Case: Mathalone Vs. Bombay Life Assurance Co. Ltd.Pingle Venkat Rama Reddyv.S

up the right attitude by enquiring as to who the real beneficiary was and to be satisfied by the production of the relative transfer forms. Now, if this had been the only attitude of Mr. Reddy much might have been said in his favour. But unfortunately in this very letter Reddy clearly declined any liability or obligation upon him to apply for these shares on behalf of his beneficiary. Whether he knew that his purchaser was Sir Padampat or not, as the learned Judge has held, or whether there is force in Sir Jamshedjis contention that Messrs. Craigie, Blunt and Caroe referred to the purchasers as Sir Padampat and others, the fact remains that Reddy did not accept his liability as a trustee and then agreed to discharge that liability provided he was satisfied as to who his purchaser was. He only wanted to be satisfied about his purchaser in order to send to him the letter to renunciation. That was the only question on which he wanted to be satisfied. In view of the attitude taken up by Reddy the plaintiff had no other course open to him except to file the suit, and, therefore, in our opinion the learned Judge was right when he came to the conclusion that the plaintiff was entitled to the relief he had claimed."We have not been able to appreciate this line of thought. The attitude adopted by Reddy could not cure the defects in the requisition alleged to have been made on behalf of the plaintiff. If the directions given to the trustee were of an inconclusive nature, and were in law ineffective, then the trustee could not be mulcted in damages for not obeying them, even if his attitude was not what it should have been. The plaintiff is not entitled to damages, unless and until he proves that he made a proper and effective demand on the trustee and this the trustee failed to carry out. On this ground also, both the suits are bound to fail18. Mr. Pathak argued that the plaintiff was entitled to reliefs (a) and (b) both in his suit as well as in the receivers suit and that the receivers suit was wrongly dismissed by the High Court. We are unable to agree. In our opinion, the High Court rightly held that the receiver appointed in the suit of Sir Padampat could not acquire the newly issued shares in his name. That privilege was conferred by Section 105-C only on a person whose name was on the register of members. The receivers name admittedly was not in the register and the company was not bound to entertain that application. Mr. Pathak argued that that may be so but the receiver was not making an application in his individual right but he had been armed by the court with power to apply in the right of the defendant Reddy. The fact however is that the receiver made the application in his own name. Even if Mr. Pathaks contention is right the company was no party to the suit filed by Sir Padampat against Reddy and that being so, no order could be issued to the company in that suit to recognize the receiver as a shareholder in place of Reddy. The matter might have been different if the company was a party to the suit and was ordered by the court to register the receivers to name in place of Reddys for the 484 shares purchased by Sir Padampat and was also ordered to issue new shares in the name of the receiver. It is not necessary for us to offer any final opinion on the question whether the court would have been within its right to direct his name to be included in the register, even if the company was impleaded in the suit filed by Sir Padampat against Reddy. We are however quite clear that the company not having been impleaded in that suit, it was not bound to issue the new shares in the name of a person whose name was not already in the register of members even if he represented a person whose name was already in the register. The High Court was thus right in dismissing the receivers suit. We are also of the opinion that the appellate Bench of the High Court was also right when it declined to grant reliefs (a) and (b) of the plant to Sir Padampat. The sanction given to the company to issue new capital had lapsed long before BHAGWATI J. granted reliefs (a) and (b) to the plaintiff. It was an extraordinary procedure in a civil suit to direct a company which was no party to the original suit to obtain fresh sanction for the issue of new shares and then allot them to the plaintiff. It seems to have been overlooked that if sanction to issue new capital was somehow obtained, that capital would also have to be distributed as directed by Section 105-C and could not be allotted by the directors in favour of any particular shareholder. In the altered situation that arose after the institution of the suit, if the plaintiff succeeded, the only relief that could be granted to him was the relief of damages. We are however unable to grant the relief to the plaintiff in view of our finding that Reddy could not be compelled as constructive trustee to buy new shares in his own name for the cestui que trust and further in view of our finding that even if he could be compelled to acquire those shares in his own name for the cestui que trust he could not be said to have defaulted in his duty in carrying out the directions of the cestui que trust as in this case no proper and valid requisition was made by the cestui que trust on the trustee for the acquisition of those shares. The plaintiffs in the two suits are therefore not entitled to any relief

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

Explanation:
1[ds]It was been held in the courts below that Sir Padampat became on the 29th July, 1944, the sole beneficial owner of 484 shares sold by Reddy, the legal title to which was vested in him. That having been found, the relation of trustee and cestui que trust was thereby established between them. All that is necessary to establish such a relationship is in the defendant. The fact that such a relationship qua the 484 shares sold by Reddy existed between the parties to the suit was not disputed by the learned Attorney-General appearing for Reddy, but he contested the view of the High Court that the cestui que trust could not on any principle of equity or law call upon the trustee to bear his burdens and ask him to obtain on his behalf new shares of the company or make further investments in its capital which would involve in its train new obligations and freshsection limits the proper of the directors to dispose of the further issue of capital in any manner that they may think most beneficial to the company. They are under a mandate to offer these shares in the first instance to the members in proportion to the existing shares held by them. In other words, a member becomes entitled under the provisions of this section by reason of his being the holder of a certain number of shares in the company, to obtain shares in the further