dedol-hf/india-case-legal-rag huggingface dataset:
without  making  any  discrimination between  them  the  two
requirements  of  section 105-C were complied with  and  the
resolution  and offer did not contravene that  section  even
though 272 shares remained undistributed as a result of  the
offer of four new shares for every five shares.
49-A
392
   Held also per KANIA C.,J. MAHAJAN, MUKHERJEA and
DAS JJ.--that the fact that one of the motives of the direc-
tors  in issuing further shares was to prevent  an  outsider
who  had   not yet  become  a   shareholder,   from  getting
control   of  the company did not render the  resolution  or
the  offer  illegal  inasmuch  such a motive  could  not  in
itself be said to be not in the interests of the company and
even  assuming  that such a motive was bad  this  additional
motive could not render the resolution and offer illegal  as
the company was in fact in need of further funds and it  was
necessary  in the interests of the company to issue  further
shares.
Judgment of the Bombay High Court affirmed.
JUDGMENT:
    APPEAL  from  the High Court of  Judicature  at  Bombay:
(Civil Appeal No. LXIX of 1949).
    This  was an appeal from the judgment and decree of  the
High  Court of Bombay dated 11th March, 1949,  (Chagla  C.J.
and  Tendolkar  J.) in Appeal No. 85 of 1947,  confirming  a
decree  of the said High Court in its Original  Jurisdiction
dated  10th November, 1947. The facts of the case and  argu-
ments of the counsel arc set out in the judgment.
    N.P. Engineer (M.M. Desai and H.J. Umrigar with him) for
the appellants.
    M.C.  Setalvad  (G. N. Joshi with him)  for  respondents
Nos. 1 to 6 and 8 and 9.
    1950.  May 4.  The Court delivered the  following  Judg-
ments:
   KANIA  C.J.--This is an appeal from the decision  of  the
High Court of Judicature at Bombay.  The respondent  company
was  incorporated in 1908 with an authorised capital of  Rs.
10  lakhs  divided into 10,000 shares of Rs. 100  each.   By
1945, 5,404 shares were subscribed and Rs. 25 per share were
called  on  each of them.  Four thousand  five  hundred  and
ninetysix shares out of the authorised capital thus remained
unissued.  From about July, 1944,  Mr.  Padampat  Singhania,
a   businessman  interested   in   many companies, began  to
purchase shares of the company from the holders thereof on a
large scale. This naturally
     393
put  up the price of the shares considerably.  On  the  18th
September,  1944,  at a board meeting of the  directors  the
chairman  drew attention of his co-directors to the  attempt
thus made by an outsider to corner the shares of the  compa-
ny.  In pursuance of a resolution passed at the meeting, the
chairman  issued  a circular to  the  existing  shareholders
acquainting them of the true position and suggesting that if
they wanted to part with the shares they might get in  touch
with  the chairman.  A circular was accordingly issued  with
the  result that two rival groups were thus offering to  buy
shares  from  those who were desirous of selling  them.  The
shares  on which about Rs. 12 or 14 were paid per  annum  as
dividend began to be quoted in the market at about Rs. 2,000
per  share in March, 1945.  Mr. Singhania had not  submitted
to  the  company for registration of the  transfers  to  his
name  the shares purchased by him.  In the meantime  on  the
8th  January,   1945, an application was submitted   by  the
company to the Examiner of Capital Issues for sanction of  a
fresh  issue of capital.  Several reasons were mentioned  in
that application to show why the company required additional
capital.  Such application had become necessary owing to war
regulations.   The  Government granted the sanction  on  the
16th  February, 1945, and the communication was received  by
the  company  on  the 20th of February. On the  next  day  a
board  meeting  was held at which the directors  decided  to
issue the remaining 4,596 shares at a premium of Rs. 75  per
share and to call Rs. 25 per share on them. Pursuant to this
resolution a circular was issued to the shareholders on  the
same day with copies of the form of application and renunci-
ation  referred  to in the resolution and in  the  circular.
The  shares  were offered to the shareholders shown  on  the
register  of  members  in the 'proportion  of  four  further
shares  for every five shares held by them.  The  last  date
for  submission  of  the application and  payment  was  10th
March, 1945. The directors and their friends in the next few
days applied and were allotted 1,648 shares.  By the 6th, of
March, 1945, 2,204 shares were allotted to shareholders  who
had applied for the same.
