vil Appeal Nos 801 and 802 of 1962
Appeals from the judgment and d decree dated August 111960 of the Bombay High Court in first Appeals Nos 819 820 of 1955
Purshottam Trikamdas VJ Jhaveri and SN Andley for the appellants in both the appeals
KH Bhabha lqbal Chagla and JB Dadachanji for the respondent in both the appeals
The Judgment of the Court was delivered by Bachawat J
The Bank of Poona Ltd hereinafter referred to as the Company now amalgamated with the SangIi Bank Ltd was incorporated in 1945
The Company was promoted by NG Parulekar and Murlidhar Chaturbhuj Loya
The authorised capital of the Company was Rupees fifty lakhs divided into 50000 ordinary shares of Rs 100 each
By the end of April 1946 the Company was able to find subscribers for 4860 shares only
In view of section 2771 of the Indian Companies Act 1913 the Company was unable to carry on business unless the subscribed capital was not less than half the authorised capital
In order to comply with the requirements of section 2771 the directors of the Company decided that they or their nominees would subscribe for a large number of shares
Narayandas Shriram Somani was one of the directors of the Company
Ramnath Shriram Somani is his brother
They carried on business in the name of Ramkisan Ramratan Somani
Jivanbai is the mother of Narayandas and Ramnath Goverjabai is the wife of Narayandas and Kamalabai is the wife of Ramnath
Narayandas decided to subscribe for 2000 shares in the names of the three ladies
At a meeting held on May 25 1946 the board of directors of the Company allotted 500 shares to Goverjabai 500 shares to Kamalabai and 1000 shares to Jivanbai against three separate applications for shares signed by them
The applications were accompanied by three separate hundis dated May 25 1946 for Rs 25000 Rs 12500 and Rs 12500 drawn by Narayandas in favour of the Company
The meeting of May 25 1946 was attended by three directors Murlidhar Loya D R Nayak and Narayandas
At that meeting the directors also sanctioned a 779 loan of Rs 60000 to Ramnath
On May 28 1946 Ramnath obtained from the Company the loan of Rs 60000 against his promissory note and a separate loan account No 118 was opened in his name in the books of the Company
The three hundis were honoured on May 29 1946
The directors of the Company at a meeting held on June 8 1946 resolved to give an overdraft of Rs 40000 to Ramnath
A separate overdraft account LAC No 71 in the name of Ramnath was opened in the books of the Company and Ramnath obtained the sanctioned overdraft by a cheque dated June 27 1946 for Rs 15000 and another cheque dated June 29 1946 for Rs 25000
The balance of the application and allotment moneys amounting to Rs 12500 Rs 12500 and Rs 25000 in respect of the shares of Goverjabai Kamalabai and Jivanbai were paid to the Company on June 22 June 28 and June 29 respectively
There is reason to believe that the subscription of the 2000 shares was financed
 by the advances to Ramnath
On December 28 1948 Ramnath was indebted to the Company in his loan account for Rs 65743 6 6 and in his overdraft account for Rs 41909 10 0
On that date both accounts were closed and a new loan account No 9 with a debit of Rs 109500was opened in the name of Ramnath who executed a promissory note
The Reserve Bank of India was pressing the Company to take steps in respect of the advances to Ramnath
In these circumstances Ramnath repaid to the Company Rs 18500 on December 29 1950 and Rs 1500 on January 2 1951
At the same time on January 6 1951 the Company gave a new loan of Rs 20000 to Ramkisan Ramratan Somani and Ramnath and the borrowers executed a joint and several promissory note in favour of the Company for the sum of Rs 20000 
In respect of this loan a separate loan account was opened in the books of the Company
In his loan account No 9 Ramnath repaid Rs 100000 on December 27 1951 and Rs 4198 8 0 on December 29 1951 and as a result of the last payment the account was closed
The above sum of
100000 was paid on behalf of Ramnath by Narayandas who on the same date obtained a loan of Rs 100000 from the Company
On the same date Narayandas executed a promissory note for the sum of Rs 100000  a letter of pledge and trust receipt in respect of cloth saris etc valued at Rs 150000  and a separate loan account No 6184 in his name was opened in the books Of the Company
In spite of demands the Company was unable to realise its dues in respect of the outstanding loans
On March 18 1954 the Company instituted Special Suit No 39 of 1954 in the Court of the Civil Judge Senior Division of Poona against Ramkisan Ramratan Somani and Ramnath for the recovery of Rs 22964 13 0 due from them in respect of their loan account and the promissory note dated January 6 1051
The suit was dismissed by the trial N 5SCI 11 780 Court on April 23 1955 but in First Appeal No 819 of 1955 preferred
by the Company the High Court decreed the suit
Civil Appeal No 801 of 1962 arises out of this claim
On April 24 1954 the Company instituted Special Suit No 78 of 1954 in the Court of the Civil Judge Senior Division Poona against Narayandas for the recovery of Rs 109099 14 4 due from him in respect of the loan account No 6184 and the promissory note dated December 27 1951
On April 23 1955 the trial Court dismissed the suit but in First Appeal No 820 of 1955 preferred by the Company the High Court decreed the suit
Civil Appeal No 802 of 1962 arises out of this claim
On behalf of the appellants Mr Purushottam Tricamdas contended  that the allotment of the 2000 shares and the several loans in the names of Ramnath and Narayandas were not genuine transactions and that the parties did not intend that the allottees would be the holders of the shares or that Narayandas and Ramnath would be liable to repay the loans
