dedol-hf/india-case-legal-rag huggingface dataset:
directors  entering  the arena was a race  for  purchase  of
shares  of the company which inevitably led to a  phenomenal
rise  in the price of the shares.  The shares which in  1944
were  quoted at Rs. 250 per share went up to Rs.  2,000  per
share in March, 1945.  It may be noted here that the  shares
purchased  by  the Singhania group were  not  submitted  for
registration  of  the transfers with the result  that  their
names have not yet been entered on the register of  members.
In  the  meantime, on January 8, 19,15, an  application  was
submitted  by the company to the Examiner of Capital  Issues
for  sanction  for a fresh issue of capital,  setting  forth
several  reasons for which such capital was required by  the
company.  The required sanction dated February 16, 1945, was
received  by  the company on February 20, 1945, and  on  the
next  day (,February 21, 1945) 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 up  Rs.
25 per share on them.  The minutes of the board meeting (Ex.
O)  are printed at pages 301-2 of the Paper Book.   Pursuant
to  this  resolution  of the board a circular  (Ex.  q)  was
issued to the shareholders on the same day with copies
414
of the form of application and form of renunciation referred
to  in  the resolution and in the circular.   These  further
shares were offered to the shareholders shown on the  regis-
ter  of members in the proportion of four further shares  to
every  five  shares  then held by them. The  last  date  for
submission  of the applications and necessary  payments  for
the  shares so offered was fixed for March 10, 1945.  It  is
said that on the very next day after the board meeting 1,648
shares were allotted and that between February 22, and March
6, 1945, 2,204 shares were allotted to the shareholders  who
had  applied  for  the same.   The suit  out  of  which  the
present appeal has arisen was filed on March 5, 1945.
    The  plaintiffs  are two of the members of  the  company
suing" for themselves and all other aggrieved  shareholders"
of  the  company.  The defendants are the  company  and  the
eight  directors.   The reliefs prayed for are  as  follows,
inter alia:
    (a)  That it may be declared that the resolution of  the
directors and the offer referred to in para 6 hereof contra-
venes  the provisions of section 105-C of  Indian  Companies
Act and was and is ultra vires, and illegal;
    (b)  That  it  may be declared that the  said  offer  of
shares  referred to in para 6 hereof is not bona fide or  in
the interest of the defendant company and is ultra vires and
illegal;
    (c)  That the defendants 2 to 9 may be restrained by  an
injunction  from allotting any shares or doing  any  further
act in pursuance of the said offer."
It  will be noticed that none of the shareholders  other
than the directors to whom further shares had been  allotted
before  the filing of the suit has been made a party to  the
suit.   Further, even as against the defendants 2 to  9  the
consequential  relief by way, of cancellation of the  allot-
ments of further shares to them and the rectification of the
register  in respect thereof has not been prayed for by  the
plaintiffs.
The  contentions of the plaintiffs as set forth  in  the
plaint on which the above prayers were founded may be summa-
rised shortly as follows:
415
(i)  the company was not in need of capital, (ii) 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  to  the  second
defendant and his friends the control of the first defendant
company," and
(iii) the issue and offer of further shares are illegal  and
void for contravention of the provisions of section 105-C of
the  Indian Companies Act.  It is necessary to examine  each
of these contentions and to ascertain their effect.
      Re (i): Both the Courts below.have found it as a  fact
that  at the time the directors resolved upon the  issue  of
further  shares the company was in need of capital  for  the
purposes  mentioned  in  the company's  application  to  the
Examiner of Capital Issues referred to above.  This  concur-
rent  finding of fact has not been contested before  us  and
the next contention of the appellants will have to be  exam-
ined in that light.
      Re  (ii): It is not disputed that the  company's  need
for  funds standing by itself will afford a good  motive  to
the  directors  to issue further  shares.   The  contention,
however, is that if that motive was not the sole motive  but
was  mixed up with any other motive, it was an abuse of  the
powers of the directors to issue further shares.  This  plea
is  clearly  a departure from the case made in  the  plaint.
