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

In July, 1944, a struggle commenced between the group of Sir Padampat Singhania and the group of Shri Meneklal Prem Chand for control of the management of the Bombay Life Assurance Co. Ltd. and there was a race for the acquisition of the shares of the company between the two groups. Sir Padampat, the appellant in Civil Appeal No. 54 of 1950, and respondent in the cross appeal No. 53 of 1950, on the 25th July, 1944, purchased through Shri P. N. Gupta, his Bombay agent, 667 shares of the company, 484 out of which belonged to Mr. Reddy, the appellant in C.A. No. 53 of 1950 and respondent in Civil Appeal No. 54 ofThis deal was made on his behalf by a firm of share and stock brokers Bhaidas Gulabdas. The shares were sold at the rate of Rs. 300 per share. On the 29th July Gupta executed a receipt in favour of Bhaidas Gulabdas acknowledging the receipt of these shares, while Bhaidas Gulabdas as constituted attorneys of Mr. Reddy executed five blank transfer forms in respect of the 484 shares sold by them - four for 100 shares each, and one for 84 shares. It is alleged that these transfer forms were ultimately filled in the name of Sir Padampat Singhania. Sir Padampat, however, made no application to the company for registration of his name in the register of shareholders till the 11th April, 1945. On an application being made, the company declined to register the shares in his name and intimated to him their refusal to do so on the 8th May,the 8th January, 1945, the company, in order to combat the move of Sir Padampat to acquire control of its management, made an application under rule 94-A of the Defence of India Rules for sanction for the issue of further capital. The sanction was granted and the company was authorised within a time limit of six months to increase the its capital by a sum of Rs. 4, 59, 600 by issuing 4, 596 shares; otherwise the sanction was to lapse. On the 21st February, 1945, the directors of the company passed a resolution increasing the capital to the company by issuing these 4, 596 shares of Rs. 100 each at a premium of Rs. 75 per share. On the existing shares only Rs. 25 per share had been called up. The company therefore decided that the new shares should be offered to the existing shareholders in the proportion of four shares to every five shares held for shareholders. Reddy, as a shareholder of 534 shares (including 484 shares sold by him on 25th July but yet not registered in the transferees name), thus became entitled to 427 new shares and one fractional certificate. Out of the 427 new shares offered to him he was entitled to 40 shares in his own right which appertained to 50 unsold shares which he still held in the company. The other 384 shares appertained to the shares that he had sold. The company issued a circular letter to every shareholder giving the details of the offer made and along with it sent two forms, A and B. Form A being the application form for allotment of new shares, the shareholder had to subscribe his name to it and return it to the company for allotment of the shares offered accompanied by a cheque for the amount that had to be paid for obtaining the shares. Form B was a renunciation form. In case a shareholder did not want all of any of the shares offered to be allotted to him, he was allowed to renounce his right in favour of some other personOn the 21st February, 1945, Reddy returned to the company form A duly filled in, requesting the company for allotment of 40 shares out of the new issue, which appertained to the 50 shares he still held in the company. In respect of the balance of 384 shares offered to him and which appertained to the 484 shares sold by him he said nothing. The renunciation form was retained by him. On the 23rd February, 1945, Messrs. J. L. Mehta and N. K. Bhartiya purporting to act on behalf of the purchasers of 484 shares wrote to Reddy asking him to forward to them the companys circular letter along with forms A and B as and when to received by him, after appending to them his signatures, to enable them to apply for these shares either in Mr. Reddys name or in the name of the transferees. He was told that he was to hold the shares offered when acquired as a trustee for them. On the 28th February, 1945, Messrs. Craigie Blunt & Caroe, a firm of solicitors, also acting on behalf of the purchasers, wrote to Mr. Reddy a letter to a similar effect. This was prefaced with the remark that the offer of fresh shares by the company was illegal. Without prejudice to that contention, Mr. Reddy was called upon to apply for the newly offered shares and obtain them on their behalf or to send them the application form (A) and the renunciation form (B) and the fractional certificate to enable them to obtain the new shares offered which appertained to the 484 shares sold by him. The relevant part of this letter reads thusare instructed by our clients, the parties to whom you sold these shares, Mr. J. L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhania, Mr. N. K. Bhartiya and others to call upon you to apply for the additional shares and fractional certificates now issued to which you have become entitled, and to let us know when you have done so. When allotted to you, you will hold these shares on their behalf and please then hand them to the Hindustan Commercial Bank Ltd., Appollo Street, Fort, Bombay, who will pay you the sum of Rs. 100 for every share allotted to you, which should be accompanied by blank transfer form signed by you as the transferor and the form of renunciation unsigned. They will also pay you the proportionate sum on any fractional