-
pretation on it and the argument of hardship or inconven-
ience should not weigh with it. It was further suggested
that the directors could always give effect to the provi-
sions of the section by increasing the capital in a manner
and to the extent that the further shares
407
could be offered to the shareholders in such a proportion
that all the shares offered could be taken up them. In other
words, it was contended that the section not only fetters
the powers of the directors in the matter of sale of shares
but it also restricts their discretion in the matter of
increase of capital and as to the number of further shares.
This contention, if accepted, would mean that the legisla-
ture by enacting section 105-C indirectly enjoined on the
directors that whenever they decide to increase capital by
issue of further shares they should make the increase only
to such an extent and in a manner as to enable the existing
shareholders to take the whole of it. If that was the
intention of the section, there was nothing easier for the
legislature to say so. The section, on the other hand,
recognizes that the directors have a discretion in the
matter of the increase of capital when it says, "when the
directors decide to increase the capital of a company." It
means that it is within their absolute discretion to take
the decision whether to increase the capital or not. It is
also within their discretion to say to what limit and to
what extent they will increase the capital. It is also for
them to decide how many shares and of what value they will
issue. Once they have taken their decision, it is then and
then only that section 105-C comes into operation. At that
stage they have to offer the new shares to the shareholders
and at that stage they can offer them in a businesslike
manner to all of them equitably and equally and if out of
the shares offered some cannot be taken up by the sharehold-
ers as they do not fit in the ratio in which the offer has
been made, the only result is that those shares remain
unoffered and thus unissued. I am therefore of the opinion
that the learned Judges of the Court of appeal were right
when they held that under section 105-C the shares have to
be offered to the existing shareholders as nearly as the
circumstances would admit and that the section has to be
given a businesslike construction and should be construed
liberally and that the charge of contravention of section
105-C cannot be levelled against the directors so long as
they have not disposed of the unoffered balance contrary to
408
the provisions of the section. The result is that the first
contention of the learned counsel stands negatived.
The next question whether the action of the directors in
passing the resolution was not bona fide seems to be con-
cluded by concurrent findings of fact of the Courts below to
the effect that the resolution was passed because the compa-
ny needed additional funds at the moment when the new issue
was decided upon and that the issue of shares was not due
solely to the desire on the part of the directors to keep
themselves in the saddle.
It is not the practice of this Court ordinarily to
interfere with concurrent conclusions on questions of fact
reached in the Courts below unless those conclusions have
been reached on extraneous considerations or by violating
rules of procedure or by committing any breach of some
provision of law: vide Srimati Bibhabati Devi v. Kumar
Ramendra Narayan Roy (1) The learned counsel for the appel-
lants while conceding. that it was not open to him to chal-
lenge concurrent findings of fact of the Courts below, urged
that the whole case has been looked at by them from an
erroneous angle. It was contended that the Courts below had
misdirected themselves in their approach to the decision of
the issue of bona fides. In this connection emphasis was
laid on the following observations in the judgment of the
learned Chief Justice and on similar observations occurring
elsewhere :--
"In this particular case it is urged and urged with
considerable force that the reason which actuated the’
directors on the 21st February, 1945, in resolving to issue
new shares was the fear that the Singhsnia group, would
capture the company and oust the present directors from
their vantage point and take control of the company itself.
It may be that one of the factors that weighed with the
directors was that consideration. It may even be that it
weighed with them a great deal. It may also be that the
directors selected this particular time viz. the 21st Febru-
ary, 1945, for the issue of’ these shares because of the
impending danger of the--’
73 I.A-. 246.
409
majority of shares going into the hands of the Singhania
group with the necessary consequences. If, with all that,
it is established before the Court that in fact on the 21st
February, 1945, the company was in need of funds, that the
funds were required for the working of the company, then the
Court will not interfere with the discretion exercised by
the directors, because the principle is obvious that if the
new shares have been issued because the company needs funds,
then it cannot be said that the discretion vested in the
directors has been exercised not in the interests of the
company or for the purpose of the company. It is only when
that discretion is exercised solely for the personal ends of
directors, for their personal 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 this case that the answer to that
question must be in the affirmative. If that be the posi-
tion all other considerations can be of no avail or of very
little avail as against this central fact in this case and
as I am satisfied as to the central fact, I would agree with
the learned Judge who took the same view and came to the
conclusion that the plaintiffs have failed to discharge the
burden which lay upon them of establishing that the issue of
new shares was not bona fide and not in the interests of and
for the benefit of the company."
It was argued that the learned Judges were not right in
thinking that all other considerations were of
410
no avail and should be practically kept out of consideration
once it was established that the company needed funds. It
was said that it having been found that at the time of the
aforesaid resolution the directors were considerably influ-
enced by the consideration of keeping out the Singhania
group from capturing the company, and by the consideration
of keeping themselves in the saddle, it should have been
held that they were acting with an ulterior motive, and that
their decision as to the need of the company for further
funds was vitiated by reason of the ulterior motive.
It is convenient here to state what the true approach
should be to a question of this nature when it arises in a
case. It is well settled that in exercising their powers
whether general or special, the directors, must always bear
in mind that they hold a fiduciary position and must exer-
cise their powers for the benefit of the company and for
that alone and that the Court can intervene to prevent the
abuse of a power whenever such abuse is held proved, but it
is equally settled that where directors have a discretion
and are bona fide acting in the exercise of it, it is not
the habit of the Court to interfere with them. When the
company is in no need of further capital, directors are not
entitled to use their power of issuing shares merely for the
purpose of maintaining themselves and their friends in
management over the affairs of the company, or merely for
the purpose of defeating the wishes of the existing majority
of shareholders.
