dedol-hf/india-case-legal-rag huggingface dataset:
Act  itself.  As already pointed out,. the  learned  counsel
for the respondents contended that the above was the correct
view  as to the scope of the. section.  The learned  counsel
for  the appellants however- urged that on a  proper  inter-
pretation of the.
    403
section  its  scope could not be limited only  to  cases  of
issue  of  further shares by creation of new shares  by  in-
creasing  the nominal capital of the company, but  that  the
language  employed in the section also included  within  its
ambit cases where there was a further issue of shares by the
directors,  within   the  authorized  capital.  The  learned
counsel  laid considerable emphasis on the expression  "fur-
ther  shares" used in the section and suggested  that  these
words  have  been used advisedly instead of  the  expression
"new  shares"  in  order to bring within the  scope  of  the
section increases in the capital of a company whether within
the authorised limit or outside it.
    The  third interpretation of the section  finds  support
from the language employed by the legislature in the opening
part  of the section, wherein it is said: "Where the  direc-
tors  decide to increase the capital of the company  by  the
issue  of  further shares.......  "The  directors  can  only
decide to increase the capital at their own initiative  when
they issue further shares out of the authorised capital.  In
no other case can the directors themselves decide as to  the
increase  in the capital of a company. Under section 50  the
capital can only be increased by a resolution of the  compa-
ny.   Once  the company has increased the  nominal  capital,
then  the directors can issue shares within the  new  limit.
Therefore the authority of the directors, strictly speaking,
in  respect  to  the increase of capital is  limited  to  an
increase within the authorised limit.  They cannot by  their
own  decision increase the nominal capital of  the  company.
In  view  of this language the third interpretation  of  the
section seems more plausible.
    The  expression "capital of a company" is  an  ambiguous
phrase  and  may mean either issued  capital  or  authorized
capital  according  to  the context.  It has  been  used  in
different senses in various parts of the Act.  In what sense
it  has  been used in this section is by no  means  an  easy
matter  to decide, particularly in view Of the fact that  in
spite  of  the introduction of this section  in  the  Indian
Companies  Act in the year 1936, article42 still remains  as
one  of the articles to be adopted by companies if  they  do
not choose otherwise
404
and this refers to cases of increase in the nominal  capital
of  a company.  In my opinion, for the purpose  of  deciding
the  present  case it is not necessary to pronounce  on  the
question  as to the precise scope of the section  because  I
consider  that on any interpretation of it  the  appellants'
contention  has to be negatived. If the interpretation  sug-
gested by the learned counsel for the respondents is accept-
ed,  then the plaintiffs' contention on the  first  question
fails, because here there has been no increase in the  capi-
tal of the company under section 50.  Conceding however  for
the  sake of argument (but not deciding) that the  scope  of
the  section is as it has been contended for by Sir  Noshir-
wan,  the question still remains "To what extent  has  there
been  a contravention of its provisions by the directors  in
the  present case."  So far as I have been able to see,  the
resolution passed by the directors is in accordance with the
provisions  of the section and does not  injuriously  affect
the shareholders or the company, and they cannot be said  to
have any cause of grievance against it.  In other words,  in
my  opinion, the resolution substantially complies with  the
provisions  of  section 105-C of the Indian  Companies  Act.
The directors offered all the new shares to the shareholders
in  the ratio of 4 to 5, as the shares of the  company  were
held  in  multiples of five to a larger extent than  in  any
other multiple.  The result of fixing this ratio is that 272
shares remain outside the offer.  In whatever other  propor-
tion the shares were offered, still a few shares were  bound
to  remain unoffered. If a liberal interpretation is  placed
on  the section, then it has to be held that the  directors'
resolution  substantially complies with its  provisions.  On
the other hand, if a technical and literal interpretation is
placed  on  the section, then the directors  were  bound  to
offer  the shares in the ratio of 4596/5404 in spite of  the
practical  difficulties  that  might result  in  the  actual
working  out of such a proportion, and irrespective also  of
whatever absurdities or anomalies might thus result. I am of
the  opinion  that the section has to be  given  a  workable
construction  and  a construction that  is  businesslike  in
preference  to a literal construction which might lead to  a
deadlock. In each
405
case  it should be seen whether the directors have  substan-
tially complied with the provisions of the section or not.
