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PETITIONER:

MATHALONE

Vs.

RESPONDENT:

BOMBAY LIFE ASSURANCE CO. LTD.PINGLE VENKAT RAMA REDDYV.SIR

DATE OF JUDGMENT:

19/05/1953

BENCH:

MAHAJAN, MEHR CHAND

BENCH:

MAHAJAN, MEHR CHAND

BOSE, VIVIAN

JAGANNADHADAS, B.

CITATION:

1953 AIR 385 1954 SCR 117

CITATOR INFO :

R 1959 SC 775 (10)

RF 1981 SC1298 (137)

R 1985 SC 520 (20)

RF 1986 SC1370 (77,79)

ACT:

Indian Companies Act (VII of 1913), s. 105-C-Transfer of

shares-Transferee's name not entered on register-Offer of

new shares under s. 105-C-Transferor whether bound to

acquire the new shares as trustee for transferee-Duties of

transferor--Validity of requisition by transferee-Suit by

transferee against transferor-Maintainability.

HEADNOTE:

A, who held a certain number of shares in- a company,

sold some of these shares to B on the 29th July, 1944, and

executed blank transfer forms in respect of the shares. B

made an application to the company for registration of his

name, only on the 11th April, 1945, and his application was

rejected. Meanwhile, in February, 1945, the company

resolved to issue new shares and offered to A the number of

shares to which he was entitled under the provisions of s.

105-C of the Indian Companies Act in respect of the shares

which stood in the register in his name. A did not apply

for the now shares pertaining to the shares sold to B. A

firm of solicitors sent a requisition to A on behalf of B,

C, D, E and others who claimed to be the purchasers of the

shares sold by A, calling upon A to apply for the additional

shares, and to hold them, when allotted, on behalf of B, C,

D and E and others, and offering to indemnify A against all

liabilities he may incur thereby. A declined to apply but

offered to sign the renunciation form in favour of the true

purchasers. As the time fixed for making an application for

the new shares was about to expire, B filed a suit against A

praying that A may be ordered to deliver to B the

application form for the now shares, and to hand over the

new share certificates when received, with transfer forms in

blank duly signed by him, and for damages in the

alternative. A receiver

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118

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was appointed and he applied to the company in his own name

for allotment of the new shares and for registering his name

in respect thereof but the company declined to do so. The

receiver filed a suit against the company for allotment of

the new shares to him. The High Court of Bombay held that,

as A was a trustee of B in respect of the new issue, and he

had failed to apply for the new shares, he was liable in

damages to B. On appeal :

Held, (i) that if A ",as not of his own volition, prepared

to obtain the now shares in his name, there was no principle

of law or equity by which he could be compelled to acquire

those shares by spending his own money or by undertaking

financial liabilities and pass them over to B on receiving

the amount spent by him from the purchaser or being

otherwise fully indemnified by him in respect of the

liabilities incurred or to be incurred.

(ii)Assuming that A was under any such obligation, as the

requisition made by the solicitors to A to purchase the

shares was made on behalf of 4 disclosed and some

undisclosed persons, it was ineffective and inadequate, and

A was not guilty of any breach of duty as a trustee in not

complying with the requisition.

(iii)As B had no right to call upon A to buy the new shares

in his own name for his (B's) benefit, a fortiori, the

receiver had also no such right.

(iv) In any event, as the company was not a party to B's

suit, no order could be issued to the company in that suit

to recognise the receiver as a shareholder in respect of

shares sold to B and, as long as he was not on the register,

the company was not bound to entertain an application from

him for issue of the now share in his favour.

Hardoon v. Belilios ([1901] A. C. 118), E. D. Sassoon, & Co

Ltd. v. Patch (45 Bom. L.R. 46), Miles v. Safe Deposit

Trust Co. (66 L.E. 903) referred to. Biss v. Biss ([1903] 2

Ch. 40), Jones v. Evans ([1913] 1 Ch. 23) distinguished.

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 52, 53 and

54 of 1950.

Appeals from the Judgment and Decree dated the 7th March,

1949, of the High Court of Judicature at Bombay in Appeals

Nos. 55 and 54 of 1948, arising out of Decree dated the 29th

July, 1948, of the said High Court in its Ordinary Original

Civil Jurisdiction in Suits No. 336 of 1945 and No. 786 of

1948.