issue of capital as ofis not a fruit of stock ownership, in the nature of a profit, nor does it amount to a division of any part of the assets of the company. It is not an organic product of the original stock like the young of animals or the fruit of trees, but, as described by the Supreme Court of America in Miles v. Safe Deposit Trust Co., this right to subscribe to new stock is but a right to participate in preference to strangers and on equal terms with other existing shareholders in the privilege of contributing new capital called for by the corporation - an equity that inheres in stock ownership under such circumstances as a quality inseparable from the capital interest represented by the old stock. The exercise of the privilege depends on the option of the shareholder. If he likes, he can invest further money and purchase a proportionate share of the new issue of capital. He is of course not obliged to do so. He has also the right to assign the offer made to him in favour of any other persons but in that event the directors have the option to allot or not to allot the shares to the person in whose favour the shareholder renounces the shares offered to him. The offer, of course, creates fresh rights but it also brings in its train liabilities and obligation. It confers the right on a shareholder to purchase shares in the new issue of capital in preparation to his existing shareholding, but in order to obtain that right he has to fulfil certain obligations and he has to incur certain liabilities. In the first instance, if he decides to invest his money in the further capital issued, he has to make an application to the company for the allotment of shares so offered and with his application he has to remit to the company the amount of the application money. That having been done, if the shares offered are only partly paid up, as they were in this case, he incurs on allotment the further liability of meeting any future calls on these shares. Can it be said in this situation that a transferor of a certain number of shares, being the legal owner of those shares and the beneficial interest of which vests in the cestui que trust, is liable for all the payments and obligations attaching to the view issue of shares and is bound to act in both respects for the benefit of the cestui que trust; in other words, that he is under a duty, when so instructed by his beneficiary, to make an application for the new issue of shares offered under the provisions of Section 105-C and obtain them in his name by making the necessary payments and by incurring the consequentialour opinion the observations made in these cases cited above must be limited to the facts of those cases. We are here dealing with a trustee with peculiar duties and peculiar liabilities, and it is a fallacy to suppose that every trustee has the same duties and liabilities. In none of the cases cited by Mr. Pathak was there any question of the trustees incurring any personal any personal pecuniaryonly question there was whether he should exercise the option of receiving the dividend or of converting the bonus into the shape of capital. It is part of the general law of trust that a trustee must act in a manner most beneficial to the cestui que trust and he can retain no benefit to himself from the corpus of the trust estate or from anything that accrues to that estate subsequently. None of these cases deal with a situation like the one that has arisen in the presentsee no principle of equity or of general law which obliges a trustee to buy new shares in his own name for the benefit of the cestui que trust and when in so doing he has to bear a heavier pecuniary burden than he undertook to bear as constructive trustee by reason of the sale of his shares in favour of the cestui que trust and which relationship was contemplated to also only till the time when the shares sold could not be registered in the name of the transferee. Of course, if the trustee of his own volition chose to obtain the new shares which appertain to the shares already sold by him, on principles of equity it could not be denied that the cestui que trust would have been entitled to call upon the trustee to band over those shares to him on receipt of the amount spent by the trustee; but if the trustee of his own volition is not prepared to obtain those shares in his own name, it is difficult to see on what principle of law or equity he can be forced to make an application for obtaining those shares in his own name, and then pass them over to the cestui que trust after obtaining the amount spent by him or after being otherwise fully indemnified in respect of the payments made or to be made, or liabilities incurred or to be incurred in future. It is difficult to conceive any principle of equity which obliges a person in the position of a constructive trustee in respect of X number of shares to also become a constructive trustee in respect of an additional, say, Y number of shares and thus become a trustee of X plus Y shares. Such a burden is not a necessary consequence or an incident of the original transaction of purchase and sale of shares or of the legal relationship of trustee and cestui que trust thusview can be sustained on the intelligible principle that the transferor as a constructive trustee in respect of the shares sold by him cannot retain any benefit himself of the new issue which is annexed to the shares sold by him and if any benefit arises out of that offer made under Section 105-C, that benefit must go to the beneficiary, but more than that the beneficiary is not entitled to call upon the trustee to doMr. Pathak reiterated the argument that had been accepted by the High Court that if the only duty of Reddy was to transfer the offer made to him under Section 105-C to Sir Padampat after signing the renunciation, then in that case Sir Padampat could not get the full advantage of that offer because in that event the directors were not bound to allot the shares to the person in whose favour they have been renounced by the shareholder, while on an application made by the shareholder they were bound to allot him the shares offered. That disadvantage is certainly there but it has to be borne in mind that the relationship of constructive trustee and cestui que trust created on principles of equity cannot be extended ad infinitum in respect of all future acquisitions of rights annexed to the shares sold which acquisitions may involve not only rights but liabilities and obligations which the constructive trustee may not be prepared to undertake, and in this situation the cestui que trust may not be able to get all the benefits of the fresh incident annexed to the ownership of the shares that he had purchased. He himself may be blamable for the loss that he may have thus to suffer by his not having made an application in time for getting himself registered