    The  basic idea underlying the section is that  whatever
is  given, is given to all the existing shareholders and  is
distributed equally and equitably between them.   It  cannot
be denied that all the shareholders were offered the further
shares  and  that they were offered equally  and  equitably.
Whatever  is the balance remains with the company  with  the
result that the capital remains unincreased to this  extent.
In such a situation it is  difficult to hold that the  reso-
lution  passed by the directors has contravened  the  provi-
sions  of  section  105-C and has caused  any  detriment  or
injury either to the company or to the shareholders. Even if
the  resolution  passed by the directors is held  to  be  in
technical breach of the section, as it has caused no  injury
to anybody, the resolution cannot be held to be void.  Under
the  law as it existed prior to 1936, if a company  incorpo-
rated in its Articles of Association article 42 mentioned in
the  schedule to the Indian Companies Act, then in the  case
of  issue of new shares the directors' discretion  was  cur-
tailed inasmuch as they were bound to offer these shares  in
the  first instance in proportion as nearly as  the  circum-
stances admitted to the amount of the existing shares to the
existing  shareholders but in all other cases their  discre-
tion  remained unfettered. It was open to a company  not  to
adopt  article  42  and thus fetter the  discretion  of  the
directors  even  in the case of the issue  of  new  capital.
After  1936 it has been made obligatory on the directors  to
give the first option to buy further shares to the  existing
shareholders  and without any favour to anyone.  That  being
the  intent  and purpose of the section, it has  been  fully
carried out by the directors in the present instance and has
been carried out in a businesslike way because the ratio  in
which  they offered the shares is the ratio which  works  to
the convenience of the largest number of shareholders as the
shares of the company are held mostly in multiples of  five.
If  the  shares were issued in any other ratio,  that  would
have created some difficulty in the way of shareholders  who
held shares in multiples of five and who owned 2,110
406
shares.  They would have been obliged to  collect  fractions
before  they  could  claim a whole share and  thus  make  an
application within the time allowed to exercise the  option.
Where the language of a statute in its Ordinary meaning  and
grammatical construction leads     manifest contradiction of
the apparent purpose of the enactment, or to some  inconven-
ience  or absurdity, hardship or injustice,  presumably  not
intended,  a construction may be put upon it which  modifies
the  meaning  of the words, and even the  structure  of  the
sencence.  In  my opinion, the section when  it  says  "such
shares shall be offered to the members" should be  construed
liberally and not literally, as such an interpretation would
make   the section workable and would not in any way  affect
its  intent  and purpose, the phrase "such  shares"  meaning
those shares which admit of being so offered in a  business-
like way.
    It  was  argued  that a liberal  interpretation  of  the
section would result in the directors allotting the  balance
of  shares remaining out of the further shares unoffered  to
their own friends and relations and it would operate to  the
detriment  of  the other shareholders.  In  this  connection
reference  was made to para 8 of the resolution  above  men-
tioned.  In my opinion this paragraph does not bear out  the
contention  of the appellants because it has reference  only
to shares not applied for, obviously shares not offered  and
which could not be taken up by the shareholders cannot  fall
under that description. That paragraph applies only to cases
where  the shares could be applied for and then no  applica-
tion was made in respect of them.  It was not disputed  that
the directors in the present case had not sold these  shares
to  any one and that these have remained unissued.   It  was
urged  strongly  by the learned counsel for  the  appellants
that  the  section being imperative and its  language  being
unambiguous,  the Court was bound to place a literal  inter-
pretation  on it and the argument of hardship  or  inconven-
ience  should  not weigh with it. It was  further  suggested
that  the directors could always give effect to  the  provi-
sions  of the section by increasing the capital in a  manner
and to the extent that the further shares
407
could  be offered to the shareholders in such  a  proportion
that all the shares offered could be taken up them. In other
words,  it was contended that the section not  only  fetters
the powers of the directors in the matter of sale of  shares
but  it  also restricts their discretion in  the  matter  of
increase of capital and as to the number of further  shares.
