Case: Madanlal Fakirchand Dudhediya Vs. Changdeo Sugar Mills Limited, Bombay &amp; Others

2. The first defendant company Shree Changedeo Sugar Mills Limited is a public limited company. Before it was incorporated into a public limited company, it was a private limited company. The promoters of the private limited company were the plaintiff Madanlal, defendant No. 2 Nanasaheb, defendant No. 3 Kundalik and Kasturchand, the father of defendant Nos. 7The private limited company was incorporated in 1939 and later converted into a public limited company, as I have just said, in the year 1944 by reason of a settlement which was arrived at in the three suits pending in the High Court between Messrs. A. H. Bhiwandiwala and Co., the Managing Directors of the Company, and the promotors. At the time when the company was incorporated, a promoters agreement was arrived at onand it stated :"Because the Company entered into an agreement to pay the abovenamed promoters a sum equal to 12 per cent of its net profit till expiry of the period and on conditions mentioned in this agreement, and for other reasons, each of them agreed to purchase shares worth Rupeesout of the Companys capital and (thus) they established the Company. Also in the rules framed for partners mentioned in the Articles of Association it has been stated that the Company will enter into such an agreement with the promoters for these reasons. For the help rendered and pains taken by you the promoters and because each of you has agreed to purchase and has purchased shares worth Rupeesout of the Companys capital, the Company is entering into an agreement with you and also the three other persons as follows : 1. The Company, Companys hukdars, guardians, heirs (and) assignees shall pay each of you the promoters, your guardians, heirs, executors, administrators (and) assigns a sum equal to (Rs.(in words Rupees three and annas two), per cent out of the Companys net profit as long as the Company is in existence. The Companys net profit shall be understood as described in S. 87(c) of the Indian Companies Act."There was a provision made in the Articles of Association for an agreement between the Company and the promoters and the provision was made in Art. 3. It was in these words :"The company shall enter into the following agreement : An agreement with each of Messrs. Kasturchand Shrikissan Jhaver, Nanasaheb Bapuji Jagtap, Kundalik Narayan Khilari and Madanlal Fakirchand Dudhediya regarding payment of a percentage of the net profits of the Company to each of them and their respective heirs, executors, administrators and assigns."The agreement datedwas later modified onand by the modified agreement the promoters for themselves and their respective heirs, executors and administrators resigned their office and surrendered and renounced their rights to act as a Managing Director or Managing Directors of the Changdeo Sugar Mills Ltd., conferred on them by the Articles of Association of the Company and they further agreed to receive 6 1/4 per cent as promoters commission instead of 12 1/2 per cent as provided in their respective agreement with the Company. The modified agreement was confirmed onwhen the three suits to which I have just referred were compromised. The new Companies Act, being Act No. I of 1956, came into force onThereafter, the plaintiff received a letter from the Company intimating to him that the Company would not pay any more commission after April 1956 as the agreement between the parties regarding payment of commission out of the net profits of the Company had become illegal. Later, in October 1956, the plaintiff received a notice from the Company informing him that an extraordinary general meeting of the shareholders of the Company was to be held inter alia for the purpose of amending certain Articles of Association of the Company. One of the proposed amendments was to delete Art. 3 from the Articles of the Association of theplaintiff contends in the suit that the provisions of the Companies Act, 1956, do not offend against the agreement datedwhich modified the prior agreement datedbetween the parties and has filed the suit for a declaration that the agreement between the parties is a valid and legal agreement and for an injunction to restrain the Company from passing a resolution deleting Art. 3 of the Articles of Association of the Company or from taking any action on the footing that the agreement had become illegal and void.3. The suit is resisted by the first defendant company mainly upon the contention that after the coming into force of the Companies Act, 1956, the agreements datedmade between the Company on the one hand and each of the plaintiff, defendant No. 2, defendant No. 3 and Kasturchand on the other hand, as modified by the agreements datedhad become void, illegal and inoperative and did not bind the first defendant company. It is contended that, in view of the provisions of S. 9 and S.76 of the Companies Act, 1956, the agreement datedto pay a sum equal to 6 1/4 per cent out of t he Companys net profit to the original promoters, of whom the plaintiff is one, is not binding on the first defendant company.The learned Judge took the view that the agreements datedas modified by the agreement datedhad become illegal and void and, therefore, they were not binding on the first defendant company on the coming into force of the Companies Act, 1956, onIt is this view which is challenged by Mr. Munshi, the learned counsel for the plaintiff, in this appeal.