G.S. Pathak (H. J. Umrigar and P. N. Mehta, with him) for

the appellant in Civil Appeals Nos. 52 and 54 and respondent

in Civil Appeal No. 53,

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M. C. Setalvad, Attorney-General for India (J. B.Dadachanji,

with him) for the respondent in Civil Appeals Nos. 52 and 54

and appellant in Civil Appeal No. 53.

1953. May 19. The Judgment of the Court was delivered by

MAHAJAN J.-These appeals, though they arise out of two

different suits, 336 of 1945 and 786 of 1948, can be

disposed of by a common judgment, as both these suits were

instituted in effect to obtain the same relief.

In July, 1944, a struggle commenced between the group of Sir

Padampat Singhania and the group of Shri Maneklal Prem Chand

for control of the management of the Bombay Life Assurance

Co. Ltd. and there was a race for the acquisition of the

shares of the company between the two groups. Sir Padampat,

the appellant in Civil Appeal No. 54 of 1950, and respondent

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in the cross appeal No. 53 of 1950, on the 25th July, 1944,

purchased through Shri P. N. Gupta, his Bombay agent, 667

shares of the company, 484 out of which belonged to Mr.

Reddy, the appellant in C.A. No. 53 of 1950 and respondent

in Civil Appeal No. 54 of 1950. This deal was made on his

behalf by a firm of share and stock brokers, Bhaidas

Gulabdas. The shares were sold at the rate of Rs. 300 per

share. On the 29th July, Gupta executed a receipt in favour

of Bhaidas Gulabdas acknowledging the receipt of these

shares, while Bhaidas Gulabdas as constituted attorneys of

Mr. Reddy executed five blank transfer forms in respect of

the 484 shares sold by them-four for 100 shares each, and

one for 84 shares. It is alleged that these transfer forms

were ultimately filled in the name of Sir Padampat Sin-

ghania. Sir Padampat, however, made no application to the

company for registration of his name in the register of

shareholders till the 11th April, 1945. On an application -

being made, the company declined to register the shares in

his name and intimated to him their refusal to do so on the

8th May, 1945.

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On the 8th January, 1945, the company, in order to combat

the move of Sir Padampat to acquire control of its

management, made an application under rule 94-A of the

Defence of India Rules for sanction for the issue of further

capital. The sanction was granted and the company was

authorised within a time limit of six months to increase its

capital by a sum of Rs. 4,59,600 by issuing 4,596 shares;

otherwise the sanction was to lapse. On the 21st February,

1945, the directors of the company passed a resolution

increasing the capital of the company by issuing these 4,596

shares of Rs. 100 each at a premium of Rs. 75 per share. On

the existing shares only Rs. 25 per share had been called

up. The company therefore decided that the new shares

should be offered to the existing shareholders, in the

proportion of four shares to every five shares held by the

shareholders. Reddy as a shareholder of 534 shares

(including 484 shares sold by him on 25th July, but yet not

registered in the transferee's name) thus became entitled to

427 new shares and one fractional certificate. Out of the

427 new shares offered to him he was entitled to 40 shares

in his own right which appertained to 50 unsold shares which

he still held in the company. The other 384 shares

appertained to the shares that he had sold. The company

issued a circular letter to every shareholder giving the

details of the offer made and along with it sent two forms,

A and B. Form A being the application form for allotment of

new shares, the shareholder had to subscribe his name to it

and return it to the company for allotment of the shares

offered accompanied with a cheque for the amount that had to

be paid for obtaining the shares. Form B was a renunciation

form. In case a shareholder did not want all or any of the

shares offered to be allotted to him, he was allowed to

renounce his right in favour of some other person.

On the 21st February, 1945, Reddy returned to the company

form A duly filled in, requesting, the company for allotment

of 40 shares out of the new issue,

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which appertained to the 50 shares he still held in the

company. In respect of the balance of 384 shares offered to

him and which appertained to the 484 shares sold by him he

said nothing. The renunciation form was retained by him.