There-the  case was that there was no need for funds at  all
and  the sole motive of the directors was merely  to  retain
their own control over the affairs of the company.  It will,
however, be a hypertechnicality to shut out this plea  alto-
gether.  The  plea of mixed motive raises  three  questions,
namely-
    (a)  whether  apart from the motive of  finding  further
capital  for  the company, there was any, and, if  so,  what
other motive,
      (b) was that other motive vitiated by bad faith, and
      (c) if it was so vitiated, whether the presence of  it
nullified the good motive and rendered the issue of  further
shares illegal and void.
116
The  contention  of  the plaintiffs before  Bhagwati  J.  as
before  us,  was that the company was not  in  need      any
further capital in February, 1945, and that the directors of
the company decided to issue the further capitalmerely  With
a view to retain control of the management of the company in
their  hands. On the evidence before him, Bhagwati J.  found
that  the  motive of the directors was rather  to  keep  the
Singhania  group out of the control of the company  than  to
retain  their  own  control.  The race for  the  purpose  of
purchasing  the  shares was not merely for  the  purpose  of
increasing their holdings for holdings' sake but was  really
with a view to prevent the Singhania group from obtaining  a
majority of shares which would give them the control of  the
management  of  the company and enable them to  utilise  the
life  funds of the company for the purposes of  the  various
industrial  concerns of the Singhania group. The  result  of
keeping out the Singhania group might well be to  strengthen
the  position of the directors and to keep them in the  sad-
dle, but the proximate motive was to exclude the Singhanias.
The  distinction  is  real and  quite  understandable.   The
appeal  Court  does not appear to have dissented  from  this
view  of  the matter and I do not see any reason to  take  a
different  view. It follows, therefore, that apart from  the
motive of raising fresh capital for the purposes and benefit
of  the company,  the directors also  had   another  motive,
namely, to prevent the Singhania group, who are strangers to
the  company,  from intruding into its affairs so as  to  be
able  to  assume a controlling hand in  its  management  for
their own purposes rather than for the benefit of the compa-
ny.   On the evidence on record the existence of this motive
side  by  side with the motive of  raising  further  capital
cannot be denied.
    The question then arises whether in acting up to it  the
directors  were actuated by bad faith.  In coming to a  con-
clusion  on this point it has to be borne in mind  that  the
Singhania group had only purchased some shares from  various
existing  shareholders but did not submit the  transfers  of
registration so as to get their names put upon the  register
of members.  It is clear that until the Singhania group  get
their names.
     417
entered  in the register of members, they are not  share  :-
1950-9501 holders but are complete strangers to the  company
,.
It  has been held in Percival v. Wright(1)  that  ordinarily
the  directors  are  not trustees for  individual  share  ;-
holders.  Even if the directors owe some duty to the  exist-
ing shareholders on the footing of there being  some fiduci-
ary  relationship  between them as stated  in    some  cases
[see for example In re Gresham Life Assurance Society] (,2),
I  see  no cogent reason for extending this  principle  and.
imputing  any  kind of fiduciary  relationship  between  the
directors  and  persons who are complete  strangers  to  the
company.   In  my judgment, therefore, the  conduct  of  the
respondents  2  to 9 cannot be judged on the  basis  of  any
assumed fiduciary relationship existing between them and the
Singhania  group.   In my opinion, the respondents  2  to  9
owed]  no  dnty to the Singhania group and,  therefore,  the
motive  to exclude them cannot be said to be mala  fide  per
se. In North-West Transportation Company, Ltd. v. Beatty (3)
the Judicial Committee  observed atp. 601:
   "But the constitution of the company enabled the  defend-
ant  J.H. Beatty to acquire this voting power; there was  no
limit  upon the number of shares which a  shareholder  might
hold,  and for every share so held he was entitled to  vote,
the  charter itself recognised the defendant as a holder  of
200  shares,  one-third of the aggregate number;  he  had  a
perfect right to acquire further shares, and to exercise his
voting  power in such a manner as to secure the election  of
directors  whose views upon policy agreed with his own,  and
to  support  those  views  at  any  shareholders'  meeting."