394
The  appellants  are two shareholders  of  the  company.
They  filed the suit, out of which this present  appeal  has
arisen, "for themselves  and all other aggrieved  sharehold-
ers  of  the company."  The defendants are the  company  and
eight  directors.   It is contended in the plaint  that  the
whole issue of these further shares and the idea of increas-
ing  the capital of the company was mala fide and  with  the
object of retaining the control and management of the compa-
ny  in the hands of defendants 2 to 9.  It is  further  con-
tended that the resolution of the directors and the offer of
shares contained in the circuluar letter were in  contraven-
tion  of section 105-C of the Indian Companies  Act.   There
were  further prayers restraining the company and  directors
from  proceeding with the allotment of shares.  It was  con-
tended  that the company was not in need of capital and  the
issue  of  further  shares was not made bona  fide  for  the
benefit or in the interest of the company but had been  made
"merely with the object of retaining or securing the  second
defendant and his friends the control of the first defendant
company."
    Considerable evidence was led in the trial Court on  the
question of bona fides.  The trial Court held that the issue
of new shares was bona fide and the appellate Court has also
come  to the conclusion that the object of the directors  in
issuing  the  new shares was not merely with the  object  of
retaining  or  securing  to the  second  defendant  and  his
friends  the control of the first defendant  company.   They
held  that the company was in need of capital. The suit  was
consequently dismissed and that decision was affirmed by the
High Court on appeal.
    The decision of the appellate Court has been  challenged
before  us on both grounds.  The learned  counsel  appearing
for the appellants did not contest the concurrent finding of
fact of both the lower Courts to the effect that the company
was in need of capital. It was however urged on their behalf
that as the issue of these shares, although not admitted  in
the written
   395
statement  but admitted in the course of evidence,  was  for
the  purpose of preventing the control of the company  going
in  the hands of Mr. Singhania, the directors had not  acted
bonn'  fide  and solely in the interest of the  company.   I
have  read the judgment prepared by Das J. and I agree  with
his  conclusion  and line of reasoning on this part  of  the
case.   In my opinion, the contention of the  appellants  on
this point was rightly rejected by both the lower Courts and
that contention must fail.
    That  leaves  the question whether the  issue  of  these
shares  was in contravention of section 105-C of the  Indian
Companies Act. That section runs as follows:-
    "  Where the  directors  decide to increase the  capital
of  the company by the issue of further shares  such  shares
shall be offered to the members in proportion to the  exist-
ing  shares held by each member (irrespective of class)  and
such offer shall be made by notice specifying the number  of
shares  to which the member is entitled and limiting a  time
within which the offer if not accepted, will be deemed to be
declined;  and  after  the expiration of such  time,  or  on
receipt  of  an  intimation from the member  to  whom,  such
notice  is given that he declines to accept the  shares  of-
fered, the directors may dispose of the same in such  manner
as they think most beneficial to the company."