certificate to which you are entitled on handing over the same to the bank in blank unsigned on or before the 7th March,you prefer to do so, please send the form of application A duly signed by you as well as the renunciation form B as also the fractional certificate and the relevant application attached thereto unsigned in blank to our client, Mr. N. K. Bhartiya at Second Floor, Rahimtoola House, Homji Street, Fort, Bombay, so as to reach him before the 7th March, 1945, and he will then forward the application to the company on your behalf along with the necessaryclients agree to indemnify you against any and every liability which you will incur by applying for the partly paidare instructed to point out that you are a trustee for our clients by virtue of the fact that you have sold your shares in this company to them pending our clients name being entered in the register in respect of the shares which you have sold to them and that you are bound to comply with out clientsHindustan Commercial Bank Ltd. also wrote a letter to Mr. Reddy on the 1st of March 1945, which reads thusreference to a circular dated the 28th February, 1945, issued by Messrs. Craigie Blunt and Caroe on behalf of their clients Mr. J. L. Mehta, Sir Padampat Singhania, Lala Kailashpat Singhania, Mr. N. K. Bhartiya and others, we have instructions to pay you in respect of all shares of the abovenamed company in the new issue that you deliver to us at Rs. 100 per share, when such shares are allotted to you in exchanger for the allotment letters or share scrips with a duly signed transfer deed. We have also instructions to pay you at Rs. 20 per fractional certificated to us on or before the 7th March, 1945. Please note that we shall do the same if the shares and/or fractional certificates are delivered to us in terms of the circular mentioned above. You may send these to us through any bank and the exchange commission will also be paid byletters indicate that the persons named therein with some undisclosed persons were the purchasers of the shares sold by Reddy and they were the equitable owners of the shares, in spite of the original bargain having been made by Sir Padampat. It was not disclosed in these letters that the persons named therein were mere nominees or benamidars of Sir Padampat. One fact however is beyond dispute that the names of these persons were not entered in the blank transfer forms in the column of transferee, and eventually it was the name of Sir Padampat alone that was enteredReddy replied to all these communications received by him on the 3rd March, 1945, in the following termsreference to all these communications, I have to state that nearly eight months have elapsed since I sold the shares and the shares are not as yet transferred to the names of the purchasers. I have no objection to give the renunciation forms, duly signed in favour of the real and true purchasersAs regards the requisition made by you in paras 4 and 5 of the circular letter of 28th February, 1945, I fail to understand as to how I am under an obligation to comply with it. I am ready and willing to sigh renunciation form in favour of the true purchasers, on my shares are the real and those purchasers of those shares by their producing the transfer forms given by me duly executed by them along with the shareelse may be said about the attitude of Reddy, he was certainly entitled to know the name of the person or persons who were the real purchasers of the shares sold, because he could only respect and comply with the requisition made by those persons and those persons alone and by none else. Not satisfied with this reply and in view of the fact that the last date for making the application for the issue of additional shares was to expire on the 10th March, Sir Padampat instituted suit No. 336 of 1945 on the 8th March, 1945, on the Original Side of the Bombay High Court, inter alia, for the following reliefs against Mr. Reddy as the sole defendant. The company was not impleaded in this suit"1. That the defendant may be ordered to send and deliver to the plaintiff the application form A annexed to the circular letter for the number of additional shares allotable to him, as also the fractional certificates and the application relating thereto (unsigned and in blank) upon the plaintiff paying to him such sum as this Honourable Court may direct and/or upon the plaintiff giving such indemnity as this Honble Court may deemThat the defendant may be ordered upon receiving the certificates of the new shares to hand over the same as also the fractional certificates to the plaintiff together with transfer forms in blank duly signed bythe 7th December, 1945, the plaint was amended and an alternative relief for a decree for Rs. 7, 29, 600 by was of damages was includedwas averred in the plaint that upon the sale by the defendant of 484 shares the plaintiff became the beneficial owner of those shares and the defendant became a trustee for him of all rights and benefits whatsoever appertaining or accruing to the said shares, that one of such rights was the right and opportunity to apply for shares forming part of the new issue, that the defendant was bound to do all lawful acts in relation to and for the purpose of securing the said benefits for the plaintiff and which the plaintiff might call upon him to do, on terms of the plaintiff indemnifying him against all the consequences thereof, and that the plaintiff was ready and willing to do the same. It was further alleged that unless the plaintiffs rights were safeguarded by the 10th March, 1945, which was the last day for making application for the shares, he will be