It appears to me that the learned Judges in the Court
below approached the decision of this question in the light
of the principles stated above and the contention of the
learned counsel therefore does not seem right. Where the
directors are not chargeablefor breach of trust so far as
the company is concerned and where their action is for the
benefit of the company, then merely because in promoting the
interests of the company they also promote their own inter-
ests. it cannot be held that they have not acted bona )fide.
As it has been said in Hirsche v. Sims (1), if the true
effect of the whole evidence is that the defendants truly’
(1) (1894) A.C. 654.
411
and reasonably believed at the time that what they did was
for the interest of the company, they are not chargeable
with dolus malus or breach of trust merely because in pro-
moting the interest of the company they were also promoting
their own, or because they afterwards sold shares at prices
which gave them large profits.
Both the Courts below have as fact that to a certain
extent in resolving to issue new shares the directors were
actuated by a fear that the Singhania group would capture
the company and oust the present directors from their
vantage point and take control of the company itself. It
was argued that this motive was an ulterior motive and the
exercise of power by the directors to achieve this objec-
tive by the issue of further shares was an exercise of
power for the purpose for which it was not conferred. This
argument would have had force if this was the main purpose
of the directors in issuing the further shares, but this
is not the case here. As found by the High Court, the
central fact working in the mind of the directors was the
necessity of further funds for the company at the moment
they passed the resolution. That being so, it seems to me
that the existence of the other motive does not make the
action of the directors in respect of the issue of further
shares mala fide.
Moreover, in the present case it seems to me that the
directors were on the defensive. They felt that the
attempt of the Singhanias to capture the controlling inter-
est 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 sharehold-
ers about it. They first attempted to enter into the
field of competition with the Singhanias but it seems that
they were not wholly successful in their objective. They
then decided to issue further capital by taking into
consideration the
53
412
interest and the needs of the company and ifs requirements
in respect of capital at the moment. They also thought
that by this action they would also be able to keep out
the Singhanias from capturing the company. They were under
no obligation to Singhanias who had not yet even been en-
tered as shareholders on the register of shareholders. There
was no dolus malus in their mind as directors of the compa-
ny, as affecting the company or its shareholders. On the
other hand, they honestly considered it to be in the best
interests of the company to meet such an attack. The re-
sult- therefore is that it cannot be held that this is one
of those unusual cases where this Court should not give
weight to the concurrent findings of fact by the Courts
below, or that it is a case where it can be held that the
High Court in arriving at its findings has committed a
breach of any rule of procedure or law and that there is no
evidence to support the findings that have been arrived at.
The result therefore is that this appeal fails and is
dismissed with costs.
DAS J.--I agree that this appeal must be dismissed. As,
however, my decision rests on slightly different reasons, I
desire to state them in my judgment.
For the purpose of appreciating the questions involved
in this appeal which has been brought by the plaintiffs it
will suffice to set out the following facts.
The Bombay Life Assurance Company, Ltd. (hereinafter
referred to as "the company")was incorporated in 1908 with
an authorised capital of Rs. 10,00,000 divided into 10,000
shares of Rs. 100 each. By 1945, 5,404 shares in all were
subscribed, and Rs. 25 per share had been paid on them.
This left 4,596 shares out of the total authorised capital
yet to be issued. The plaintiffs are two of the shareholders
of the company. Respondents 2 to 9 are the directors of the
company of whom respondent 2 is the chairman of the board of
directors. It appears that
413
from July, 1944, shares in the company began to be purchased
from the holders thereof by or in the interest of Sri
Padampat Singhania. This attempt to buy up the shares on a
large scale naturally resulted in a sudden rise in the price
of the shares. This abnormal rise in the price could not
but attract the attention of the board of directors. On
September 18, 1944, a board meeting was held at which the
chairman drew the attention of his co-directors to the
serious implications of the attempt of an outsider group to
corner the shares of the company. It was decided at that
meeting that a circular should be issued to the Shareholders
acquainting them of the true position and the chairman was
authorised to sign the circular. Accordingly, on September
19, 1944, a circular was issued to the shareholders drawing
their attention to what was happening and exhorting.them, in
case they -wanted to dispose of their holdings, to offer
them to the chairman. The result of the chairman and other
directors entering the arena was a race for purchase of
shares of the company which inevitably led to a phenomenal
rise in the price of the shares. The shares which in 1944
were quoted at Rs. 250 per share went up to Rs. 2,000 per
share in March, 1945. It may be noted here that the shares
purchased by the Singhania group were not submitted for
registration of the transfers with the result that their
names have not yet been entered on the register of members.
In the meantime, on January 8, 19,15, an application was
submitted by the company to the Examiner of Capital Issues
for sanction for a fresh issue of capital, setting forth
several reasons for which such capital was required by the
company. The required sanction dated February 16, 1945, was
received by the company on February 20, 1945, and on the
next day (,February 21, 1945) a board meeting was held at
which the directors decided to issue the remaining 4,596
shares at a premium of Rs. 75 per share and to call up Rs.
25 per share on them. The minutes of the board meeting (Ex.
