Case: Gaya Sugar Mill Limited Vs. Nand Kishore Bajoria &amp; Another

two respondents were acting in their own right, and not as agents of the company in respect of this property. It was further held that the purpose for which the money was held was unlawful and therefore no relationship of principal and agent could be created in respect of an unlawful purpose.10.In our judgment the view taken by the Appeal Bench cannot be sustained and the decision has to be reversed on the short ground that till the scheme was formally approved by the share-holders and creditors and was sanctioned by the court and the share capital was thus reduced, the preference share-holders could not acquire any rights under the scheme and become beneficiaries regarding the amount realized by sale of the shares of the Ryam Sugar Company Ltd. Till that event happened, it is obvious that the ownership of the shares remained in the Gaya Sugar Mills Ltd., and the amount realized by the sale of those shares remained the property of the Mills.It is clearly provided in the agreement that a fresh meeting of the share-holders will be called in Calcutta for considering the scheme and that steps will be taken for sanction of the Court and of the share-holders according as necessary for implementing the scheme.In this situation the covenants and directions contained in the agreement were mere proposals, and till implemented, neither the preference share-holders acquired any right under these proposals, nor did the so-called preference trustees become vested with the ownership of Ryam Sugar Company Ltd.s shares or the immoveable properties that were proposed to be transferred to them and which they were authorised to sell.In other words, the agreement of 1-1-1950 remained in an inchoate shape and never became operative. The two respondents Messrs. Nand Kishore Bajoria and Mahadeolal thus never became trustees for the preference shareholders as contemplated in the proposed scheme. The Gaya Sugar Mills Ltd., thus remained, as it was, the legal owner of the shares and of the sale-proceeds as well as of the immovable properties.11. The next question that arises for consideration is what was the true relationship between the company and these two respondents before the proposed scheme was sanctioned. The company, pending the sanction of the court, passed a Resolution that the shares be sold, and the sale-proceeds be put in the possession of the, two respondents, for distribution amongst preference share-holders in the event of reduction of capital being sanctioned by the court.In our judgment there can be no manner of doubt that in the situation that arose these two persons were the agents of the company for selling the shares and keeping the sale-proceeds with them till the scheme was sanctioned, and if the scheme was not sanctioned, they remained agents of the company in custody of the sale-proceeds. They could not be trustees under an inchoate document, and therefore the only possible relationship that could be constituted between them and the company would be that of principal and agent appointed for a particular purpose and to meet a particular eventuality. The relationship of principal and agent need not be expressly constituted and can be brought about by implication of law on a particular situation arising or from the necessity of a case.In the present case this relationship was clearly brought about by the situation that arose by the scheme not being implemented. By the exigencies of this particular case that relationship has to be necessarily implied. It is also clear that the shares were sold under the Resolution passed by the Board of Directors of the Company and it is the Board that fixed the price for which the shares were to be sold. The transfer deeds were also got executed by the company from the persons in whose names the shares were nominally standing. The two respondents were merely in custody of the amount till the expected event happened. As that event did not happen, the property never became vested in them as trustees for distribution amongst the preference shareholders. On the other hand, they remained as mere agents of the company and held this money for the company pending the sanction of the scheme.The money belonged to the company and was thus in the hands of the agents of the company, and the official liquidator was entitled to its return under the provisions of S. 185, Indian Companies Act.As no obligation was annexed to the ownership of this money till the scheme was sanctioned, no trust was created and the courts were, therefore, in error in deciding this case on the basis either of an express trust or on the basis of a constructive trust. The Appeal Bench of the High Court thought that no relationship of principal and agent was constituted between the company and the two respondents by the agreement of 1-1-1950, because the two respondents in effecting the sale of the shares were acting in there own right. This construction of the agreement, in our opinion, is clearly erroneous.The two respondents had no right of their own in the shares or in the money and whatever right they had they acquired as would-be trustees under the agreement which never matured. That being so, they could not act in their own right in selling the shares of the Ryam Sugar Coy. Ltd. and in keeping the sale proceeds in their custody. We have also not been able to follow how the Appeal Bench of the High Court arrived at the conclusion that the scheme propounded in the agreement was unlawful.We are constrained to observe that both the learned Single Judge and the Appeal Bench of the High Court completely lost sight of the fact that no right could be vested either in the preference shareholder or the so-called trustees on the basis of a document which merely contained proposals and which was of an inchoate character and which was never completed or became operative and it is this opinion which led to an error in the decision of the case.12.