irretrievably prejudiced. An application was made for the appointment of a receiver of the application form and letter of renunciation and of the rights of Reddy in the new issue of sharesOn the same day BHAGWATI J. made an order under Order XL, rule 1, of the Civil Procedure Code, appointing the court receiver, interim receiver of the application form and letter or renunciation and of the rights, if any, of the defendant in the 384 shares of the Bombay Life Assurance Co. Ltd. The receiver was given power to exercise all the rights of the defendant in respect of the said shares on the plaintiff giving the usual undertakings. On the 10th March, 1945, the receiver made a request to the company for the allotment to him of 384 shares to the new issue appertaining to the 484 shares standing in Reddys name in the company register and sold by him on the 25th July, 1944. This application was accompanied by a remittance of Rs. 38, 400 payable on these shares according to the resolution of the board. The company was requested to register the name of the receiver in the register of members in respect of these shares. On the 30th April, 1945, the company intimated to the receiver that his application for allotment of shares was considered by the board of directors in a meeting held on the 21st April, 1945, and it was resolved to reject the same because Reddy had accepted the companys offer only on the extent of 40 shares and the offer regarding the balance hadresult was that the company refused to register the name of the receiver in respect of the new shares on the 30th April, 1945, and it also refused Sir Padampats application for registering his name as transferee in respect of the 484 shares of Reddy purchased by him which might have entitled him to retain the new shares in his own name. Sir Padampat having thus failed in getting the newly issued shares registered in the name of the receiver had no alternative left but to fight out the suit already instituted to obtain practically the same reliefs which were claimed in his own suit, by the receiver against the company with the leave of the court, namely, suit No. 786 ofThis suit was filed on the 8th March, 1948, after the lapse of about three years of the companys rejection of the receivers application. It was explained in para. 14 of the plaint that the suit had not been filed earlier as the validity of the issue of the issue of the new shares was being challenged in suit No. 347 of 1945. The prayer in this suit was that the defendant company be ordered to allot to the plaintiff 384 shares mentioned in the application and to put his name on the share register of the company for the said sharesBoth the suits were heard by BHAGWATI J., who delivered one judgment in both of them and substantially granted the reliefs claimed in both the suits. It was held by the learned Judge that the 484 shares which Reddy had sold through Bhaidas Gulabdas had been purchased by Sir Padampat, that as trustee of these shares he as vendor was also a trustee of all property rights annexed to the shares and that it was the duty of Reddy, when called upon to do so by Sir Padampat on proper safeguard and indemnity for payment, to transfer to Sir Padampat all the benefits which he derived by the issue of the new shares by virtue of his being their legal owner. It was further held that a proper requisition had been made by the beneficial owner on the trustee to obtain for him these shares and that the trustee regulated in his huts in not complying with that requisition and that the company was also in error in refusing the application of the court receiver for registration of his name as a shareholder in respect of the new shares on the remaining shares had lapsed. It was argued on behalf of the company that the sanction given by the Examiner of Capital Issues having lapsed, no relief could be given against the company and it could not be ordered to allot shares to the plaintiff as there was no available capital which could be issued. BHAGWATI J., however took the view that the plaintiff could not be deprived of his rights by reason of this circumstance. In the result he ordered the company with the order and allot within three months 384 shares to the plaintiff after obtaining a fresh sanction for the same from the authority concerned. Before concluding the learned Judge said that issues 10 and 11 had not been argued before him and the contentions raised therein seem to have been abandoned and that even otherwise there was no merit in them. Against this common judgment in both the suits, Reddy and the company preferred separate appeals. The appeal Bench of the High Court allowed the companys appeal and dismissed the receivers suit on the finding that the court receiver was not entitled to the allotment of the new shares in his own name as such. Civil Appeal No. 52 of 1950 has been preferred against this decision. In suit No. 366 of 1945 Reddys appeal was allowed to the extent that the plaintiff was held disentitled by the reason of lapse of the sanction to reliefs (a) and (b) granted to him by BHAGWATI J. It was however held that he was a trustee of Sir Padampat in respect of the shares of the new issue and he having failed to apply for the new shares was liable to him in damages and the fact that he made an application in respect of 40 shares did not disentitle him to make another application in respect to the 384 shares. It was also held that a proper requisition had been made by the beneficiary upon the trustee to carry out the trust and he had defaulted in complying with the requisition.

Reasoning:
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