    On behalf of the respondents three answers were  submit-
ted.  The first was that the section deals with the case  of
increase  of capital by the directors beyond the  authorised
limit and as in the present case the new shares were  issued
within  the authorized limit of capital, the section has  no
application.   The second was that the terms of the  section
should  be  construed in a practical way and  there  was  no
difference between Regulation 42 in Table A of the Companies
Act and section 105-C in respect of the scheme to offer  the
proportion  of shares to the existing shareholders.  It  was
argued  that  so  long as they were offered  "as  nearly  as
circumstances  admit"  the directors had complied  with  the
requirements  of the section and therefore their action  was
not  illegal.  The third answer was that in fact the  direc-
tors had not committed any
50
396
breach of the terms of section 105-C up to now and therefore
their  action cannot be held to be illegal.  In view  of  my
conclusion  on the third point it is not  necessary  to  ex-
press  any  opinion on the first two  answers  submitted  on
behalf  of  the respondents.  It seems to  me  that  section
105-C, interpreted strictly as contended by the  appellants,
casts on the directors two obligations.  They have to  offer
the shares issued to the shareholders on the register of the
company and not to anyone else, and secondly, the offer must
be in the same proportion to all the shareholders and  there
should  be no discrimination amongst them.  It is  not  con-
tended that by the offer made by the directors to the share-
holders there has been any discrimination amongst the share-
holders on the register of the company.  It was contended on
behalf  of  the appellant that the directors had  failed  to
offer  all the shares resolved to be issued by them  to  the
existing shareholders and therefore the requirements of  the
section had not been complied with.  It was argued that the
directors having resolved to issue 4,596 shares, they had to
offer  that  whole lot at once to the  shareholders  on  the
register  and  the result of the offer made by them  was  to
retain  in their hands 272-4/5 shares.  In my opinion,  this
contention  is  unsound.  By their resolution  of  the  21st
February, 1945, the directors resolved to issue 4,596 shares
out  of  the authorized capital of the  company.  They  have
offered  shares to the existing shareholders in the  propor-
tion of four new shares to five shares held by them.   Inas-
much  as  the offer does not absorb the whole lot  of  4,596
shares I am unable to construe the offer as an offer of  the
whole lot at once to the existing shareholders.  Unless  the
whole  lot  of shares in pursuance of the.  offer  could  be
accepted  and  taken up I am unable to  consider  the  offer
contained  in the circular as an offer of the 4,596  shares.
That however does not establish the contention of the appel-
lants. I find nothing in the section to justify the  conclu-
sion  that the directors must offer all the shares  resolved
to be issued in one lot to the shareholders.  I can Conceive
of.  numerous cases where a limited company with  a  growing
business does not
397
require  its capital to be called up at once. For  instance,
soon after a company is formed it may issue shares of, say a
lakh  of rupees required for the construction of the  build-
ings, and after  a year when it requires further capital for
payment  of machinery etc.  it can issue further shares.   I
do  not think the section as worded prevents  the  directors
from  issuing shares to existing shareholders from  time  to
time  in  that  way. As noticed before, the  object  of  the
section is to prevent discrimination  amongst   shareholders
and  prevent the directors from offering shares to outsiders
before  -they are offered to the shareholders.  So  long  as
these two requirements  are complied  with,  the  action  of
the directors in selecting the time when they will issue the
shares as also the proportion in which they should be issued
is  a  matter  left to their discretion and it  is  not  the
province.of the Court to interfere with the exercise of that
discretion.  This is of course subject to the general excep-
tion that the directors are not to act against the  interest
of the company or mala fide. No such question arises in this
case and therefore it is unnecessary to discuss that  aspect
of  the  situation. In my opinion therefore  on  this  third
ground this contention of the appellants should be rejected.
    The appeal therefore fails and is dismissed with costs.
    MAHAJAN J.--This is an appeal by special leave from  the
judgment  and  decree  of the High Court  of  Judicature  at
Bombay  (Chagla  C.J. and Tendolkar J.)  dated  11th  March,
1948,  confirming the judgment of the said  High  Court   in
its Original Jurisdiction (Bhagwati J.) dated 10th November,
1947.
The  two  questions canvassed in this  appeal  are:  (1)
whether the issue of further shares by the directors was  in
contravention  of  the provisions of section  105-C  of  the
Indian  Companies  Act, and (2) whether this issue  was  not
made  bona  fide.   Both these questions  were  answered  in
favour of the respondents by the High Court.
    The Bombay Life Assurance Co. Ltd., the first  defendant
in the case, was incorporated in the year
398
1908 as a limited company with an authorized capital of  ten
lakhs.  Five thousand four hundred and four shares had  been
issued  till the year 1945 and they were paid up to  Rs.  25
each.  The second defendant is the chairman of the board  of
directors  which  is comprised of defendants 2  to  9.   The
company has a life fund of Rs. 230 lakhs.