On the 23rd February, 1945, Messrs. J. L. Mehta and N. K.

Bhartiya purporting to act on behalf of the purchasers of

484 shares wrote to Reddy asking him to forward to them the,

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company's circular letter along with forms A and B as and

when received by him, after appending to them his

signatures, to enable them to apply for these shares either

in Mr. Reddy's name or in the name of, the transferees. He

was told that he was to hold the shares offered when

acquired as a trustee for them. On the 28th February, 1945,

Messrs. Craigie, Blunt & Caroe, a firm of solicitors, also

acting on behalf of the purchasers, wrote to Mr. Reddy a

letter to a similar effect. This was prefaced with the

remark that the offer of fresh shares by the company was

illegal. Without prejudice to that contention, Mr. Reddy

was called upon to apply for the newly offered shares and

obtain them on their behalf or to send them the application

form (A) and the renuniciation form (B) and the fractional

certificate to enable them to obtain the new shares offered

which appertained to the 484 shares sold by him. The

relevant part of this letter reads thus: --

"We are instructed by our clients, the parties to whom you,

sold these shares,Mr. J. L. Mehta, Sir Padampat Singhania,

Lala Kailashpat Singhania, Mr. N. K. Bhartiya and others to

call upon you to apply for the additional shares and

fractional certificates now issued to which you have become

entitled, and to let us know when you have done so. When

allotted to you, you will hold these shares on their behalf

and please then hand them to the Hindustan Commercial Bank

Ltd., Apollo Street, Fort, Bombay, who will pay you the sum

of Rs. 100 for every share allotted to you, which should be

accompanied by blank transfer form signed by you as the

transferor and the form of renunciation unsigned. They will

also pay you the,

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Proportionate sum on any fractional certificate to which you

are entitled on handing over the same to the bank in blank

unsigned on or before the 7th March, 1945.

If you prefer to do so, please send the form of application

'A' duly signed by you as well as the renunciation form 'B'

as also the fractional certificate and the relevant

application attached thereto unsigned in blank to our

client, Mr. N. K. Bhartiya at Second Floor, Rahimtoola

House, Homji Street, Fort, Bombay, so as to reach him before

the 7th March, 1945, and he will then forward the

application to the company on your behalf along with the

necessary remittance.

Our clients agree to indemnify you against any and every

liability which you will incur by applying for the partly

paid shares.

We are instructed to point out that you are a trustee for

our clients by virtue of the fact that you have sold your

shares in this company to them pending our clients' name

being entered on the register in respect of the shares which

you have sold to them and that you are bound to comply with

our clients' request."

The Hindustan Commercial Bank Ltd. also wrote a letter to

Mr. Reddy on the 1st of March, 1945, which reads thus :-

"With reference to a circular dated the 28th February, 1945,

issued by Messrs. Craigie, Blunt and Caroe on behalf of

their clients Mr. J. L. Mehta, Sir Padampat Singhania, Lala

Kailashpat Singhania, Mr. N. K. Bhartiya and others, we have

instructions to pay you in respect of all shares of the

abovenamed company in the new issue that you deliver to us

at Rs. 100 per share, when such shares are allotted to you

in exchange for the allotment letters or share scrips with a

duly signed transfer deed. We have also instructions to pay

you at Rs. 20 per fractional certificate delivered to us on

or before the 7th March, 1945. Please note that we shall do

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the same if the shares and/or fractional certificates are

delivered to us in terms of the circular mentioned above.

You may send these to us through any

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bank and the exchange commission will also be paid by us."

These letters indicate that the persons named therein with

some undisclosed persons were the purchasers of the shares

sold by Reddy and they were the equitable owners of the

shares, in spite of the original bargain having been made by

Sir Padampat. It was not disclosed in these letters that

the persons named therein were mere nominees or benamidars

of Sir Padampat. One fact however is beyond dispute that

the names of these persons were not entered in the blank

transfer forms in the column of transferee, and eventually

it was the name of Sir Padampat alone that was entered

therein.

Mr. Reddy replied to all these communications received by

him on the 3rd March, 1945, in the following terms:-

"With reference to all these communications, I have to state

that nearly eight months have elapsed since I sold the

shares and the shares are not as yet transferred to the

names of the purchasers. I have no objection to give the

renunciation forms, duly signed in favour of the real and

true purchasers.