on the register of members and for not having taken proper steps in law for getting his transfer recognized by the company if the request made by him has already been refused by the company. The equitable principle on the basis of which the legal relationship between the transferor and the transferee arises cannot be worker in a manner so as to prejudice the position of the constructive trustee and made him an accounting party in respect of all privileges or fresh offers that may be annexed to the shares sold for all time to comeMr. Pathak urged that his client was prepared not only to pay the application money and the allotment money to the trustee but was further prepared to indemnify him against any future calls on those shares. It has to be remembered that even the original 484 shares sold by Reddy to Sir Padampat were partly paid up shares and Reddy was liable to pay the amount of any call made on those shares, subject to being indemnified when the time arose by Sir Padampat for the amount paid on those shares. If Mr. Pathaks convention is accepted, then Reddy will also become further liable for future calls on the new 384 shares. He would be entitled only to claim indemnity when an occasion arose. It is well settled that a trustee is not entitled to claim indemnity till he suffers an injury for which he has to be indemnified. But the fact remains that the liability to pay calls is for the time being his liability and not that of the cestui que trust. Once his name is entered on the register of shareholders, a mere right to claim indemnity may, in a case like the present, when the time to claim it arises, prove to be merely illusory. The shares may go down in value, the company may go in liquidation, or the financial position of the equitable owner of the shares maythus hold that Sir Padampat was not entitled to call upon Reddy to make an application in his own name for the acquisition of the newly issued shares by investing his own money in the first instance and then recovering it from Sir Padampat or by signing the application form and sending it to Sir Padampat for acquiring the shares in his name. All that he was entitled to was to call upon him to send him the renunciation form. This Reddy was prepared to do and offered to do so provided the names of all the persons in whose favour renunciation had to be made were disclosed to him. Admittedly this was never done and Sir Padampat could not gain his object by merely having the renunciation form, because the directors of the company in the circumstances of this case would never have granted his application, if made in his own name on the basis of the renunciation form signed by Reddy. Sir Padampats or the receivers suit therefore in this view of the case could not have been decreedOn the view expressed above, both the suits must fail. If Sir Padampat had no right to call upon the trustee to buy the newly offered shares in his own name for his benefit, a fortiori, the receiver appointed by the court had also no such right, and on this short ground the claim put forward in both the suits has to beare further of the opinion that even if it was held that Reddy was under a duty to sign the application form and the renunciation form and send them over to Sir Padampat to enable the latter to obtain the newly offered shares in Reddys name, the requisition that was made on his behalf directing the trustee to purchase these shares and to exercise the option was ineffective and inadequate. On the basis of that requisition, it was not possible for the trustee to carry out the mandate of the cestui que trust, and, that being so, on this ground also, the plaintiff was disentitled to relief in the twoPathak argued that the plaintiff was entitled to reliefs (a) and (b) both in his suit as well as in the receivers suit and that the receivers suit was wrongly dismissed by the High Court. We are unable to agree. In our opinion, the High Court rightly held that the receiver appointed in the suit of Sir Padampat could not acquire the newly issued shares in his name. That privilege was conferred by Section 105-C only on a person whose name was on the register of members. The receivers name admittedly was not in the register and the company was not bound to entertain that application. Mr. Pathak argued that that may be so but the receiver was not making an application in his individual right but he had been armed by the court with power to apply in the right of the defendant Reddy. The fact however is that the receiver made the application in his own name. Even if Mr. Pathaks contention is right the company was no party to the suit filed by Sir Padampat against Reddy and that being so, no order could be issued to the company in that suit to recognize the receiver as a shareholder in place of Reddy. The matter might have been different if the company was a party to the suit and was ordered by the court to register the receivers to name in place of Reddys for the 484 shares purchased by Sir Padampat and was also ordered to issue new shares in the name of the receiver. It is not necessary for us to offer any final opinion on the question whether the court would have been within its right to direct his name to be included in the register, even if the company was impleaded in the suit filed by Sir Padampat against Reddy. We are however quite clear that the company not having been impleaded in that suit, it was not bound to issue the new shares in the name of a person whose name was not already in the register of members even if he represented a person whose name was already in the register. The High Court was thus right in dismissing the receivers suit. We are also of the opinion that the appellate Bench of the High Court was also right when it declined to grant reliefs (a) and (b) of the plant to Sirseems to have been overlooked that if sanction to issue new capital was somehow obtained, that capital would also have to be distributed as directed by Section 105-C and could not be allotted by the directors in favour of any particular shareholder. In the altered situation that arose after the institution of the suit, if the plaintiff succeeded, the only relief that could be granted to him was the relief of damages. We are however unable to grant the relief to the plaintiff in view of our finding that Reddy could not be compelled as constructive trustee to buy new shares in his own name for the cestui que trust and further in view of our finding that even if he could be compelled to acquire those shares in his own name for the cestui que trust he could not be said to have defaulted in his duty in carrying out the directions of the cestui que trust as in this case no proper and valid requisition was made by the cestui que trust on the trustee for the acquisition of those shares. The plaintiffs in the two suits are therefore not entitled to any relief