This  contention, if accepted, would mean that the  legisla-
ture  by enacting section 105-C indirectly enjoined  on  the
directors  that whenever they decide to increase capital  by
issue  of further shares they should make the increase  only
to such an extent and in a manner as to enable the  existing
shareholders  to  take  the whole of it.  If  that  was  the
intention  of the section, there was nothing easier for  the
legislature  to  say so.  The section, on  the  other  hand,
recognizes  that  the  directors have a  discretion  in  the
matter  of the increase of capital when it says,  "when  the
directors  decide to increase the capital of a company."  It
means  that it is within their absolute discretion  to  take
the decision whether to increase the capital or not.  It  is
also  within  their discretion to say to what limit  and  to
what  extent they will increase the capital. It is also  for
them  to decide how many shares and of what value they  will
issue.  Once they have taken their decision, it is then  and
then only that section 105-C comes into operation.  At  that
stage they have to offer the new shares to the  shareholders
and  at   that stage they can offer them in  a  businesslike
manner  to all of them equitably and equally and if  out  of
the shares offered some cannot be taken up by the sharehold-
ers  as they do not fit in the ratio in which the offer  has
been  made,  the  only result is that  those  shares  remain
unoffered and thus unissued.  I am therefore of the  opinion
that  the learned Judges of the Court of appeal  were  right
when  they held that under section 105-C the shares have  to
be  offered  to the existing shareholders as nearly  as  the
circumstances  would  admit and that the section has  to  be
given  a businesslike construction and should  be  construed
liberally  and that the charge of contravention  of  section
105-C  cannot be levelled against the directors so  long  as
they have not disposed of the unoffered balance contrary to
408
the provisions of the section.  The result is that the first
contention of the learned counsel stands negatived.
    The next question whether the action of the directors in
passing  the resolution was not bona fide seems to  be  con-
cluded by concurrent findings of fact of the Courts below to
the effect that the resolution was passed because the compa-
ny needed additional funds at the moment when the new  issue
was  decided upon and that the issue of shares was  not  due
solely  to the desire on the part of the directors  to  keep
themselves in the saddle.
    It  is  not  the practice of this  Court  ordinarily  to
interfere  with concurrent conclusions on questions of  fact
reached  in the Courts below unless those  conclusions  have
been  reached on extraneous considerations or  by  violating
rules  of  procedure  or by committing any  breach  of  some
provision  of  law:  vide Srimati Bibhabati  Devi  v.  Kumar
Ramendra Narayan Roy (1) The learned counsel for the  appel-
lants while conceding. that it was not open to him to  chal-
lenge concurrent findings of fact of the Courts below, urged
that  the  whole  case has been looked at by  them  from  an
erroneous angle.  It was contended that the Courts below had
misdirected themselves in their approach to the decision  of
the  issue of bona fides.  In this connection  emphasis  was
laid  on the following observations in the judgment  of  the
learned Chief Justice and on similar observations  occurring
elsewhere :--
    "In  this  particular case it is urged  and  urged  with
considerable  force  that  the reason  which  actuated  the'
directors on the 21st February, 1945, in resolving to  issue
new  shares  was the fear that the  Singhsnia  group,  would
capture  the  company and oust the  present  directors  from
their vantage point and take control of the company  itself.