O) are printed at pages 301-2 of the Paper Book. Pursuant
to this resolution of the board a circular (Ex. q) was
issued to the shareholders on the same day with copies
414
of the form of application and form of renunciation referred
to in the resolution and in the circular. These further
shares were offered to the shareholders shown on the regis-
ter of members in the proportion of four further shares to
every five shares then held by them. The last date for
submission of the applications and necessary payments for
the shares so offered was fixed for March 10, 1945. It is
said that on the very next day after the board meeting 1,648
shares were allotted and that between February 22, and March
6, 1945, 2,204 shares were allotted to the shareholders who
had applied for the same. The suit out of which the
present appeal has arisen was filed on March 5, 1945.
The plaintiffs are two of the members of the company
suing" for themselves and all other aggrieved shareholders"
of the company. The defendants are the company and the
eight directors. The reliefs prayed for are as follows,
inter alia:
(a) That it may be declared that the resolution of the
directors and the offer referred to in para 6 hereof contra-
venes the provisions of section 105-C of Indian Companies
Act and was and is ultra vires, and illegal;
(b) That it may be declared that the said offer of
shares referred to in para 6 hereof is not bona fide or in
the interest of the defendant company and is ultra vires and
illegal;
(c) That the defendants 2 to 9 may be restrained by an
injunction from allotting any shares or doing any further
act in pursuance of the said offer."
It will be noticed that none of the shareholders other
than the directors to whom further shares had been allotted
before the filing of the suit has been made a party to the
suit. Further, even as against the defendants 2 to 9 the
consequential relief by way, of cancellation of the allot-
ments of further shares to them and the rectification of the
register in respect thereof has not been prayed for by the
plaintiffs.
The contentions of the plaintiffs as set forth in the
plaint on which the above prayers were founded may be summa-
rised shortly as follows:
415
(i) the company was not in need of capital, (ii) the issue
of further shares was not made bona fide for the benefit or
in the interest of the company but had been made "merely
with. the object of retaining or securing to the second
defendant and his friends the control of the first defendant
company," and
(iii) the issue and offer of further shares are illegal and
void for contravention of the provisions of section 105-C of
the Indian Companies Act. It is necessary to examine each
of these contentions and to ascertain their effect.
Re (i): Both the Courts below.have found it as a fact
that at the time the directors resolved upon the issue of
further shares the company was in need of capital for the
purposes mentioned in the company’s application to the
Examiner of Capital Issues referred to above. This concur-
rent finding of fact has not been contested before us and
the next contention of the appellants will have to be exam-
ined in that light.
Re (ii): It is not disputed that the company’s need
for funds standing by itself will afford a good motive to
the directors to issue further shares. The contention,
however, is that if that motive was not the sole motive but
was mixed up with any other motive, it was an abuse of the
powers of the directors to issue further shares. This plea
is clearly a departure from the case made in the plaint.
There-the case was that there was no need for funds at all
and the sole motive of the directors was merely to retain
their own control over the affairs of the company. It will,
however, be a hypertechnicality to shut out this plea alto-
gether. The plea of mixed motive raises three questions,
namely-
(a) whether apart from the motive of finding further
capital for the company, there was any, and, if so, what
other motive,
(b) was that other motive vitiated by bad faith, and
(c) if it was so vitiated, whether the presence of it
nullified the good motive and rendered the issue of further
shares illegal and void.
116
The contention of the plaintiffs before Bhagwati J. as
before us, was that the company was not in need any
further capital in February, 1945, and that the directors of
the company decided to issue the further capitalmerely With
a view to retain control of the management of the company in
their hands. On the evidence before him, Bhagwati J. found
that the motive of the directors was rather to keep the
Singhania group out of the control of the company than to
retain their own control. The race for the purpose of
purchasing the shares was not merely for the purpose of
increasing their holdings for holdings’ sake but was really
with a view to prevent the Singhania group from obtaining a
majority of shares which would give them the control of the
management of the company and enable them to utilise the
life funds of the company for the purposes of the various
industrial concerns of the Singhania group. The result of
keeping out the Singhania group might well be to strengthen
the position of the directors and to keep them in the sad-
dle, but the proximate motive was to exclude the Singhanias.
The distinction is real and quite understandable. The
appeal Court does not appear to have dissented from this
view of the matter and I do not see any reason to take a
different view. It follows, therefore, that apart from the
motive of raising fresh capital for the purposes and benefit
of the company, the directors also had another motive,
namely, to prevent the Singhania group, who are strangers to
the company, from intruding into its affairs so as to be
able to assume a controlling hand in its management for
their own purposes rather than for the benefit of the compa-
ny. 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 con-
clusion on this point it has to be borne in mind that the
Singhania group had only purchased some shares from various
existing shareholders but did not submit the transfers of
registration so as to get their names put upon the register
of members. It is clear that until the Singhania group get
their names.
417
entered in the register of members, they are not share :-
1950-9501 holders but are complete strangers to the company
,.