Beatty referred to in the above passage was a director.   It
follows  therefore, that the fact of the directors  entering
into  a competition with the Singhania group  in  purchasing
the  shares of the company was quite legitimate and was  not
mala  fide.   It  was urged, however, that  the  issuing  of
further shares, although the company required further  capi-
tal,  was,  in  the circumstances, evidence  of  bad  faith.
Bhagwati  J. dealt (1) L.R. (1902) 2 Ch. 421.    (2) L.R.  8
Oh. App. 446 at 0. 449.                (3) L.R. 12 A.C. 589.
418
with  the various acts of the directors relied upon  by  the
plaintiffs as indicating bad faith on the part of the direc-
tors  and on a consideration of all of them was  'unable  to
come  to  the conclusion that the issue of  new  shares  was
decided  upon  by the directors not bona       fide  in  the
interests of the company and merely with a view to keep  the
control of the affairs of the company in their hands."   The
learned  Judge, therefore, came     to the  conclusion  that
the  issue of further shares and the offer thereof  made  on
the  21st February, 1945, wasnot ultra vires  and  illegal.'
Some  of  these facts on which the charge of mala  fide  was
sought  to be founded were urged before the appeal Court  by
learned  counsel  'or  the appellants.   The  learned  Chief
Justice  discussed the matters and concluded by saying  that
he  agreed   with the trial Judge that  the  plaintiffs  had
failed to discharge the burden which lay upon them of estab-
lishing  that the issue of new shares was not bona fide  and
not  in the interests, and for the benefit, of the  company.
I  do not see any cogent reason for taking a different  view
on  the  facts.   The position, shortly put,  was  that  the
Singhania  group, who were outsiders and to whom the  direc-
tors  owed  no duty, were out to corner the  shares  of  the
company  for their own ends.  To thwart that object  of  the
Singhania  group  by making it more and more  difficult  for
them to acquire more shares the directors took advantage  of
the  existing needs of the company for further  capital  and
decided upon to issue further shares.  The issue of  further
shares  served two purposes, namely, the purpose of  finding
the necessary finance, and to exclude the interlopers,  both
of which purposes, according to the directors, were for  the
benefit  of the company. Rightly or wrongly,  the  directors
felt  that  it was not in the interests of  the  company  to
allow the Singhania group a controlling hand in the  manage-
ment  of  the affairs of the  company.   Their  apprehension
evidently  was  that the Singhania group, if and  when  they
became  shareholders, would use their voting power in  their
own interests and to the detrimcnt of the company by utilis-
ing  the life fund of the company for the purposes of  their
various  other in-dustrial concerns.  I find nothing in  the
evidence on
419
record to doubt the honesty of the directors in holding this
view  and,  that  being so, I see nothing  improper  if  the
directors  in the interests of the company and the  existing
shareholders tried to prevent what, according to them, would
be  a  catastrophe. Indeed, if the directors  honestly  held
that view---and as already stated I have no reason to  think
that  they  did not--they would, in my  opinion,  have  been
guilty  of  dereliction of duty to the company  and  to  the
existing  shareholders if they did not exert  themselves  to
prevent such evil.  In my judgment the motive to prevent the
Singhania  group, who were outsiders, from acquiring a  con-
trol over the company cannot, as  between the  directors and
the company and the existing shareholders, be stigmatised as
mala fide.
    At  two places in his judgment the learned Acting  Chief
Justice  expressed  the  view that if  it  were  established
before  the Court that the company needed  further  capital,
all  other  considerations could be of no avail or  of  very
little avail as against that central fact. Tendolkar J.  did
not  consider it necessary to deal with the various acts  of
the directors relied upon as evidence of their mnala  fides,
because he was of the view that assuming that the  directors
did all those acts with the object of keeping the  Singhania
group  out  of  control of the company, the  moment  it  was
established that the company was in need of further  capital
or legitimate purposes, the fact that the directors utilised
such  need for the purpose of establishing  themselves  more
firmly  in  the saddle did not render the issue  of  further
capital  either ultra vires or invalid. Learned counsel  for
the  plaintiffs  contends  that the learned  Judges  in  the
Courts below entirely overlooked the point that the presence
of such bad motive would nullify the good motive of  finding
capital  necessary for the company and this mixture  of  mo-
tives  would render the issue of further shares illegal  and
void.  Tiffs leads me to a consideration of the  third  sub-
head on the assumption that what I have called the addition-
al motive was a bad motive.