It  may  be that one of the factors that  weighed  with  the
directors  was that consideration.  It may even be  that  it
weighed  with  them a great deal. It may also  be  that  the
directors selected this particular time viz. the 21st Febru-
ary,  1945,  for the issue of' these shares because  of  the
impending danger of the--'
73 I.A-. 246.
409
majority  of  shares going into the hands of  the  Singhania
group  with the necessary consequences.  If, with all  that,
it is established before the Court that in fact on the  21st
February,  1945, the company was in need of funds, that  the
funds were required for the working of the company, then the
Court  will not interfere with the discretion  exercised  by
the directors, because the principle is obvious that if  the
new shares have been issued because the company needs funds,
then  it  cannot be said that the discretion vested  in  the
directors  has  been exercised not in the interests  of  the
company or for the purpose of the company.  It is only  when
that discretion is exercised solely for the personal ends of
directors,  for their personal aggrandisement,  for  keeping
themselves in power, then undoubtedly that discretion cannot
be said to have been exercised for the purpose of or in  the
interests of the company."
    Reference  was also made to the concluding part  of  the
same judgment which runs thus :--
    "Undoubtedly this is a case of high finance and we  have
been  given a glimpse of what high finance can be and  there
is  great justification in what Mr. Amin has said as to  the
manner in which some of the things were done with regard  to
the  affairs  of this company. But ultimately we  must  come
down  to the one short and simple question, was the  company
in need of funds at the time when the directors decided upon
the  issue of new shares, and in my opinion there can be  no
doubt on the evidence led this case that the answer to  that
question  must be in the affirmative.  If that be the  posi-
tion all other considerations can be of no avail or of  very
little  avail as against this central fact in this case  and
as I am satisfied as to the central fact, I would agree with
the  learned  Judge who took the same view and came  to  the
conclusion that the plaintiffs have failed to discharge  the
burden which lay upon them of establishing that the issue of
new shares was not bona fide and not in the interests of and
for the benefit of the company."
It was argued that the learned Judges were not right  in
thinking that all other considerations were of
410
no avail and should be practically kept out of consideration
once  it was established that the company needed funds.   It
was  said that it having been found that at the time of  the
aforesaid resolution the directors were considerably  influ-
enced  by  the consideration of keeping  out  the  Singhania
group  from capturing the company, and by the  consideration
of  keeping  themselves in the saddle, it should  have  been
held that they were acting with an ulterior motive, and that
their  decision  as to the need of the company  for  further
funds was vitiated by reason of the ulterior motive.
    It  is convenient here to state what the  true  approach
should  be to a question of this nature when it arises in  a
case.   It is well settled that in exercising  their  powers
whether general or special, the directors, must always  bear
in  mind that they hold a fiduciary position and must  exer-
cise  their  powers for the benefit of the company  and  for
that  alone and that the Court can intervene to prevent  the
abuse of a power whenever such abuse is held proved, but  it
is  equally settled that where directors have  a  discretion
and  are bona fide acting in the exercise of it, it  is  not
the  habit  of the Court to interfere with them.   When  the
company is in no need of further capital, directors are  not
entitled to use their power of issuing shares merely for the
purpose  of  maintaining  themselves and  their  friends  in
management  over the affairs of the company, or  merely  for
the purpose of defeating the wishes of the existing majority
of shareholders.
    It  appears to me that the learned Judges in  the  Court
below approached the decision of this question in the  light
of  the  principles stated above and the contention  of  the
learned  counsel therefore does not seem right.   Where  the
directors  are not chargeablefor breach of trust so  far  as
the  company is concerned and where their action is for  the
benefit of the company, then merely because in promoting the
interests of the company they also promote their own  inter-
ests. it cannot be held that they have not acted bona )fide.
As  it  has been said in Hirsche v. Sims (1),  if  the  true
effect of the whole evidence is that the defendants truly'
(1) (1894) A.C. 654.
    411
and  reasonably believed at the time that what they did  was
for  the  interest of the company, they are  not  chargeable
with  dolus malus or breach of trust merely because in  pro-
moting the interest of the company they were also  promoting
their own, or because they afterwards sold shares at  prices
which gave them large profits.