It has been held in Percival v. Wright(1) that ordinarily
the directors are not trustees for individual share ;-
holders. Even if the directors owe some duty to the exist-
ing shareholders on the footing of there being some fiduci-
ary relationship between them as stated in some cases
[see for example In re Gresham Life Assurance Society] (,2),
I see no cogent reason for extending this principle and.
imputing any kind of fiduciary relationship between the
directors and persons who are complete strangers to the
company. In my judgment, therefore, the conduct of the
respondents 2 to 9 cannot be judged on the basis of any
assumed fiduciary relationship existing between them and the
Singhania group. In my opinion, the respondents 2 to 9
owed] no dnty to the Singhania group and, therefore, the
motive to exclude them cannot be said to be mala fide per
se. In North-West Transportation Company, Ltd. v. Beatty (3)
the Judicial Committee observed atp. 601:
"But the constitution of the company enabled the defend-
ant J.H. Beatty to acquire this voting power; there was no
limit upon the number of shares which a shareholder might
hold, and for every share so held he was entitled to vote,
the charter itself recognised the defendant as a holder of
200 shares, one-third of the aggregate number; he had a
perfect right to acquire further shares, and to exercise his
voting power in such a manner as to secure the election of
directors whose views upon policy agreed with his own, and
to support those views at any shareholders’ meeting."
Beatty referred to in the above passage was a director. It
follows therefore, that the fact of the directors entering
into a competition with the Singhania group in purchasing
the shares of the company was quite legitimate and was not
mala fide. It was urged, however, that the issuing of
further shares, although the company required further capi-
tal, was, in the circumstances, evidence of bad faith.
Bhagwati J. dealt (1) L.R. (1902) 2 Ch. 421. (2) L.R. 8
Oh. App. 446 at 0. 449. (3) L.R. 12 A.C. 589.
418
with the various acts of the directors relied upon by the
plaintiffs as indicating bad faith on the part of the direc-
tors and on a consideration of all of them was ’unable to
come to the conclusion that the issue of new shares was
decided upon by the directors not bona fide in the
interests of the company and merely with a view to keep the
control of the affairs of the company in their hands." The
learned Judge, therefore, came to the conclusion that
the issue of further shares and the offer thereof made on
the 21st February, 1945, wasnot ultra vires and illegal.’
Some of these facts on which the charge of mala fide was
sought to be founded were urged before the appeal Court by
learned counsel ’or the appellants. The learned Chief
Justice discussed the matters and concluded by saying that
he agreed with the trial Judge that the plaintiffs had
failed to discharge the burden which lay upon them of estab-
lishing 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 direc-
tors owed no duty, were out to corner the shares of the
company for their own ends. To thwart that object of the
Singhania group by making it more and more difficult for
them to acquire more shares the directors took advantage of
the existing needs of the company for further capital and
decided upon to issue further shares. The issue of further
shares served two purposes, namely, the purpose of finding
the necessary finance, and to exclude the interlopers, both
of which purposes, according to the directors, were for the
benefit of the company. Rightly or wrongly, the directors
felt that it was not in the interests of the company to
allow the Singhania group a controlling hand in the manage-
ment of the affairs of the company. Their apprehension
evidently was that the Singhania group, if and when they
became shareholders, would use their voting power in their
own interests and to the detrimcnt of the company by utilis-
ing the life fund of the company for the purposes of their
various other in-dustrial concerns. I find nothing in the
evidence on
419
record to doubt the honesty of the directors in holding this
view and, that being so, I see nothing improper if the
directors in the interests of the company and the existing
shareholders tried to prevent what, according to them, would
be a catastrophe. Indeed, if the directors honestly held
that view---and as already stated I have no reason to think
that they did not--they would, in my opinion, have been
guilty of dereliction of duty to the company and to the
existing shareholders if they did not exert themselves to
prevent such evil. In my judgment the motive to prevent the
Singhania group, who were outsiders, from acquiring a con-
trol over the company cannot, as between the directors and
the company and the existing shareholders, be stigmatised as
mala fide.
At two places in his judgment the learned Acting Chief
Justice expressed the view that if it were established
before the Court that the company needed further capital,
all other considerations could be of no avail or of very
little avail as against that central fact. Tendolkar J. did
not consider it necessary to deal with the various acts of
the directors relied upon as evidence of their mnala fides,
because he was of the view that assuming that the directors
did all those acts with the object of keeping the Singhania
group out of control of the company, the moment it was
established that the company was in need of further capital
or legitimate purposes, the fact that the directors utilised
such need for the purpose of establishing themselves more
firmly in the saddle did not render the issue of further
capital either ultra vires or invalid. Learned counsel for
the plaintiffs contends that the learned Judges in the
Courts below entirely overlooked the point that the presence
of such bad motive would nullify the good motive of finding
capital necessary for the company and this mixture of mo-
tives would render the issue of further shares illegal and
void. Tiffs leads me to a consideration of the third sub-
head on the assumption that what I have called the addition-
al motive was a bad motive.
It is well established that directors of a company are
in a fiduciary position vis-a-vis the company and
53
420
must exercise their power for the benefit of the company.
If the power to issue further shares is exercised by the
directors not for the benefit of the company but simply and
solely for their personal aggrandisement and to the detri-
ment of the company, the Court will interere and prevent the
directors from doing so. The very basis of the Court’s
interference in such a case is the existence of the rela-
tionship of a trustee and of cestui que trust as between
the directors and the company.
The first case to be referred to is that of Fraser v.
Whalley(1). In that case a new company was incorporated in
1859 by an Act of Parliament. By that Act also certain
existing railway companies were authorised "to acquire, take
and hold shares in the undertaking of the company, and for
such purpose to create new shares in their undertakings."