It  is well established that directors of a company  are
in a fiduciary position vis-a-vis the company and
53
420
must  exercise their power for the benefit of  the  company.
If  the  power to issue further shares is exercised  by  the
directors not for the benefit of the company but simply  and
solely  for their personal aggrandisement and to the  detri-
ment of the company, the Court will interere and prevent the
directors  from  doing  so. The very basis  of  the  Court's
interference  in such a case is the existence of  the  rela-
tionship  of a trustee and of cestui que trust   as  between
the directors and the company.
    The  first case to be referred to is that of  Fraser  v.
Whalley(1).  In that case a new company was incorporated  in
1859  by  an Act of Parliament.  By that  Act  also  certain
existing railway companies were authorised "to acquire, take
and  hold shares in the undertaking of the company, and  for
such  purpose to create new shares in  their  undertakings."
The existing companies in 1861 passed resolutions  authoris-
ing their directors to exercise this power.  The resolutions
were, however, not acted upon and the existing companies did
not issue n ;w shares in their undertakings for the  purpose
of taking up any share in the new company and all the shares
of  the  new company were issued to persons other  than  the
existing  companies. In short, the shares which it was  con-
templated  would be taken up by the existing companies  were
no longer available.   Subsequently, in 1862, another Act of
Parliament was passed authorising the new company to make  a
branch  line and for that purpose to raise fresh capital  by
the creation and issue of new shares. But this new Act  gave
no  fresh power to the existing companies to take up any  of
these new shares to be issued by the new company.  One Savin
held  the majority of shares in the existing  companies  and
there was dispute between him and the directors.  The gener-
al  meeting of the company was shortly going to be held  and
the directors knew that at the ensuing general meeting their
policy  would be repudiated by the majority of  shareholders
and  they would be turned out from their office.  It was  in
these  circumstances that the directors purporting to act on
the resolutions of (1) (1864)2 H. & M. 10.
    421
1861,  resolved  to  issue new shares.  Suit  was  filed  on
behalf  of the shareholders to restrain the  directors  from
issuing  any  new shares.  On a motion for  injunction  Wood
V.C. granted an interlocutory injunction.  In course of  his
judgment the learned Judge observed:
    "The  directors  are informed that at the  next  general
meeting  they are likely to be removed, and,  therefore,  on
the  very verge of a general meeting, they,  without  giving
notice  to  anyone, with this indecent  haste  and  scramble
which is shewn by the times at which the meetings were held,
resolve that shares are, on the faith of this obsolete power
entrusted to them for a different purpose, to be issued  for
the very purpose of controlling the ensuing general meeting.
    I have no doubt that the Court will interfere to prevent
so  gross a breach of trust.  I say nothing on the  question
whether the policy advocated by the directors, or that which
I  am  told is to be pursued by Savin, is the more  for  the
interest  of  the company. That is a matter wholly  for  the
shareholders.  I fully concur in the principle laid down  in
Foss  v.  Harbortie  (2 Hare, 461) as to that,  but  if  the
directors  can  clandestinely and at the last moment  use  a
stale  resolution for the express purpose of preventing  the
free  action of the shareholders, this Court will take  care
that,  when the company cannot interfere, the Court will  do
so."
    It will be noticed that this decision proceeds  entirely
on  the  grounds that the resolutions of 1861 on  which  the
directors  purported to act were obsolete, for they had  not
so long been acted upon and also because the shares  contem-
plated by that resolution were not available, and that  even
if  the resolutions were still effective and gave  authority
to  the directors to issue new shares, the  directors  could
only  do so for the purpose of acquiring shares in  the  new
company  and not for the purpose of controlling the  ensuing
general meeting and preventing the free action of the share-
holders.   There was no evidence whatever in that case  that
the issue of shares was at all for the benefit of the compa-
ny.   The issue of shares in that case was not for the  pur-
pose  of taking up shares in the new company for which  pur-
pose alone the power could be exercised,
422
but that it was being exercised, wholly and solely for quite
a  different purpose, namely, of maintaining  themselves  in
office.