It is to be noticed that the plea that the allotment of the 2000 shares was not intended to be operative was not sufficiently raised in the pleadings
Narayandas pleaded in his written statement that at the time of the purchase of the shares Loya and Parulekar gave him and Ramnath the assurance that the sum of Rs 100000 required for the purchase of the shares would be paid by the Company on interest at 412 per cent per annum and Loya and Parulekar would not demand and recover the amount but they would sell the shares and credit the amount of the sale proceeds towards the principal and interest in the loan account and would not allow Narayandas and Ramnath to suffer loss with regard thereto
Narayandas swore that it was agreed between him Parulekar and Loya that he would nominally take the 2000 shares which would be finally sold to others and he would be out of liability and he and Ramnath would not repay the loans nor take any benefit thereunder
He also suggested that he or Ramnath did not repay any moneys out of their own pocket and all repayments in the accounts were made out of the moneys received by him from the Company
At the trial the Company did not examine either Loya or Parulekar
It may be that Loya and Parulekar gave some understanding to Narayandas with regard to the disposal of
the shares and in view of this understanding they subsequently
executed in favour of Narayandas two letters dated December 27 1951 whereby Parulekar agreed to buy from him 500 shares and Loya agreed to buy from him 800 shares
But these assurances if any were given to Narayandas by Parulekar and Loya in their individual capacity and not as directorS of the Company
There is no record of any assurance given on behalf of the Company to Narayandas in the minutes of the board meetings
Narayandas and  his nominees Goverjabai Kamalabai and
Jivanbai dealt with the shares on the footing that they
were the owners of
the shares some of the shareswere transferred to third parties under transfer 781 deeds executed by Jivanbai and the sale proceeds were credited to the loan account of Narayandas Jivanbai received from the Company all the 1000 shares allotted to her and executed a receipt dated February 25 1953
Narayandas obtained from Loya and Parulekar written undertakings dated December 27 1951 for the purchase of 800 and 500 shares respectively
By letter dated June 28 1954 Narayandas called upon Parulekar to fulfil his undertaking for the purchase of 500 shares
All these circumstances prove that the allotment of the 2000 shares was intended to be operative and the allottees were intended to be the holders of the shares
Ramnath out of his own funds paid several sums of money towards discharge of his indebtedness in the loan accounts
He paid Rs 750 4 0 in the overdraft account towards interest on December 12 1946 and Rs 1484 7 0 in the loan account No 118 on April 21 1947 and we are not satisfied that these sums were paid out of commission earned by Narayandas from the Company
Similarly on December 29 1951 he paid Rs 4198 8 0 in the loan account No 9 and on January 4 1954 Rs 100 was paid by Ramkisan Ramratan and Ramnath in their loan account
The loan accounts were secured by promissory notes
Moreover the loan account of Narayandas was secured by a trust receipt and a letter of pledge
Even on March 3 1953 Narayandas executed a letter in favour of the Company declaring that he held as security a stock of sarees valued at Rs 150000 
In respect of other loan transactions the Company charged the appellants interest at the rate of 6 per cent and those loans were repaid quickly
But the loan transactions in suit were intended to be of a more permanent nature and in order to accommodate Narayandas and Ramnath the Company agreed to charge interest at 412 per cent
We are satisfied that the allotment of the 2000 shares was intended to be operative and the allottees became the owners of the shares
We are also satisfied that the loans to Ramnath and Narayandas were intended to be operative and the Company did not give any assurance to them that
they would not be called upon to repay the loans
The next contention of Mr Purushottam Tricamdas arises in this way
Article 126 of the articles of association of the Company provides that the directors may determine the quorum necessary for the transaction of business and unless and until otherwise determined three directors shall be the quorum
The directors did not make any other determination with regard to quorum and at all material times a quorum of three was required for a directors  meeting
The board meeting of May 25 1946 was attended by three directors only namely M C Loya D R Nayak and Narayandas
At this meeting the directors resolved to allot 2000 shares to the nominees of Narayandas
Narayandas was dearly interested in the allotment of the shares
Section 91B1 of the Indian Companies Act 1913 provided that No director shall as a director 782 vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote and if he does so vote the vote shall not be counted
The Poona Bank Ltd was a public company and section 91B1 applied to its directors
Narayandas therefore ought not to have
voted at the meeting of May 25 1946
If his vote is excluded there was no quorum for the meeting
Mr Purushottam Tricamdas therefore contended that the allotment of 2000 shares to the nominees of Narayandas at this meeting was invalid and no title passed to the allottees in respect of the shares and in the circumstances there was a total failure of the consideration paid for the shares and as the consideration was paid out of the loans the appellants are not liable to repay the same