    In the year 1944 Sir Padampat Singhania, an  industrial-
ist  of Kanpur, attracted by the soundness of this  concern,
began  purchasing the shares of the company with a  view  to
acquiring a controlling interest  in its  management.   Soon
after competition started for the purchase of the shares  of
the  company  between the Singhania group and  the  Maneklal
Premchand group who were in management of this company.  The
result of this competition was that shares which were  ordi-
narily  quoted at 250 went up as much as to 2,000 in  March,
1945.  A circular was issued by the directors to the  share-
holders  apprising them of the activities of  the  Singhania
party  and  suggesting that those who wanted to  sell  their
shares should sell them in the first instance to the  chair-
man.  This circular does not seem to have had much effect as
the  shareholders wanted to reap the maximum  benefit  which
would come to them as a result of this  competition  between
two rich parties.  By the end of December, 1944, the Singha-
nia  group had purchased 2,517 shares as against 2,397  held
by Maneklal Premchand's party. The Singhania group had  thus
acquired  a  majority of the shares in  the  company  though
these  had  not yet been transferred in their name.  On  8th
January,  1945, the chairman at his own instance  and  after
consulting some of the directors made an application to  the
Examiner of Capital Issues for permission for a fresh  issue
of  capital.  This was allowed on 20th February,  1945.   As
soon  as  sanction  of the Examiner of  Capital  Issues  was
obtained for increasing the capital of the company, a  meet-
ing of the directors was held on 21st February, 1945, and it
adopted the following resolution :--
    1.   That the capital of the company be  increased  from
Rs. 5,40,400 to Rs. 10,00,000 by the issue of the
    399
remaining 4,596 ordinary shares of Rs. lOO each at a premium
of Rs. 75 per share.
    2.   That as on the existing shares of Rs. 100 each  Rs.
25 is paid up, to call Rs. 22 per, share on these new shares
also.
    3.   That these new.shares shall rank pari passu in  all
respects  with the existing shares of the company, but  they
shall  be entitled to rank for dividend as from  1st  April,
1945.
    4.  That these new shares shall be offered in the  first
instance by a circular to the shareholders of the company as
shown on the register of members on 20th February, 1945,  in
the proportion of four new shares to every five shares  held
by them in the capital of the company on that date.
    5.   That  in the case of any shareholder  holding  less
than  five  shares or whose holding of shares shall  not  be
complete multiples of five shares, then fractional  certifi-
cates  shall  be issued to such shareholders in  respect  of
their  rights for fraction of a share, each fractional  cer-
tificate representing one-fifth of a share.
    6.   That  a sum of Rs. 100 per share  (Rs.  25  towards
capital and Rs. 75 for premium) shall be payable along  with
application for these new shares.
    7.  That all applications for shares in accordance  with
this  offer (including applications for shares made  in  re-
spect  of  and accompanied by  fractional  certificates  and
applications for shares accompanied by a renunciation)  must
be presented to and payment made at the registered office of
the  company  in Bombay on or before the 10th  March,  1945.
Any shareholder or person in whose favour a renunciation has
been signed not applying on or before the 10th March,, 1945,
in  terms of the offer shall be deemed to have  declined  to
participate  in this new issue and all  fractional  certifi-
cates  not  presented as required on or before
10th  March, 1945, will cease to have any validity and  will
not entitle the holder to any rights.
8.  That any balance of the shares remaining out of this
issue  not  applied for by the: 10th March, 1945,  shall  be
disposed  of by the directors as they may consider  best  in
the interests of the company.
400
That  the draft circular to the shareholders  with  the
enclosures   (form A being the form of application,  form  B
form  of renunciation and form. of  fractional  certificates
with  application form)  placed on the table by the  manager
and actuary be approved and initialled by the chairman.
    10.   That  the  manager and actuary be  and  is  hereby
directed  to issue forthwith the necessary circulars to  the
shareholders.
11.  That a committee consisting of the chairman and any
one  of  the directors or the chairman and any  two  of  the
directors  be  and are hereby appointed  to  scrutinise  the
application for the new shares which may be received and  to
make allotment of these new shares.................."
   It  is the validity of this resolution 'that is the  sub-
ject matter of the present dispute. The plaintiffs, who  are
two  shareholders  of the company owing  allegiance  to  the
Singhania  group,  filed the suit out of which  this  appeal
arises challenging this issue of further shares, principally
on two grounds, viz.  (1) that the new issue contravenes the
provisions of section 105-C of the Indian Companies Act, and
(2)  that the issue of shareswas not bona fide made  in  the
interests or for the benefit of the first defendant company,
but was resolved upon merely with the object of retaining or
securing to the second defendant and his friends control  of
the first defendant company.   As already stated, both these
contentions  were negatived by the trial Judge and the  suit
was dismissed and this decision was affirmed on appeal.