Court's reasoning:
With respect, we are unable to agree with Mr. Munshi. By the agreement datedthe changes made in the prior agreement were mainly two. The Managing Directors rights, which each of the promoters was to enjoy by turn, were surrendered and the aggregate commission payable to the promoters was reduced to a sum equal to 6 1/4 per cent from 12 1/2 per cent of the net profit of the Company. The essential character of the original agreement, viz. that the commission was to be paid in consideration of the promoters subscribing or agreeing to subscribe for shares or debentures was preserved. It was because of that agreement that the commission, in all aggregating to 6 1/4 per cent of the net profit was agreed to be paid to the plaintiff, defendant No. 2, defendant No. 3 and the father of defendants Nos. 7 to 10 by the agreement datedThe words "we hereby further agree to receive 6 1/4 per cent as promoters commission instead of 12 1/2 per cent as provided in our respective agreements with the Company" are clearly referable to the agreement datedwhich was indisputably an agreement for subscribing for shares or debentures. In our view, therefore, the agreement datedis an agreement to pay commission in consideration of an agreement to subscribe for shares or debentures or procure subscriptions for shares or debentures. Besides, it is to be noted that in the plaint there is no pleading that the character of the original agreement datedwas so thoroughly changed that the agreement datedceased to be an agreement for subscribing for shares or debentures. On the contrary, in paragraph 25 of the plaint, the plaintiff averred that the amounts of the commission were payable as before by the Company. The words "as before" would destroy the present contention of the plaintiff that the agreement datedwas not an agreement to pay commission in consideration of subscribing or agreeing to subscribe for shares orare unable to agree. The English Acts regulated the structure of limited companies in England and concerned themselves with the powers of the said companies and the limits within which they were free to act. The Indian enactment of 1956 was passed with a view to regulate the affairs of the companies in India, and that being so it would not be right, in our view, to turn to the English Acts for construing the provisions of the Indian Act ofIn our view, S. 76,(1) is both an enabling and a restrictive provision. It enables the companies to pay commission on shares and debentures, but restricts and regulates the quantum of the commission. The words "5 per cent of the price at which the shares are issued" and the words "2 1/2 per cent of the price at which the debentures are issued" which occur in(1) are indicative of the quantum of the commission to be paid. They are not indicative, in our view, of the source from which the payment of the commission may proceed. In our opinion, therefore, upon a natural construction of the language of(ii) of clause (b) of(I) of S. 76, it must be held that the payment of commission on shares and debentures might proceed from any source, capital monies or profit, but it is to be restricted up to a certain percentage, the percentage being different in the case of shares and debentures.There is another reason also why we feel we must reject Mr. Munshis contention that the restriction upon payment of a commission imposed by(1) of S. 76 extends only to the application of the capital of a company and not to the profit of the company. As I have said in the earlier part of this judgment, the restriction envisaged by(1) applies to the payment of a commission, not only on shares, but on the debentures as well. In other words,(1) places debentures on the same footing as. shares so far as the payment of a commission is concerned. This must serve, in our opinion, as a serious obstacle to the contention that(1) is only an enabling provision permitting the companies to pay commission out of capital. So far as the Companies Act is concerned, debentures are not a capital of a company. As Palmer has said in his Company Precedents, the word debenture is employed to describe an instrument under seal evidencing a debt. The essence of a debenture is originally an admission of indebtedness and that is its essential characteristic, the centralhave examined this contention carefully, but we regret we are unable to accept it. The agreements dated41 represented a contract between the parties. In pursuance of that contract, the Company agreed to pay a certain commission to the promoters; and the consideration for this was the agreement on the part of the promoters to subscribe for shares. That being so, we cannot accept the contention that the provisions of(1) of S. 76 would not be attracted in this case. Whatever commission the plaintiff is asking the Company to pay to him under these agreements, he is claiming by way of a consideration for the agreement between himself and the Company, the agreement being one of subscription for shares. The learned counsel for the first defendant company has contended before us, and rightly, that after the coming into force of the Act of 1956, no such payment by way of commission could be legally made under(1) of S. 76 as would contravene the provisions of sub clause(ii) of clause (b) of(1). The claim which the plaintiff has made is in contravention of sub clause (ii) of clause (b) and cannot be sustained. We are of the view that S. 76 applies to these agreements and accordingly the provisions of S. 9 would also be attracted. Section 9 lays down that, save as otherwise expressly provided in the Act, the provisions of the Act shall have effect, notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of thisas S. 9 says, the provisions of the Act (i.e. S. 76 in the context of this case) shall have effect, notwithstanding the fact that the agreements were executed before the coming into force of this Act. Therefore, in view of S. 9 read with S. 76 of the Act, we must accept the contention of the first defendant company that the plaintiff would not be entitled to receive any commission from the company in contravention of(ii) of clause (b) of(1) of S.is to be remembered, however, that the important words in S. 2 of the Capital Issues (Continuance of Control) Act are "in this Act."Therefore, the definitions of securities and of the expression issue of capital as contained in the Capital Issues (Continuance of Control) Act would not govern the meaning of the term debenture as it occurs in the Companies Act, 1956. So far as the Companies Act, 1956, is concerned, I have already stated, for the reasons given in the previous part of this judgment, that debenture is an instrument under seat evidencing a debt. It is not capital.