Now a director of a company stands in a fiduciary position towards the company and is bound to protect its interests
For long it has been an established rule of equity that he must not place himself in a position in which his personal interest conflicts with his duty and unless authorised by the company s articles he must not vote as a director on any contract or arrangement in which he is directly or indirectly interested
Standard articles give effect to this rule of equity
See Palmer s Company Precedents 17th Edn Part I p 553
If he votes in such a case his vote would not be counted and his presence would not count towards the quorum that is to say the minimum number fixed for the transaction of business by a board meeting for a quorum must be a disinterested quorum and must be comprised of directors who are entitled to vote on the particular matter before the meeting
See In re
Yuill vs Greymouth Point Elizabeth Railway and Coal Company LimitedC
If an interested director votes and without his vote being counted there is no quorum the meeting is irregular and the contract sanctioned at the meeting is voidable by the company against the director and any other contracting party who has notice of the irregularity see Transvaal Lands Company vs New Belgium Transvaal Land and Development CompanyC but the company may waive the irregularity and affirm the transaction
The matter is put succinctly by Gore Browne in Handbook on Joint Stock Companies 41st Edn p 363 thus According to the well established rule that an agent can not act on behalf of his principal in a matter in which the agent has a conflicting interest or duty directors are precluded from taking part in any resolution under which they take a benefit or which adopts a contract that concerns them unless the Articles authorises their doing so
It must be here noted that if interested directors take part in any transaction there is an irregularity 1 1904 1 ch
2 1914 2 Ch
488 783 which renders the transaction voidable by the company as against the directors and any persons who have knowledge of the facts
Section 91 B embodied the existing rule of equity in the form of a statutory provision
In Pratt Bombay Ltd vs
MT Ltd and Sassoon  Co Ltd vs Pratt Bombay Ltd1 Sir George Rankin observed that the section is a concise statement of the general rule of equity explained in the Transvaal Lands Company s caseC and he pointed out that the impugned transactions on which the interested directors had voted were voidable by the official liquidator of the company
The voting by the interested director of itself does not invalidate the contract
The effect of section 9lB is that the vote of the interested director must be excluded and if as a result of such exclusion there is no quorum the resolution sanctioning the contract is irregular and the contract is liable to be avoided by the company against the directors and any other contracting party having notice of the irregularity
Section 9lB is meant for the protection of the company and the company may if it chooses waive the irregularity and affirm the contract
We think that the allotment of the 2000 shares to the nominees of Narayandas in the meeting of the directors of the company held on May 25 1946 was not void
In view of the fact that Narayandas was not entitled to vote on the allotment and after exclusion of his vote there was no quorum the allotment was irregular and the Company was entitled to avoid the allotment
Instead of avoiding the allotment the Company has chosen to affirm it
The allotment is therefore valid and binding on the allottees
Moreover Narayandas cannot be heard to say that there was no valid allotment of the shares
For the purpose of satisfying the requirement of section 277I it was necessary to allot the shares and he allowed the Company to commence business on the footing that the shares had been subscribed
He was a director of the Company and a party to the resolution allotting the shares
He dealt with the shares on the footing that the allottees were the holders of the shares with a clear knowledge of the circumstances on which he might have rounded his present objection
He cannot now be heard to say that he was interested in the allotment and could not vote
Like the director in York Tramways Company vs Willows3 he is now estopped from contending that the allotment is invalid
For all these reasons we hold that the allotment is valid and there is no failure of consideration
In the plaint in Suit No 78 of 1954 the Company pleaded that on December 27 1951 Narayandas took from it on loan a sum of 1 ILR 2 19142 Ch
3 1882 8 QBV 685 784 Rs 100000 and executed an on demand promissory note for the amount
Mr Purushottam Tricamdas contended that as a matter of fact no cash amount was paid and no loan was advanced by the Company to Narayandas on December 27 1951 and consequently the suit as framed is not maintainable
Now at the relevant time Ramnath was indebted to the Company for Rs 104198 in respect of loan account No 9
On December 27 1951 at the request of Narayandas the Company credited Ramnath with Rs 100000 in his loan account and debited Narayandas with Rs 100000 in a new loan account opened in his name
On the same date Narayandas acknowledged in writing the receipt of Rs 100000 and executed a promissory note for the amount in favour of the Company
Ramnath took full advantage of the credit of Rs 100000 and on payment of the balance of Rs 4198 8 0 closed his loan account No 9
Though no actual money passed the two entries in the books of account amounted to payment of Rs 100000 by the Company to Narayandas by way of a loan and repayment of the same amount by Narayandas to the Company towards discharge of the indebtedness of Ramnath in the latter s loan account with the Company
