Case: Madanlal Fakirchand Dudhediya Vs. Shree Changdeo Sugar Mills Ltd

That question arises in this way. The appellant, Madanlal Fakirchand Dudhediya, and respondents Nos. 2 and 3 and the father of respondents Nos. 7 to 10 were the promoters of the 1st respondent Co., Shree Changdeo Sugar Mills Ltd. The said Co. was incorporated in 1939 as a Private Limited Company. It was, however, converted into a Public Ltd. Co. in 1944. At the time of the original incorporation of the Co. a Promoters Agreement was arrived at whereby the Co. agreed during its existence to pay a sum equal to 3 1/8 % every year out of its net profits to each of the four promoters. As a result of this agreement, the aggregate consideration payable every year to the promoters came to 12 1/2 % of the net profits of the Co. Article 3 of the Articles of Association of the Co. justified the making of this agreement. In 1941 the Co. came into financial difficulties and in consequence, on the 22nd April, 1941, a tripartite Agreement was arrived at between the Company, M/s. Ardeshir Hormusji Bhiwandiwalla and Co., and the Promoters. Under this agreement, it was agreed, inter alia, to appoint the said firm of Bhiwandiwalla and Co. or its nominee as the Managing Agents of the Co. for 10 years with an option to the Co. to extend the said period upon certain terms. At this time, the earlier agreement as to the payment of the promoters commission was modified and the said commission payable to the promoters was reduced to 6 1/4 % and Art. 3 of the Articles of Association was accordingly amended. Three years later, disputes arose between the parties and they led to three suits filed on the original side of the Bombay High Court. All the said suits were compromised and decrees by consent were passed in them. One of the terms of the compromise was that the promoters commission payable to the four promoters which was Rs. 1-9-0 to each of them and which came to 6 1/4 % in the aggregate payable to them under the agreement entered into between them and the Managing Agents shall remain in force as in the Agreement and the promoters right of commission shall continue accordingly. Thus, as a result of the compromise, the promoters commission which was payable to them under the earlier Agreement was saved.2. After the Act came into force on the 1st of April, 1956, the appellant received a letter from respondent No. 1 informing him that respondent No. 1 had been advised that as from the date of the commencement of the Act, the agreement between the parties as to the payment of the promoters commission had become illegal and void and that the 1st respondent would not, therefore, pay any more commissions after April, 1956. In October, 1956 the appellant received a notice from the 1st respondent that an extraordinary general meeting of the shareholders of the 1st respondent Co. was going to be held, inter alia, for the purpose of amending certain Articles of Association of the Co. One of the amendments proposed to be put before the said meeting was to delete Article 3 from the Articles of Association of the Co. On receipt of this notice, the appellant filed the present suit on the 13th December 1956. By his plaint, he claimed a declaration that the argument between the parties was valid and legal and he asked for an injunction restraining respondent No. 1 from passing any resolution deleting Article 3 of the Articles of Association of the respondent Co. or from taking any action on the basis that the said agreement had become illegal and void. Respondent No. 1 resisted this suit. It was urged on its behalf that as a result of the provisions of Section 76(1) and (2) of the Act, the agreement in question had become void and could not be enforced. Respondents Nos. 2 to 10 are the other beneficiaries under the said agreement and they supported the appellant. The Learned Judge who tried the suit held that the defence raised by respondent No. 1 was well-founded and that the agreement in question having become void and unenforceable under the relevant provisions of the Act, no declaration could be granted or no injunction could be issued in favour of the appellant as claimed by him. In the result, the appellants suit was dismissed with costs. The appellant then preferred an appeal challenging the correctness of the decision of the Trial Court. The Court of Appeal, however, agreed with the view taken by the learned Trial Judge and dismissed the appeal preferred by the appellant. The appellant then applied for and obtained a certificate from the High Court and it is with the said certificate that he has come to this Court by his present appeal.