The existing companies in 1861 passed resolutions authoris-
ing their directors to exercise this power. The resolutions
were, however, not acted upon and the existing companies did
not issue n ;w shares in their undertakings for the purpose
of taking up any share in the new company and all the shares
of the new company were issued to persons other than the
existing companies. In short, the shares which it was con-
templated would be taken up by the existing companies were
no longer available. Subsequently, in 1862, another Act of
Parliament was passed authorising the new company to make a
branch line and for that purpose to raise fresh capital by
the creation and issue of new shares. But this new Act gave
no fresh power to the existing companies to take up any of
these new shares to be issued by the new company. One Savin
held the majority of shares in the existing companies and
there was dispute between him and the directors. The gener-
al meeting of the company was shortly going to be held and
the directors knew that at the ensuing general meeting their
policy would be repudiated by the majority of shareholders
and they would be turned out from their office. It was in
these circumstances that the directors purporting to act on
the resolutions of (1) (1864)2 H. & M. 10.
421
1861, resolved to issue new shares. Suit was filed on
behalf of the shareholders to restrain the directors from
issuing any new shares. On a motion for injunction Wood
V.C. granted an interlocutory injunction. In course of his
judgment the learned Judge observed:
"The directors are informed that at the next general
meeting they are likely to be removed, and, therefore, on
the very verge of a general meeting, they, without giving
notice to anyone, with this indecent haste and scramble
which is shewn by the times at which the meetings were held,
resolve that shares are, on the faith of this obsolete power
entrusted to them for a different purpose, to be issued for
the very purpose of controlling the ensuing general meeting.
I have no doubt that the Court will interfere to prevent
so gross a breach of trust. I say nothing on the question
whether the policy advocated by the directors, or that which
I am told is to be pursued by Savin, is the more for the
interest of the company. That is a matter wholly for the
shareholders. I fully concur in the principle laid down in
Foss v. Harbortie (2 Hare, 461) as to that, but if the
directors can clandestinely and at the last moment use a
stale resolution for the express purpose of preventing the
free action of the shareholders, this Court will take care
that, when the company cannot interfere, the Court will do
so."
It will be noticed that this decision proceeds entirely
on the grounds that the resolutions of 1861 on which the
directors purported to act were obsolete, for they had not
so long been acted upon and also because the shares contem-
plated by that resolution were not available, and that even
if the resolutions were still effective and gave authority
to the directors to issue new shares, the directors could
only do so for the purpose of acquiring shares in the new
company and not for the purpose of controlling the ensuing
general meeting and preventing the free action of the share-
holders. There was no evidence whatever in that case that
the issue of shares was at all for the benefit of the compa-
ny. The issue of shares in that case was not for the pur-
pose of taking up shares in the new company for which pur-
pose alone the power could be exercised,
422
but that it was being exercised, wholly and solely for quite
a different purpose, namely, of maintaining themselves in
office.
Punt v. Symons & Co. Limited (1) was a motion for an
interim injunction to restrain the holding of a meeting of
the defendant company for confirming the resolution for
issue of shares. On the evidence it was quite clear "that
these shares were not issued bona fide for the general
advantage of the company, but that they were issued with the
immediate object of controlling the holders of the greater
number of shares in the company, and of obtaining the neces-
sary statutory majority for passing a special resolution
while, at the same time, not conferring upon the minority
the power to demand a poll." Byrne J. granted an injunction
restraining the defendant from holding the confirmatory
meeting and observed:
"1 am quite satisfied that the meaning, object, and
intention of the issue of these shares was to enable the
shareholders holding the smaller amount of shares to control
the holders of a very considerable majority. A power of the
kind exercised by the directors in this case, is one which
must be exercised for the benefit of the company; primarily
it is given them for the purpose of enabling them to raise
capital when required for the purposes of the company.
There may be occasions when the directors may fairly and
properly issue shares in the case of a company constituted
like the present for other reasons. For instance, it would
not be at all an unreasonable thing to create a sufficient
number of shareholders to enable statutory powers to be
exercised, but when I find a limited issue of shares to
persons who are obviously meant and intended to secure the
necessary statutory majority in a particular interest, I do
not think that is a fair and bona fide exercise of the
power."
The learned Judge concluded with the following words:
"If I find as I do that shares have been issued under the
general and fiduciary power of the directors for the express
purpose of acquiring an unfair majority (1) L.R. [1903] 2
Ch. 506.
423
for the purpose of altering the rights of parties under the
articles, I think I ought to interfere."
Piercy v. S. Mi1Is & Co. Ltd. (1) was a witness action
before Peterson J. It was indeed a gross case. On the
evidence Peterson J. found that it was manifest "that the
shares were allotted simply and solely for the purpose of
retaining control in the hands of the existing directors."
After stating the facts, the learned Judge said:
"The question is whether the directors were justified in
acting as they did, or whether their conduct was a breach of
the fiduciary powers which they possessed under the arti-
cles. What they did in fact was to-override the wishes of
the holders of the majority of the shares of the company for
the time being by the issue of fresh shares issued solely
for that purpose."
Then after referring to Fraser v. Whalley and Punt
v.Symons & Co. Ltd. (supra), the learned Judge concluded:
"The basis of both cases is, as I understand, that
directors are not entitled to use their powers of issuing
shares merely’ for the purpose of maintaining their control
or the control of themselves and their friends over the
affairs of the company, or merely for the purpose of
defeating the wishes of the existing majority of
shareholders. That is however, exactly what has happened in
the present case. With the merits of the dispute as between
the directors and the plaintiff I have no concern whatever.