    Punt  v.  Symons & Co. Limited (1) was a motion  for  an
interim  injunction to restrain the holding of a meeting  of
the  defendant  company for confirming  the  resolution  for
issue  of shares.  On the evidence it was quite clear  "that
these  shares  were  not issued bona fide  for  the  general
advantage of the company, but that they were issued with the
immediate  object of controlling the holders of the  greater
number of shares in the company, and of obtaining the neces-
sary  statutory  majority for passing a  special  resolution
while,  at the same time, not conferring upon  the  minority
the power to demand a poll." Byrne J. granted an  injunction
restraining  the  defendant from  holding  the  confirmatory
meeting and observed:
    "1  am  quite satisfied that the  meaning,  object,  and
intention  of  the issue of these shares was to  enable  the
shareholders holding the smaller amount of shares to control
the holders of a very considerable majority. A power of  the
kind  exercised by the directors in this case, is one  which
must be exercised for the benefit of the company;  primarily
it  is given them for the purpose of enabling them to  raise
capital  when  required  for the purposes  of  the  company.
There  may  be occasions when the directors may  fairly  and
properly  issue shares in the case of a company  constituted
like the present for other reasons.  For instance, it  would
not  be at all an unreasonable thing to create a  sufficient
number  of  shareholders to enable statutory  powers  to  be
exercised,  but  when I find a limited issue  of  shares  to
persons  who are obviously meant and intended to secure  the
necessary statutory majority in a particular interest, I  do
not  think  that  is a fair and bona fide  exercise  of  the
power."
    The  learned Judge concluded with the  following  words:
"If  I find as I do that shares have been issued  under  the
general and fiduciary power of the directors for the express
purpose  of acquiring an unfair majority (1) L.R.  [1903]  2
Ch. 506.
423
for the purpose of altering the rights of parties under  the
articles, I think I ought to interfere."
Piercy  v. S. Mi1Is & Co. Ltd. (1) was a witness  action
before  Peterson  J.   It was indeed a gross  case.  On  the
evidence  Peterson J. found that it was manifest  "that  the
shares  were allotted simply and solely for the  purpose  of
retaining  control in the hands of the existing  directors."
After stating the facts, the learned Judge said:
    "The question is whether the directors were justified in
acting as they did, or whether their conduct was a breach of
the  fiduciary powers which they possessed under  the  arti-
cles.   What they did in fact was to-override the wishes  of
the holders of the majority of the shares of the company for
the  time being by the issue of fresh shares  issued  solely
for that purpose."
    Then  after  referring  to Fraser v.  Whalley  and  Punt
v.Symons & Co. Ltd. (supra),  the learned Judge concluded:
    "The  basis  of  both cases is, as  I  understand,  that
directors  are not entitled to use their powers  of  issuing
shares merely' for the purpose of maintaining their  control
or  the  control of themselves and their  friends  over  the
affairs  of  the  company, or merely  for  the  purpose   of
defeating   the   wishes of the existing        majority  of
shareholders.  That is however, exactly what has happened in
the present case.  With the merits of the dispute as between
the directors and the plaintiff I have no concern  whatever.
The plaintiff and his friends held a majority of the  shares
of  the  company, and they were entitled,  so long  as  that
majority remained, to have their views prevail in accordance
with  the regulations of the company, and it was not, in  my
opinion, open to the directors, for the purpose of  convert-
ing  a minority into a majority, and solely for the  purpose
of  defeating the wishes of the existing majority, to  issue
the shares which are in dispute in the present action."
    In  the  result, the shares allotted to  the  defendants
were declared void.
(1) L.R. [1920] 1 Ch. 77.
424
    It  will be noticed that in each of the three cases  the
act  of the directors was not only not of advantage  to  the
company  but was in essence to its detriment in that it  was
calculated to reduce the existing majority into minority and
to  prevent the majority of the existing  shareholders  from
exercising  their discretion with respect to what they  con-
ceived  to  be in the best interests of the  company.  Those