 Both  the  Courts below have as fact that    to  a  certain
extent in resolving to issue new shares the   directors were
actuated by a fear that the Singhania   group would  capture
the  company  and oust the present    directors  from  their
vantage point and take control   of the company itself.   It
was argued that this   motive was an ulterior motive and the
exercise of   power by the directors to achieve this  objec-
tive  by  the   issue of further shares was an  exercise  of
power for   the purpose for which it was not conferred. This
argument  would have had force if this was the main  purpose
of  the directors in issuing the further shares, but    this
is  not  the case here. As found by the  High  Court,    the
central fact working in the mind of the directors   was  the
necessity  of further funds for the company at   the  moment
they passed the resolution. That being so,    it seems to me
that  the existence of the other motive   does not make  the
action of the directors in respect of   the issue of further
shares mala fide.
     Moreover, in the present case it seems to me that   the
directors  were  on the defensive.  They  felt  that     the
attempt of the Singhanias to capture the controlling  inter-
est  in the company by paying high prices for    its  shares
must  have been with a purpose, i.e., to make   use  of  the
funds of the company in their own concerns.   Some  evidence
of  this exists on the record.  They   thought that  it  was
their  duty as directors to protect   the company from  such
an  attack  and they felt that it   was  beneficial  to  the
company  to protect it from such   an attack.  They did  not
keep the matter in secret but   informed all the  sharehold-
ers  about  it.  They first   attempted to  enter  into  the
field of competition with  the Singhanias but it seems  that
they were not wholly   successful in their objective.   They
then  decided  to    issue further capital  by  taking  into
consideration the
53
412
interest  and the needs of the company and ifs  requirements
in  respect  of capital at the moment.   They  also  thought
that   by this  action they would also be able to  keep  out
the  Singhanias from capturing the company. They were  under
no  obligation to Singhanias who had not yet even  been  en-
tered as shareholders on the register of shareholders. There
was no dolus malus in their mind as directors of the  compa-
ny,  as affecting the company or its shareholders.   On  the
other  hand, they honestly considered it to be in  the  best
interests  of the company to  meet such an attack.  The  re-
sult-  therefore is that it cannot be held that this is  one
of  those  unusual cases where this Court  should  not  give
weight  to  the concurrent findings of fact  by  the  Courts
below,  or that it is a case where it can be held  that  the
High  Court  in  arriving at its findings  has  committed  a
breach of any rule of procedure or law and that there is  no
evidence to support the findings that have been arrived at.
    The  result therefore is that this appeal fails  and  is
dismissed with costs.
    DAS J.--I agree that this appeal must be dismissed.  As,
however, my decision rests on slightly different reasons,  I
desire to state them in my judgment.
    For  the purpose of appreciating the questions  involved
in this appeal which  has been brought by the plaintiffs  it
will suffice to set out the following facts.
The  Bombay Life Assurance  Company,  Ltd.  (hereinafter
referred to as  "the company")was incorporated in 1908  with
an  authorised capital of Rs. 10,00,000 divided into  10,000
shares  of Rs. 100 each.  By 1945, 5,404 shares in all  were
subscribed,  and  Rs. 25 per share had been  paid  on  them.
This  left 4,596 shares out of the total authorised  capital
yet to be issued. The plaintiffs are two of the shareholders
of the company.  Respondents 2 to 9 are the directors of the
company of whom respondent 2 is the chairman of the board of
directors.  It appears that
413
from July, 1944, shares in the company began to be purchased
from  the  holders   thereof by or in the  interest  of  Sri
Padampat Singhania.  This attempt to buy up the shares on  a
large scale naturally resulted in a sudden rise in the price
of  the shares.  This abnormal rise in the price  could  not
but  attract  the attention of the board of  directors.   On
September  18, 1944, a board meeting was held at  which  the
chairman  drew  the  attention of his  co-directors  to  the
serious implications of the attempt of an outsider group  to
corner  the shares of the company.  It was decided  at  that
meeting that a circular should be issued to the Shareholders
acquainting  them of the true position and the chairman  was
authorised  to sign the circular. Accordingly, on  September
19, 1944, a circular was issued to the shareholders  drawing
their attention to what was happening and exhorting.them, in
case  they  -wanted to dispose of their holdings,  to  offer
them to the chairman.  The result of the chairman and  other