The plaintiff and his friends held a majority of the shares
of the company, and they were entitled, so long as that
majority remained, to have their views prevail in accordance
with the regulations of the company, and it was not, in my
opinion, open to the directors, for the purpose of convert-
ing a minority into a majority, and solely for the purpose
of defeating the wishes of the existing majority, to issue
the shares which are in dispute in the present action."
In the result, the shares allotted to the defendants
were declared void.
(1) L.R. [1920] 1 Ch. 77.
424
It will be noticed that in each of the three cases the
act of the directors was not only not of advantage to the
company but was in essence to its detriment in that it was
calculated to reduce the existing majority into minority and
to prevent the majority of the existing shareholders from
exercising their discretion with respect to what they con-
ceived to be in the best interests of the company. Those
cases were not cases of mixed motives at all. The only
motive operating in those cases in the minds of the direc-
tors was detrimental to the interests of existing sharehold-
ers and, therefore, to the company itself. Our attention was
drawn to Palmer’s Company Law, 18th Edition, p. 183, where
it is stated that "in exercising their powers, whether
general or special, directors must always bear in mind that
they are in a fiduciary position, and must exercise their
powers for the benefit of the company, and for that alone."
Relying on the words "and for that alone," it is urged that
the power to issue shares must be exercised wholly and
solely for the benefit of the company, that there must not
be any other motive whether or not that other motive is
injurious to the company and that if that power is exercised
for that purpose and also for some other purpose then irre-
spective of the nature of that other purpose the directors
would be guilty of an abuse of their power. I am not pre-
pared to read the passage in the way urged by learned coun-
sel for the plaintiffs. None of the cases cited on that
point in Palmer’s Company Law was concerned with mixed
motives at all. In none of them was there any motive bene-
ficial to the company or to the existing shareholders. In
my view what that passage means is that the power must be
exercised for the benefit of the company and that as between
the directors and the company there must be no other motive
which may operate to the detriment of the company. If the
directors exercise the power for the benefit of the company
and at the same time they have a subsidiary motive which in
no way affects the company or its interests or the existing
shareholders then the very basis of interference of the
Court is absent, for, as I have pointed out, the Court of
equity only intervenes in order
425
to prevent a breach of trust on the part of the directors
and to protect the cestui que trust, namely the company and
possibly the existing shareholders. If as between the
directors and the company and the existing shareholders
there is no breach of trust or bad faith there can be no
occasion for the exercise of the equitable jurisdiction of
the Court. I find support for my views in the following
observations of their Lordships of the Judicial Committee in
Hirsche v. Sims(1):
"If the true effect of the whole evidence is, that the
defendants truly and reasonably believed at the time that
what they did was for the interest of the company, they are
not chargeable with dolus malus or breach of trust merely
because in promoting the interest of the company they were
also promoting their own, or because they afterwards sold
shares at prices which gave them large profits."
On the facts of this case the concurrent finding is that
the company was in need of funds and, therefore, the issue
of further shares was clearly necessary and is referable to
such need. The further motive of keeping out the Singhania
group, who are not yet shareholders but are strangers, does
not prejudicially affect the company or the existing share-
holders and the presence of such further motive cannot
vitiate the good motive of finding the necessary funds for
the company. In my judgment it is impossible to hold that
the issue of fresh shares was, in the circumstances, illegal
or void.
Re (iii):--Learned counsel for the plaintiffs
contends that both the Courts below were in error in holding
that there has been no contravention of the provisions of
section 105-C of the Indian Companies Act. That section is
in the following terms :--
"Where the directors decide to increase the capital of
the company by the issue of further shares such shares shall
be offered to the members in proportion to the existing
shares held by each member (irrespective of class) and such
offer shall be made by notice specifying the number of
within which the offer, if
(1) [1894] A.C. 654, at pp. 660-661.
426
not accepted, will be deemed to be declined; and after the
expiration of such time, or on receipt of an intimation
from the member to whom such notice is given that he de-
clines to accept the shares offered, the directors may
dispose of the same in such manner as they think most bene-
ficial 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 appear-
ing 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 capi-
tal with which the company got itself registered. This
increase can only be done by the company in a general meet-
ing as provided in sub-section (2) of section 50. This
increase above’ the authorised limit cannot possibly be done
by the directors on their own responsibility. Section
105-C, however, speaks of increase of capital by the issue
of further shares. The words used are capital and not share
capital and further shares and not new shares. It speaks of
increase by the directors. Therefore, the section only
contemplates such increase of capital as is within the
competence of the directors to decide upon. It clearly
follows from this that the section is intended to cover a
case where the directors decide to increase the capital by
issuing further shares within the authorised limit, for it
is only within that limit that the directors can decide to
issue further shares, unless they are precluded from doing
even that by the regulations of
427
the company. It is said that section 105-C becomes applica-
ble after the company in a general meeting has decided upon
altering its memorandum by increasing its share capital
by issuing new shares. If the company at a general meeting
has decided upon the increase of its share capital by
the issue of new shares, then it is wholly inappropriate to
talk of the directors deciding to increase capital,
because the increase has already been decided upon by
the company itself. Further, after the company has at a
general meeting decided to increase its share capital by the
issue of new shares, the increased capital becomes its
authorised capital and then ii the directors under section
105-C decide to increase the capital by the issue of further
shares, then this decision is nothing more than a decision
to raise capital within the newly authorised limit. Final-
ly, if section 105-C were to be held applicable to the case
of an increase of capital above the authorised limit then
such construction will lead to anomalous results so far as
the companies which have adopted Table A, for the section is
not consonant with Regulation 42 of Table A which, as will
be shown hereafter, applies to increase of capital beyond
the authorised limit. If the Legislature intended that
section 105-C should apply to all companies in the matter of
increase of capital above the authorised limit, then the
simplest thing would have been to make Regulation 42 a
compulsory regulation, instead of introducing a section
which in its terms differs from Regulation 42 and which
therefore makes the position of companies which have adopted
Table A anomalous. It appears to me, therefore, for reasons
stated above, that section 105-C becomes applicable only
when the directors decide to increase capital within the
authorised limit by the issue of further shares. In this
view of the matter that section is clearly applicable to the
facts of this case.