As regards the requisition made by you in paras. 4 and 5 of

the circular letter of 28th February, 1945, 1 fail to

understand as to how I am under an obligation to comply with

it. I am ready and willing to sign renunciation form in

favour of the true purchasers, on my being satisfied that

those who are described as the purchasers of my shares are

the real and true purchasers of those shares by their

producing the transfer forms given by me duly executed by

them along with the share certificates."

Whatever else may be said about the attitude of Reddy, he

was certainly entitled to know the name of person or persons

who were the real purchasers of the shares sold, because he

could only respect and comply with the requisition made by

those persons and those persons alone and by none else. Not

satisfied with this reply and in view of the fact that the

last date for making the application for the issue of

additional shares

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was to expire on the 10th March, Sir Padampat instituted

suit No. 336 of 1945 on the 8th March, 1945, on the Original

Side of the Bombay High Court, inter alia, for the following

reliefs against Mr. Reddy as the sole defendant. The

company was not impleaded in this suit.

"1. That the defendant may be ordered to send and deliver to

the plaintiff the application form A annexed to the circular

letter for the number of additional shares allotable to him,

as also the fractional certificates and the application

relating thereto (unsigned and in blank) upon the plaintiff

paying to him such sum as this honourable court may direct

and/or upon the plaintiff giving such indemnity as this

hon'ble court may deem proper;

2. That the defendant may be ordered upon receiving the

certificates of the new shares to hand over the same as also

the fractional certificates to the plaintiff together with

transfer forms in blank duly signed by him."

On the 7th December, 1945, the plaint was amended and an

alternative relief for a decree for Rs. 7,29,600 by way of

damages was included therein.

It was averred in the plaint that upon the sale by defendant

of 484 shares the plaintiff became the beneficial owner of

those shares and the defendant became a trustee for him of

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all rights and benefits whatsoever appertaining or accruing

to the said shares, that one of such rights was the right

and opportunity to apply for shares forming part of the new

issue, that the defendant was bound to do all lawful acts in

relation to and for the purpose of securing the said

benefits for the plaintiff and which the plaintiff might

call upon him to do, on terms of the plaintiff indemnifying

him against all the consequences thereof, and that the

plaintiff was ready and willing to do the same. It was

further alleged that unless the plaintiff's rights were

safeguarded by the 10th March, 1945, which was the last day

for making application for the shares, he will be irretriev-

ably prejudiced. Ail application was made for the

appointment of a receiver of the application form and

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letterof renunciation and of the rights of Reddy in the new

issue of shares.

On the same day Bhagwati J. made an order under Order XL,

rule 1, of the Civil Procedure Code, appointing the court

receiver, interim receiver of the application form and

letter of renunciation and of the rights, if any, of the

defendant in the 384 shares of the Bombay Life Assurance Co.

Ltd. The receiver was given power to exercise all the

rights of the defendant in respect of the said shares on the

plaintiff giving the usual undertakings. On the 10th March,

1945, the receiver made a request to the company for the

allotment to him of 384 shares of the new issue appertaining

to the 484 shares standing in Reddy's name in the company

register and sold by him on the 25th July, 1944. This

application was accompanied by a remittance of Rs. 38,400

payable on these shares according to the resolution of the

board. The company was requested to register the name of

the receiver in the register of members in respect of these

shares. On the 30th April, 1945, the company intimated to

the receiver that his application for allotment of shares

was considered by the board of directors in a meeting held

on the 21st April, 1945, and it was resolved to reject the

same because Reddy had accepted the company's offer only to

the extent of 40 shares and the offer regarding the balance

had lapsed.

The result was that the company refused to register the name

of the receiver in respect of the new shares on the 30th

April, 1945, and it also refused Sir Padampat's application

for registering his name as transferee in respect of the 484

shares of Reddy purchased by him which might have entitled

him to retain the new shares in his own name. Sir Padampat

having thus failed in getting the newly issued shares regis-

tered in the name of the receiver had no alternative left

but to fight out the suit already instituted against Reddy.