    The answer to the first question depends on the  meaning
to be given to the words used in section 105-C of the Indian
Companies Act as to its scope. The section was introduced in
the  Indian Companies Act in the year 1936.   Antecedent  to
this  period  the  question of issue of new  shares  by  the
directors  was dealt with by article 42 of the  Articles  of
Association  given in the schedule to the  Indian  Companies
Act, 1913.  The article was in these terms :--
    "Subject to any directions to the contrary that. may  be
given by the  resolution  sanctioning the
401
increase  of  share capital, all new  shares  shall,  before
issue,  be  offered to such persons as at the  date  of  the
offer  are  entitled to receive notice from the  company  of
general  meetings  in proportion, as nearly as  the  circum-
stances admit, to the amount of the existing shares to which
they are entitled."
    As  its language indicates, the article only applied  to
cases  where the capital of the company was increased  by  a
resolution  of the company.  It had no application to  cases
where the directors issued further shares within the  autho-
rised  limits.   The new section introduced in  1936  is  in
these terms :--
"Where  the directors decide to increase the capital  of
the company by the issue of further shares such shares shall
be  offered  to the members in proportion  to  the  existing
shares held by each member (irrespective of class) and  such
offer  shall  be made by notice specifying  the  number  'of
shares to which the member is entitled, and limiting a  time
within which the offer, if not accepted will be deemed to be
declined,  and after the expiration of such time or  on  re-
ceipt  of an intimation from the member to whom such  notice
is given that 'he declines to accept the shares offered, the
directors  may dispose of the :same in such manner  as  they
think most beneficial to the company."
    It  qualifies  the discretion of the  directors  in  the
matter of issue of capital by enjoining on them that if they
decide  to issue further shares, the  existing  shareholders
should be given the first option to buy' them. The  language
employed in the section admits of three possible interpreta-
tions: (1) that its scope is limited to cases where there is
an  increase in the capital of the company according to  the
provisions of section 50; (2) that the section covers within
its  ambit  all  issue of further capital  whether  made  by
increasing the nominal capital or by issuing further  shares
within  the  authorised capital; (3) that  the  section  has
application only to cases where the directors issue  further
shares within the authorized limit.
    The  learned counsel for the respondents contended  that
the  Who1e intent an d purpose of 'the section was to  limit
the discretion of directors in regard to the issue
402
of  further shares in those cases alone where there  was  an
increase  in the nominal capital of the company by  recourse
to the provisions of section 50 of the Indian Companies Act.
It was argued that the phrase "increase of capital" has been
employed  by  the legislature in section 50 and  some  other
sections preceding section 105-C with reference only to  the
nominal  capital of a company and that this  expression  had
not  been  used  with reference to  the  subscribed  capital
anywhere in the Act and therefore the scope of section 105-C
should be limited to cases where the increase in the capital
is. brought about under section 50 of the Act and new shares
are  created  and issued by the directors.   In  Sircar  and
Sen's  Indian  Companies  Act, 1937 Edn.  at  page  309  the
learned authors observe as follows :--
    "The words 'further shares' must be read in  conjunction
with the words 'decide to increase the capital of the compa-
ny.'  They must mean shares which are issued for the purpose
of Increasing the capital beyond the authorized capital."
Mr.  Ghosh on Indian Company Law, 8th Edn. at  page  263
has stated as follows :--
    "The  object of this new section appears to be  to  make
the  salient provisions of Regulation 42 in Table A. ,  com-
pulsory.  The section as drafted is liable to the  construc-
tion  that  whenever the  directors decide to  increase  the
capital of the company by the issue of further shares,  even
if  it be a part of the authorized capital, the  new  shares
must be first offered to theexisting shareholders. But  this
section  should  be read in conjunction with clause  (a)  of
section 50 under subsection (2) of which the directors  have
no  power  to  increase the share capital  of  the  company.
Therefore  it  seems that the words  'further  shares'  mean
shares. beyond the authorized capital of the company."
    Whatever might be the opinion expressed by these commen-
tators, the matter has to be decided on the language of  the