The next question is whether the directors have, in the
matter of issuing and offering further shares in the present
case, been guilty of any contravention of the provisions of
this section. Learned counsel for
54
428
the plaintiffs contends that they have, because they have
not offered the whole lot of shares to the shareholders in
proportion to the existing shares held by them. It is
pointed out that although the directors decided to issue
4,596 further shares they have only offered four shares to
every five shares held by the shareholders which works out
at 4,323 1/5 shares which leaves 272 4/5 shares in the
hands of the directors which they have reserved power unto
themselves to dispose of in such manner as they think fit.
Learned Attorney-General appearing for the company sub-
mits:
That section 105-C should be construed in the light of
Regulation 42 in Table A of the Indian Companies Act, 1913;
(b) That in order to prevent absurdity and to give
business efficacy to the section, the words "as nearly as
circumstances admit" should be read into the section; and
(c) That in any event the directors have not contravened
the provisions of the section even if the same be literally
construed.
Each of these points requires serious consideration.
As to the first point it should be remembered that
section 105-C was introduced in the Act only in 1936. There
is no counterpart of it in the English Act even now. Prior
to 1936 there was no check on the powers of the directors to
issue blocks of shares, within the authorised limit, to
themselves or to their nominees, unless their powers were
circumscribed by the Articles of Association. One of the
mischiefs of the managing agency system which prevails in
this country was that the managing agents, who usually
dominated the board of directors, could, to secure their own
position, induce the board to issue blocks of preference
shares to the managing agents or their nominees. To check
this mischief section 105-C was introduced in the Indian Act
in 1936. As regards the increase of capital beyond
429
the authorised limit it could only be done by the company.
The shareholders could, while sanctioning such increase,
protect themselves by giving special directions to the
directors as to the mode of disposal of the new shares.. In
the model Regulations set forth in Table A of the 1882 Act
under the heading "Increase of Capital" are grouped three
Regulations 26 to 98. Regulation 27 was in the following
terms:
"(27) Subject to any directions to the contrary that may
be given by the meeting that sanctions the increase of
capital, all new shares shall be offered to the members in
proprtion to the existing shares held by them, and such
offer shall be made by notice specilying the number of
within which the offer, if not accepted, will be deemed to
be declined, and after the expiration of such time, or on
the receipt of an intimation from the member to whom such
notice is given that he declines to accept the shares of-
fered, the directors may dispose of the same in such manner
as they think most beneficial to the company."
In Table A of our present Act under the heading "Altera-
tion of Capital" are to be found three corresponding Regula-
tions 41 to 43. Regulation 42 is as follows:--
"(42) Subject to any direction to the contrary that may
be given by the resolution sanctioning the increase of share
capital, all new shares shall, before issue, be offered to
such persons as at the date of the offer are entitled to
receive notices from the company of general meetings in
proportion, as nearly as the circmustances admit,. to the
amount of the existing shares to which they are entitled.
The offer shall be made by notice specifying the number of
shares offered, and limiting a time within which the offer,
if not accepted, will be deemed to be declined, and after
the expiration of that time, or on the receipt of an intima-
tion from the person to whom the offer is made that he
declines to acccpt the shares offered, the directors may
dispose
430
of the same in such manner as they think most beneficial to
the company. The directors may likewise so dispose of any
new shares which (by reason of the ratio which the new
shares bear to shares held by persons entitled to an offer
of new shares) cannot, in the opinion of the directors, be
conveniently offered under this article."
The words underlined are new and are not to be found in
Regulation 27 of Table A of the 1882 Act. The scheme of the
1882 Act, as of our present Act, and the language used in
the two regulations quoted above clearly indicate, to my
mind, that they deal with that kind of increase of share
capital which involves an alteration of the conditions of
the memorandum which the company alone can do by issuing new
shares. These Regulations do not purport to deal with in-
crease of capital which is within the competency of the
directors to decide upon. In that kind of increase of capi-
tal 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 resolu-
tion of the shareholders in general meeting sanctioning such
increase. The only difference between Regulation 27 of 1882
and Regulation 42 of our present Act is that under the last
mentioned Regulation, in the absence of any direction to the
contrary, the discretion of the directors has been widened
by the introduction of the words underlined above. This
company was incorporated in 1908 under the Act of 1882. It
did not adopt the Regulations of Table A of the 1882 Act but
article 45 of its Articles of Association proceeds more or
less on the lines of Regulation 27 of Table A of the 1882
Act. The discretion given to the directors under article 45
is, therefore, obviously narrower than that left to the
directors under Regulation 42 of Table A of the present Act.