The result was as if the Company had paid a sum of Rs 100000 in cash to Narayandas and then Narayandas had returned the amount to the Company with instructions to credit it to Ramnath
To support a plea of payment it is not necessary to show that cash passed
Illustration a to section 50 of the shows that payment may be made by means of transfer entries in books of account
The Company has sufficiently established a payment of Rs 100000 by it to Narayandas by way of loan on December 27 1951
Mr Purushottam Tricamdas contended that the loans to Narayandas and Ramnath were financial assistance by the Company for the purpose of or in connection with the purchase of its shares by Narayandas or his nominees and the loans being in contravention of section 54A2 of the Indian Companies Act 1913 were illegal and could not be recovered
Mr KN Bhabha contended 1 that the appellants ought not to be allowed to take this new point in this appeal 2 the lending of the money was a part of the ordinary business of a banking company and the loans to Ramnath and Narayandas were made by the Company in the course of its business and 3 having regard to the decision in Re VGM Holdings Ltd1 the word purchase in section 54A2 did not include the acquisition of shares by subscription or allotment and in this case the loans were given in connection with the acquisition by Narayandas or his nominees of shares by subscription or allotment
and not in connection with acquisition of shares by purchase and consequently section 54A2 had no application
Now it appears that in paragraph 15 of his written statement Narayandas pleaded that 1 785 the advance of loans to him in connection with the purchase of shares was illegal but no issue was raised on the question whether the loans were financial assistance in connection with the purchase of the shares and were in contravention of section 54A2
There is a passing reference to this contention in paragraph 15 of the judgment of the trial Court but there is no reference to it in the judgment of the High Court
We find also that this contention finds no place in the statement of the case filed on behalf of the appellants
Mr Purushottam Tricamdas relied on ground No 12 of the appellants statement of case but we think that this ground is wholly insufficient to raise this contention
In these circumstances we think that it is not open to the appellants to urge this contention and we indicated this to Mr Purushottam Tricamdas in the course of the argument
In the Courts below the appellants contended that Kamalabai was a minor and therefore the allotment of 1000 shares to her was
invalid 
This contention is no longer pressed and does not survive
No other contentions were advanced before us
In the result the appeals are dismissed with costs one hearing fee
Appeals dismissed


Summary:
The respondent Bank was unable to carry on business after it was promoted in view of section 2771 of the Companies Act 1913 because its subscribed capital was less than half the authorised capital
In order to comply with the requirements of the section the directors decided that they or their nominees would subscribe for a large number of shares
The first appellant was a director of the Bank and the second appellant was the firm of the first appellant and his brother
The first appellant decided to subscribe for 2000 shaves in the names of 3 ladies of his family and the allotments of shares were made at a meeting of directors at which the first appellant also voted
At that meeting and subsequently various loans were advanced to the second appellant
A sum of Rs 100000 which was shown as a loan to the brother was later on adjusted by crediting his account with that item and debiting the account of the first appellant with that amount
The first appellant executed a promissory note and a letter of pledge for the amount and the brother paid off the balance due from him after giving effect to the credit entry and that loan account was closed
Suits were filed by the respondent against the appellants for realization of the sums due from them
The trial Court dismissed the suits but the High Court decreed them
In their appeals to this Court the appellants contended inter alia that i if the vote of the first appellant be not counted as required by section 91B1 of the Act because of his interestedness in the allotment there would be no quorum for the meeting and therefore the allotment of shares to the nominees of the first appellant would be invalid and as the consideration for the shares was paid out of the loans the appellants would not be liable to repay those loans ii since no cash amount was paid and no loan advanced by the respondent to the first appellant the suit to recover the sum of Rs 100000 as a loan was not maintainable
HELD i The allotment of the shares at the meeting to the nominees of the first appellant was not void
In view of the fact that the first appellant was not entitled to vote on the allotment and after the exclusion of his vote there was no quorum the allotment was irregular and the respondent was entitled to avoid it
But instead of avoiding the allotment the respondent has chosen to affirm it and so the allotment is valid and binding on the allottees
783 E 778 Moreover the first appellant was a party to the resolution allotting shares and dealt with the shares on the footing that the allottees were the holders with a clear knowledge of all circumstances and therefore was estopped from contending that the allotment was invalid
783 F G ii To support a plea of payment it is not necessary to show that cash passed
Illustration a to section 50 of the  shows that payment may be made by means of transfer entries in books of account
784 E