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]e principal question that falls for decision in this appeal is whether the High Court had jurisdiction, in the circumstances of this case, to require the two respondents to pay the sum of Rs. 11,39,400 to the official liquidator under the provisions of S.Indian Companies Act. The determination of this question depends on the construction of the agreement above cited and the relationship created by that agreement between the company and these two respondents taken with the resolution of the directors till the stage that the scheme was sanctioned by the court and the proposal to reduce the capital was accepted after the formalities provided for in the Indian Companies Act had been goneour judgment the view taken by the Appeal Bench cannot be sustained and the decision has to be reversed on the short ground that till the scheme was formally approved by theand creditors and was sanctioned by the court and the share capital was thus reduced, the preferencecould not acquire any rights under the scheme and become beneficiaries regarding the amount realized by sale of the shares of the Ryam Sugar Company Ltd. Till that event happened, it is obvious that the ownership of the shares remained in the Gaya Sugar Mills Ltd., and the amount realized by the sale of those shares remained the property of the Mills.It is clearly provided in the agreement that a fresh meeting of theshareholders will becalled in Calcutta for considering the scheme and that steps will be taken for sanction of the Court and of theaccording as necessary for implementing the scheme.In this situation the covenants and directions contained in the agreement were mere proposals, and till implemented, neither the preferenceacquired any right under these proposals, nor did thepreference trustees become vested with the ownership of Ryam Sugar Company Ltd.s shares or the immoveable properties that were proposed to be transferred to them and which they were authorised to sell.In other words, the agreement ofremained in an inchoate shape and never became operative. The two respondents Messrs. Nand Kishore Bajoria and Mahadeolal thus never became trustees for the preference shareholders as contemplated in the proposed scheme. The Gaya Sugar Mills Ltd., thus remained, as it was, the legal owner of the shares and of theas well as of the immovable properties.e next question that arises for consideration is what was the true relationship between the company and these two respondents before the proposed scheme was sanctioned.The company, pending the sanction of the court, passed a Resolution that the shares be sold, and thebe put in the possession of the, two respondents, for distribution amongst preferencein the event of reduction of capital being sanctioned by the court.In our judgment there can be no manner of doubt that in the situation that arose these two persons were the agents of the company for selling the shares and keeping thewith them till the scheme was sanctioned, and if the scheme was not sanctioned, they remained agents of the company in custody of theThey could not be trustees under an inchoate document, and therefore the only possible relationship that could be constituted between them and the company would be that of principal and agent appointed for a particular purpose and to meet a particular eventuality. The relationship of principal and agent need not be expressly constituted and can be brought about by implication of law on a particular situation arising or from the necessity of a case.In the present case this relationship was clearly brought about by the situation that arose by the scheme not being implemented. By the exigencies of this particular case that relationship has to be necessarily implied. It is also clear that the shares were sold under the Resolution passed by the Board of Directors of the Company and it is the Board that fixed the price for which the shares were to be sold. The transfer deeds were also got executed by the company from the persons in whose names the shares were nominally standing. The two respondents were merely in custody of the amount till the expected event happened. As that event did not happen, the property never became vested in them as trustees for distribution amongst the preference shareholders. On the other hand, they remained as mere agents of the company and held this money for the company pending the sanction of the scheme.The money belonged to the company and was thus in the hands of the agents of the company, and the official liquidator was entitled to its return under the provisions of S. 185, Indian Companies Act.As no obligation was annexed to the ownership of this money till the scheme was sanctioned, no trust was created and the courts were, therefore, in error in deciding this case on the basis either of an express trust or on the basis of a constructive trust. The Appeal Bench of the High Court thought that no relationship of principal and agent was constituted between the company and the two respondents by the agreement ofbecause the two respondents in effecting the sale of the shares were acting in there own right. This construction of the agreement, in our opinion, is clearly erroneous.The two respondents had no right of their own in the shares or in the money and whatever right they had they acquired astrustees under the agreement which never matured. That being so, they could not act in their own right in selling the shares of the Ryam Sugar Coy. Ltd. and in keeping the sale proceeds in their custody. We have also not been able to follow how the Appeal Bench of the High Court arrived at the conclusion that the scheme propounded in the agreement was unlawful.We are constrained to observe that both the learned Single Judge and the Appeal Bench of the High Court completely lost sight of the fact that no right could be vested either in the preference shareholder or thetrustees on the basis of a document which merely contained proposals and which was of an inchoate character and which was never completed or became operative and it is this opinion which led to an error in the decision of the case.