Then came section 105C in 1936. As already pointed out,
that section deals with increase of capital within the
authorised limit which the directors can decide upon without
reference to the shareholders in a general meeting of the
company. The legislature had before it both Regulation 27 of
Table
431
A of 1882 and Regulation 42 of Table A of the Act of 1913.
It chose to adopt the language of Regulation 27 in prefer-
ence to that of Regulation 42. The absence in section 105-C
of the words I have underlined in Regulation 42 cannot but
be regarded as deliberate. And I can conceive of very good
reasons for this departure. In the case of increase beyond
the authorised limit, that can be done only by the company
in general meeting and the shareholders can protect them-
selves by giving directions to the contrary and, therefore,
subject to such directions a wider latitude may safely be
given to the directors. But in the case of increase of
capital within the authorised limit which the directors may
do without reference to the shareholders the legislature did
not think it safe to leave an uncontrolled discretion to the
directors. The mischief sought to be remedied required this
curtailing of the directors’ discretion. In my judgment it
is impossible to construe section 105-C in the light of
Regulation 42 for several reasons. Regulation 42 and section
105-C do not cover the same field and cannot be said to be
in pari materia. The omission of the underlined words was
obviously deliberate. The difference in the language of the
two provisions in the same statute cannot be overlooked as
merely accidental. And lastly the reading of these words of
Regulation 42 in section 105-C will frustrate what I con-
ceive to be the underlying reason for the introduction of
the section. In my judgment the first point urged by the
learned Attorney-General which found favour with the Courts
below cannot be accepted.
The second point urged by the learned Attorney General
is founded on the supposed necessity of introducing the
words "as nearly as the circumstances admit" to avoid the
absurdity which may flow from a literal construction of
section 105-C. It must be remembered that the cardinal rule
of interpretation of statutes is to construe its provisions
literally and grammatically giving the words their ordinary
and natural meaning. It is only when such a construction
leads to an obvious absurdity which. the legislature cannot
be supposed to have intended that the Court in
432
interpreting the section may introduce words to give effect
to what it conceives to be the true intention of the legis-
lature. It is not any and every inconvenience that justi-
fies adoption of this extreme rule of construction. The
section literally construed is quite inteligible and may
easily be applied to many cases where the further shares
issued bear a uniform and round proportion. Merely because
a literal construction of the section leads to inconvenient
result in a particular case cannot, in my opinion, justify
the application of such a drastic rule of construction as is
urged by the Attorney-General. Even in this case there
would have been no inconvenience if the directors decided
for the issue of 4,053 shares which could have been offered
in the proportion of three shares to every four shares held
by each shareholder. It is true that ordinarily it is for
the directors to judge as to the exact amount of capital
needed by the company but in arriving at their decision they
cannot overlook the limitations put upon their power by the
section with respect to the proportion in which the further
shares are to be offered by them to. the shareholders.
Further, the supposed inconvenience can be easily avoided by
a reference to the shareholders in a general meeting by
asking them to increase the share capital beyond the autho-
rised limit to such an amount as would permit proportionate
disposal of the further and new shares. In my opinion there
is not sufficient force in the contention which should
induce the Court to depart from the ordinary and golden rule
of interpretation I have mentioned above.
The last point urged by the ]earned Attorney General
appears to me to be of substance. On a strictly literal
construction of the section the directors must perforce
offer all the further shares to the shareholders in propor-
tion to their respective holdings. Section 105-C comes into
operation after the directors have decided to issue further
shares. The section does not in terms provide that such
offer must be made all at once or at any particular point of
time and I see no reason to import any such requirement in
the section.
433
The underlying object of the section is to effect equitable
distribution of the further shares. Here the shares have
been offered in the proportion of four shares to every five
shares. There can be no suggestion of favouritism in this
offer. Every shareholder will get his proportion if he so
desires. The majority will remain the majority if every one
takes up the shares offered to him. It is true that 272-4/5
shares remain in hand. At best although issued they have not
been offered to anyone. I dO not agree that under clause 8
of the directors’ resolution the directors can dispose of
those 272-4/5 shares in any manner they please before offer-
ing 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., with.out offering them to the share-
holders, the shareholders will then have cause for complaint
and may then come to Court for redress. It is said that
272-4/5 shares cannot in future be offered to so many share-
holders in a reasonable proportion. If it cannot be done,
these odd shares will remain in hand until the company at
a general meeting decides to increase the share capital by
issuing new shares and then these odd shares together with
new shares will be easily capable of being offered to the
shareholders proportionately. These special considerations
which arise in the case of this company by reason of its own
peculiar circumstances cannot, in my opinion, affect or
alter the meaning and effect of the section. From all that
I can see, up to the present time, there has been no contra-
vention of the provisions of section 105-C. In my view the
directors have substantially complied with the requirements
of the section and the plaintiffs can have no grievance.
They rushed to Court prematurely.
For the reasons stated above, I am clearly of opinion
that the conclusions of the Courts below were
434
right and no ground has been made out for interfering with
the same. The result, therefore, is that this appeal is
dismissed with costs.
MUKHERJEA J.--I agree that this appeal should be dis-
missed and I concur substantially in the reasons which have
been given by my learned brother Mr. Justice Das in his
judgment.
Appear dismissed.
Agent for the Appellants: S.P. Varma.
Agent for the Respondents: Rajinder Narain.
435

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