Court's reasoning:
Section 76 refers, inter alia, to the commissions payable to any person for his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares of a Company. That being so, since the present agreement has been entered into for consideration other than those specified in S. 76, its enforcement cannot be resisted on the ground that it is hit by S. 76. The decision of this question naturally depends upon the construction of the two agreements. The first agreement of 1939 provides that for the help rendered and pains taken by the promoters and because each of them had agreed to purchase and had purchased shares worth Rs. 11/2 lakhs out of the Cos capital, the Co. was entering into an agreement with them for the payment of the commission. The agreement provided that the said commission would be payable as long as the Co. was in existence. It is thus clear that though the help rendered by the promoters and pains taken by them are incidentally referred to the agreement is substantially, if not entirely, based upon the fact that the promoters had agreed to purchase and had purchased shares worth Rs. 11/2 lakhs and so, there can be no doubt that this agreement clearly falls within the mischief of S. 76. It is, however, urged that the complexion of the first agreement changed completely when the second agreement was entered into in 1941. In this latter agreement which was entered into between the promoters and the new Managing Agents, the former agreed to receive 61/4% as promoters commission, instead 12 1/2 per cent "as provided in our respective agreements with the Company." That is the substance of the agreement. However, Mr. Sastri relies on the other recitals in the document in support of his argument that the latter agreement was not in consideration for the purchase of shares by the promoters. These recitals refer to the fact that the promoters had resigned their office and surrendered and renounced their rights to act as the Managing Director or Managing Directors of respondent No. 1 and it was in consideration of this fact that the agreement was made. We are not impressed by this argument. It is true that before this agreement was made, the new Managing Agents were appointed and that was no doubt the occasion for the making of the agreement. But the essential part of the new agreement was the reduction made in the commission payable to the promoters; for the rest the earlier agreement continued and so, in determining the scope and nature of this latter agreement, we have inevitably to go back to the first agreement. As we have just pointed out, the operative clause in the agreement in terms refers to the earlier agreements between the respective parties and avers that instead of 12 1/2 per cent, as provided by the said agreements, 6 1/4% would hereafter be paid. Therefore we are satisfied that the payment claimed by the appellant is payment by way of commission to which S. 76 would apply.5. Then it is argued that though the purchase of shares by the promoters may partly be the consideration for the agreement the service rendered by them and the pains taken by them in promoting the Co. were also set out in the first agreement as forming part of the consideration and even if the agreement as to the payment of commission all within Section 76, part of the agreement which is based on other considerations would be outside S. 76 and the two parts being severable, it is necessary to determine how much the appellant would be entitled to claim under the part which is valid. In our opinion, this argument is not open to the appellant at this stage. It appears that in the trial Court, an attempt was made on behalf of the appellant to lead oral evidence for the purpose of saying that the two considerations could be severed and so, the amount payable to the appellant in respect of that part of the agreement which was valid, should be determined. The learned Trial Judge did not allow oral evidence to be led as suggested by the appellant because he found that the case sought to be made by adducing the said oral evidence was not made out by any averments in the plaint nor was any attempt made to raise any issue in that behalf, at the time when the issues were framed. Indeed, it appears from the judgment of the learned Trial Judge that the attempt made by the appellant in that behalf was feeble and half-hearted. Thus, in the Trial Court, the appellant was not allowed to make out this case and when he went before the Court of Appeal, he apparently made no grievance about the decision of the Trial Court; otherwise the appeal Court would have dealt with this point. Therefore, we do not think that the appellant can be permitted to raise this point before us in thisis true that the shareholder would have been able to sell his shares at a premium and thereby obtain a benefit, but the said benefit cannot be said to have been obtained by him at the expense of the companys capital. Thus, the application made by the appellant was outside the prohibition contained in S. 8(2). In other words, this decision is directly a decision on the construction of S.is suggested that this sentence amounts to a decision that the provisions of S. 8(1) have reference to the payment of commission out of capital and, therefore, have no reference to the payment of commission out of profits. We are not inclined to accept this contention. It is clear that in the case of Hilder, 1902 AC 474, the House of Lords had no occasion to consider whether or not commission could be paid out of profits. That point simply did not arise in that litigation.It is thus clear that the views expressed by the different writers on Company Law disclose a difference of approach and do not appear to be based on any judicial decisions. In fact, though Mr. Sastri conceded that there was no direct decision on this point, he contended that the absence of any judicial decision shows that the point was neverIn construing section 76(1) and (2), it would be necessary to bear