He also had another suit instituted to obtain practically

the same reliefs which were claimed in his own suit, by the

receiver against the company with the leave of the court,

namely, suit No, 786 of 1948.

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This suit was filed on the 8th March, 1948, after the lapse

of about three years of the company's rejection of the

receiver's application. It was explained in paragraph 14 of

the plaint that the suit had not been filed earlier as the

validity of the issue of the new shares 'was being

challenged in suit No. 347 of 1945. The prayer in this suit

was that the defendant company be ordered to allot to the

plaintiff 384 shares mentioned in the application and to put

his name on the share register of the company for the said

shares.

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Both the suits were heard by Bhagwati J., who delivered one

judgment in both of them and substantially granted the

reliefs claimed in both the suits. It was held by the

learned judge that the 484 shares which Reddy had sold

through Bhaidas Gulabdas had been purchased by Sir Padampat,

that as trustee of these shares he as vendor was also a

trustee of all. property rights annexed to the shares and

that it was the duty of Reddy, when called upon to do so by

Sir Padampat on proper safeguard and indemnity for payment,

to transfer to Sir Padampat all the benefits which he

derived by the issue of the new shares by virtue of his

being their legal owner. It was further held that a proper

requisition had been made by the beneficial owner on the

trustee to obtain for him these shares and that the trustee

defaulted in his duty in not complying with that requisition

and that the company was also in error in refusing the

application of the court receiver for registration of his

name as a shareholder in respect of the new shares on the

ground that Reddy having applied for 40 shares, his right to

obtain the remaining shares had lapsed. It was argued on

behalf of the company that the sanction given by the

examiner of capital issues having lapsed, no relief could be

given against the company and it could not be ordered to

allot shares to the plaintiff as there was no available

capital which could be issued. Bhagwati J. however took the

view that the plaintiff could not be deprived of his rights

by reason of this circumstance. In the result he ordered

the company to comply with the order and allot within three

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months 384 shares to the plaintiff after obtaining a fresh

sanction for the same from the authority concerned. Before

concluding the learned judge said that issues 10 and 11 had

not been argued before him and the contentions raised

therein seemed to have been abandoned and that even

otherwise there was no merit in them. Against this common

judgment in both the suits, Reddy and the company preferred

separate appeals. The appeal Bench of the High Court

allowed the company's appeal and dismissed the receiver's

suit on the finding that the court receiver was not entitled

to the allotment of the new shares in his own name as such.

Civil Appeal No. 52 of 1950 has been preferred against this

decision. In suit No. 366 of 1945 Reddy's appeal was

allowed to the extent that the plaintiff was held

disentitled by the reason of lapse of the sanction to

reliefs (A) and (B) granted to him by Bhagwati J. It was

however held that he was a trustee of Sir Padampat in

respect of the shares of the new issue and he having failed

to apply for the new shares was liable to him in damages and

the fact that he made an application in respect of 40 shares

did not disentitle him to make another application in

respect of the 384 shares. It was also held that a proper

requisition had been made by the beneficiary upon the

trustee to carry out the trust and he had defaulted in

complying with the requisition. The suit was accordingly

remanded to the trial judge for assessing damages.

The principal questions involved in the appeals are:

(a)Whether on the facts and circumstances of this ease Reddy

was under a legal obligation as a trustee to apply for and

obtain on behalf of Sir Padampat 384 new shares which

appertained to the shares sold by Reddy to Singhania;

(b)whether the requisition made on Reddy by Messrs.

Craigie, Blunt & Caroe by their letter dated 3rd March,

1945, was sufficient in law to call upon him to apply for

shares of the new issue and whether Reddy committed default

as a trustee in not complying with this requisition;

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(c)whether the conduct of Sir Padampat in not lodging 484

shares for transfer to his name till April, 1945,

disentitled him to the reliefs claimed by him;

(d)whether the receiver was not entitled to make the

requisition and was not the proper person to apply for the

new shares in his own name, and whether the company was

under no obligation to allot to him the shares;

(e)whether the plaintiff was entitled to reliefs (A) and (B)

of the plaint in the altered situation of the company.