in mind the relevant rules of construction. The first rule of construction which is elementary, is that the words used in the section must be given their plain grammatical meaning. Since we are dealing with two sub-sections of S. 76, it is necessary that the said two sub-sections must be construed as a whole "each portion throwing light, if need be, on the rest." The two sub-sections must be read as parts of an integral whole and as being inter-dependent; an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy. If repugnancy cannot possibly be avoided, then a question may arise as to which of the two should prevail. But that question can arise only if repugnancy cannot be avoided.18. The important part in S.76(1) with which we are directly concerned is the one that provides that the commission paid or agreed to be paid does not exceed the limit therein prescribed. One of the conditions which has to be satisfied in the matter of payment of commission to a person subscribing for any shares is that the said commission shall not exceed 5% of the price at which the shares are issued or the amount or rate authorised by the articles, whichever is less. It is significant that this provision seeks to place an absolute ceiling on the payment of commission and in doing so it refers to the commission generally as such and does not refer to the commission paid either out of capital or out of profits; so that S. 76(1) read by itself unambiguously and clearly prescribes a ceiling on the payment of commission whatever may be the source from which the said commission may be paid. We have already seen that S. 76(1) cannot be treated merely as an enabling section. This position has been conceded by the appellant before us, and so there can be no doubt that the ceiling placed on the payment of commission is intended to act as a prohibition against the payment of any commission beyond the said ceiling. Therefore, section 76(l)(i) leaves no doubt that it covers commission paid either out of capital or out ofprovides that no company shall allot any of its shares or debentures or apply any of its capital moneys, either directly or indirectly, in payment of any commission, discount or allowance, to any person in consideration of the objects therein specified save as aforesaid and as provided in Section 79. In other words, what is prohibited by sub-s. (2) is save as aforesaid in S. 76(1) just as it is save as provided in S. 79. That means that prohibition enacted by S. 76(2) has to be worked out in the light of S. 76(1) and S. 79. The prohibition imposed by S. 76(1) is in general terms and it includes payments from any source or fund. The Legislature knew that payment of commission may be made by adopting several devices an what sub-s. (2) intends to achieve is to prohibit the adoption of such devices by making it clear that whatever be the nature of the device adopted, if the object of the device is to pay commission, then it must conform to the limit prescribed by S. 76(1). It is well-known that sometimes shares or debentures are allotted or capital money is applied in payment of commission. Similarly, under the garb of what may ostensibly be lawful payments, for instance, in respect of purchase money of any property acquired by the company or the contract price of any work to be executed for the company, commission may be paid; the purchase price of any property or the contract price of any work may be fixed so as to include something more than its real value, the difference being intended to be paid as commission. It was in view of these devices which the Legislature knew were being adopted for the payment of commission that S. 76(2) has been inserted in the form which it has taken. As has been observed by Craies On Statute Law, provisos are often inserted "to allay fears" or to remove misapprehensions. Just as S. 76(2) has to be read in the light of S. 79 and subject to its provision, so it has to be read in the light of S.76 (1) and subject to its provision. In other words, in order to clarify the position in regard to the devices which may be adopted to defeat the limit imposed by S. 76(1), the Legislature has provided by S. 76(2) that these devices are also subject to S. 76(1) and payments can be made under those garbs or devices, provided they do not exceed the limit prescribed by S. 76(1).In our opinion, therefore, far from there being any conflict or repugnancy between S. 76(1) and S. 76(2), they constitute one integrated provision, one of the objects of which is to impose a limit on the payment of commission either in respect of shares or in respect of debentures. The anxiety to save the profits of the company is as much in evidence in S. 76 (1) as it is in other sections to which we have alreadythere can be no doubt that after 1960, the limit imposed on the payment of commission in respect of shares and debentures applies as much to commissions out of capital as to those which are paid out of profits. It may be permissible to assume that by the amendment made in 1960, the Legislature has attempted to remove doubt that may have arisen owing to the use of the word "capital" in S. 76(2) and has now made its intentions clear beyond any doubt. This amendment along with several others which were made in 1960 was presumably the result of the recommendation of the Committee appointed in that behalf. In its report, the Committee observed that "in order to remove any doubt, we would recommend the deletion of the word "capital" from S. 76(2)". Thus, it is clear that the point raised in the present appeal cannot arise under the amended provisions of S.our opinion, there is no substance in this argument, Section 9 of the Act is a clear answer to this contention. Under S. 9(a) any agreement executed by the company cannot prevail if it is inconsistent with the provisions of the Act and under S. 9(b) the articles shall likewise not prevail if they are inconsistent with the provisions of the Act. Section 645 leads to the same conclusion.