It has been held in the courts below that Sir Padampat

became on the 29th July, 1944, the sole beneficial owner of

484 shares sold by Reddy, the legal title to which was

vested in him. That having been found, the relation of

trustee and cestui que trust was thereby established between

them. All that is necessary to establish such a

relationship is to prove that the legal title was in the

plaintiff and the equitable title in the defendant. The

fact that such a relationship qua the 484 shares sold by

Reddy existed between the parties to the suit was not

disputed by the learned AttorneyGeneral appearing for Reddy,

but he contested the view of the High Court that the cestui

que trust could not on any principle of equity or law call

upon the trustee to bear his burdens and ask him to obtain

on his behalf new shares of the company or make further

investments in its capital which would involve in its train

new obligations and fresh burdens.

As observed by Lord Lindley in Hardoon v. Belilios(1) the

plainest principles of justice require that cestui que trust

who gets all the benefit of the property should bear its

burden unless be can show some good reason why his trustee

should bear them himself. Mr. Pathak did not contest the

proposition that Singhania had any right as a beneficial

owner of 484 shares to throw on Reddy any of the burdens

incidental to the ownership of those shares. He conceded

that Reddy as a trustee had a right to be indemnified by his

cestui que trust against calls. The proposition is well

recognised and

(1) [1901] A.C. 118.

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the liability is enforced on the principles applicable to

the equitable ownership of property.

Once it is held established that Reddy was a trustee of the

484 shares sold by him, he as holder of those shares must

also be held to be a trustee of all the property rights

annexed to the shares. It was conceded that he was not only

the trustee of the corpus but also the trustee of the income

and of the dividends that he may receive and that he was

bound to pay them over to the beneficiary. In E.D. Sassoon

& Co. Ltd. v. Patch(1) Pratt J. held that under section 94

of the Indian Trusts Act a transferor holds the shares for

the benefit of the transferee to the extent necessary to

satisfy its demands and that as the transferee holds the

whole beneficial interest and transferor has none, the

transferor must comply with all reasonable directions that

the transferee may give and that in this situation if he

becomes a trustee of dividends he is also a trustee of the

right to vote because the right to vote is a right to

property annexed to the shares and as such the beneficiary

has a right to control the exercise by the trustee of the

right to vote. The learned AttorneyGeneral did not combat

the view expressed by Pratt J., but he objected to any

further extension of the rule therein laid down. The

question that needs our decision is bare of authority. The

English law can furnish no guidance for its solution as

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there is no provision corresponding to section 105 (C) in

the English Companies Act. In India this is the first known

occasion when a situation like this has arisen between a

transferor and transferee of shares on a stock exchange

transaction. The proposition therefore that has been

canvassed in this case has to be decided on first

impressions and on general principles of equity.

Section' 105(C), the enactment of which has conferred

certain rights and privileges on a shareholder which he did

not possess before its enactment 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

(1) 45 Bom. L.R. 46.

130

the existing shares held by each member 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 offered, the

directors may dispose of the same in such manner as they

think most beneficial to the company."

This section limits the powers of the directors to dispose

of the further issue of capital in any manner that they may

think most beneficial to the company. They are under a

mandate to offer these shares in the first instance to the

members in proportion to the existing shares held by them.

In other words, a member becomes entitled under the

provisions of this section by reason of his being the holder

of a certain number of shares in the company, to obtain

shares in the further issue of capital as of right.

This is not a fruit of stock ownership, in the nature of a

profit, nor does it amount to a division of any part of the

assets of the company. It is not an organic product of the

original stock like the young of animals or the fruit of

trees, but, as described by the Supreme Court of America in

Miles v. Safe Deposit Trust Co.(1) this right to subscribe

to new stock is but a right to participate in preference to

strangers and on equal terms with other existing

shareholders in the privilege of contributing new capital

called for by the corporation-an equity that inheres in

stock ownership under such circumstances as a quality

inseparable from the capital interest represented by the old

stock. The exercise of the privilege depends on the option

of the shareholder. If he likes, he can invest further

money and purchase a proportionate share, of the new issue

of capital. He is of course not obliged to do so. He has

also the right to assign the offer made to him in favour of

any other person but in that event the directors have the

option to allot or not to allot the

(1) 66 Law. Edition 903 at 026.

131

shares to the person in whose favour the share holder

renounces the shares offered to him. The offer, of course,

creates fresh rights but it also brings in its train

liabilities and obligations. It confers the right on a

shareholder to purchase shares in the new issue of capital

in proportion to his existing shareholding, but in order to

obtain that right he has to fulfil certain obligations and

he has to incur certain liabilities. In the first instance,

if he decides to invest his money in the further capital

issued, he has to make an application to the company for the

allotment of shares so offered and with his application he

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has to remit to the company the amount of the application

money. That having been done, if the shares offered are

only partly paid up, as they were in this case, he incurs on

allotment the further liability of meeting any future calls

on these shares. Can it be said in this situation that a

transferor of a certain number of shares who being the legal

owner of those shares and the beneficial interest of which

vests in the cestui que trust, is liable for all the

payments and obligations attaching to the new issue of

shares and is bound to act in both respects for the benefit

of the cestui que trust; in other words, whether he is under

a duty, when so instructed by his beneficiary, to make an

application for the new issue of shares offered under the

provisions of section 105-C and obtain them in his name by

making the necessary payment and by incurring the

consequential obligations. Plainly put, the question may be

posed thus: whether the obligation of a transferor of a

certain number of shares as a trustee extends also in

respect of the right to acquire further shares issued by the

company on behalf of his cestui que trust by putting himself

on the register of shareholders in respect of the new shares

regarding which. he may have to incur fresh liabilities and

obligations which were not existing at the time when he made

the transfer.

Mr. Pathak contended that as the right to obtain new shares

was inseparable from the ownership of the old stock, the

transferor of the old -stock held the option to buy new

stock in like manner as he held the

132

original stock, and if qua the old stock he was a trustee

for the beneficial owner, in the like manner he was a

trustee also of the right or the option to buy new shares

and was bound to exercise it for the benefit of the cestui

que trust and according to his directions, and was bound to

obtain new shares in his own name for the cestui que trust.

Reliance was placed for this proposition on certain

observations of Buckley J. in Biss v. Biss(1). In that

case, a lessor granted a lease for seven years of a house in

which the lessee carried on a profitable business. On

expiration of the term of the lease, the lessor refused to

renew the lease, but allowed the lessee to remain as a

tenant from year to year on increased rent. During the

tenure of the lease, the lessee died leaving a widow and 3

children, one being an infant. The widow and a son each

applied to the lessor for a new lease for the benefit of the

estate, which the lessor refused to grant. Having

determined the yearly tenancy by notices the lessor granted

to the son personally a new lease for 3 years. In an action

already instituted by the children against the

administratrix, namely, the widow, she applied to have the

new lease treated as being taken by the son for the benefit

of the estate. Buckley J. held that the son was a trustee

of the new lease for the benefit of the estate. The Court

of Appeal reversed this decision and held that the right of

renewal had been determined by the lessor long before the

son intervened, and that the new lease could not be regarded

as an accretion to the estate and the son was entitled to

retain the lease and that he had not abused his position in

any way. This case therefore is no authority for the

proposition before us, and the Court of Appeal did not say

anything on the point. Buckley J. however in the course of

his judgment observed as follows:-

"It is, of course, very familiar law that if a trustee

obtains a renewal of a lease of property vested in him as

trustee, whether by virtue of a right of renewal or not, he

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must hold the new lease for the benefit of his cestui que

trust. The leading authority upon that is

(1) [1903] 2 Ch . 40.

133

Keech v. Sanford (1). The principle is that the trustee

owes it to his cestui que trust to obtain a renewal, if he

can do so, on beneficial terms, and that the court will not

allow him to obtain a renewal upon beneficial terms for

himself when his duty is to get it for his cestui que

trust."

Reliance was also placed on certain observations of Neville

J. in Jones v. Evans(2). That was a case where the capital

of a company was divided into 10,000 shares of pound 10

each, of which 3,728 only had been issued and were fully

paid up. The company was very prosperous and the market

value of the shares was pound 30 each. The reserve fund of

the company exceeded pound, 50,000. The directors proposed

a scheme for distribution of the reserve fund representing

accumulated undivided profits amongst the shareholders, so

that every shareholder was to get a bonus of one new fully

paid up share of pound 10 for every existing share held by

him. Accordingly resolutions were passed by the company

empowering the directors to declare a bonus dividend out of

the reserve fund and sanctioning the distribution of a bonus

dividend of pound 10 per share out of the reserve fund and

authorising the further -issue of 3,728 shares of pound 10

each out of the unissued capital of the company to be

allotted pro rata amongst the existing shareholders and

directing that such new shares be paid up in full forthwith.

The directors sent a circular letter to every shareholder

with a warrant for the bonus divident on his shares,

informing him of an allotment to him of his proportion of

the new shares and giving him an option to accept or refuse

the allotment, and stating that if he accepted the allotment

he was to indorse and return the dividend warrant to the

company to be applied in payment of the new shares.

Trustees of a testator's will held 200 shares of the

company, and on receipt of the circular letter accepted

their allotment of 200 new shares, indorsed and returned

their bonus dividend warrant for pound 2,000, and afterwards

sold the new shares

(1) (1726) Sel. Cas. 61. (2) [1913] 1 Ch. 23.

134

at a profit. The question then arose whether, as between

the tenants for life and remainderman under the will, the

bonus dividend was capital or income. It was held, on the

evidence, that the company intended to capitalize the

reserve fund and not to distribute it as a bonus dividend,

and therefore the whole of the bonus dividend was capital of

the testator's estate. In the concluding portion of his

judgment, Neville J. said as follows:-

"............ when I say that the option vested in each

shareholder, either to take the dividend and keep it, or to

return it and get the greater benefit which the company

offered if be did, I do not think that is true in the case

of trustees; because it seems to me that, if by taking pound

10 in cash, when they were offered by the company a share

worth E 20 if they would return it, it would be a wilful

default on their part if they refused and took less, and

consequently their cestui que trust would be entitled to

insist upon the trustees taking the greatest benefit which

the company offered. Therefore, in the case of trustees it

seems to me that, although as between the company and them

there may be a right to elect, between them and their cestui

que trust there is no such right, and they must take the

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dividend in what I will call the capitalized form."

On the basis of these authorities, Mr. Pathak contended that

his client as a beneficiary was entitled to the fullest

benefit conferred on the old shares by reason of the new

offer and that he was entitled to compel the trustee to act

in a manner which would enable him to obtain the benefit.

In our opinion the observations made in these cases cited

above must be limited to the facts of those cases. We are

here dealing with a trustee with peculiar duties and

peculiar liabilities, and it is a fallacy to suppose that

every trustee has the same duties and liabilities. In none

of the cases cited by Mr. Pathak was there any question of

the trustees incurring any personal pecuniary liability. In

the case of Biss v. Biss(1), the question was obtaining the

benefit of renewal of a

(1) [1903] 2 Ch. 40.

135

lease, and the trustee had to incur no fresh liability for

obtaining it. On the other hand, a prosperous business was

being conducted in those premises and the renewal of the

lease was obviously for the benefit of the lessee and

carried with it no new or onerous obligations. In Jones v.

Evans (1), the trustee had incur no liability of any kind

whatsoever. That only question there was whether he should

exercise the option of receiving the dividend or of

converting the bonus into the shape of capital. It is part

of the general law of trust that a trustee must act in a

manner most beneficial to the cestui que trust and he can

retain no benefit to himself from the corpus of the trust

estate or from anything that accrue to that estate

subsequently. None of these cases death with a situation

like the one that has arisen in the present case. If the

newly offered shares were fully paid up and no liability was

attached to them, there is no question that the trustee

would have been bound to obtain them for the benefit of the

cestui quo trust. The cases referred to therefore go only

so far and no further. We see no principle of equity or on

general law which obliges a trustee to buy new shares in his

own name for the benefit of the cestui que trust, when in so

doing he has to bear a heavier pecuniary burden than he

undertook to bear as constructive trustee by reason of the

sale of his shares in favour of the cestui que trust and

which relationship was contemplated to last only till the

time when the shares sold could not be registered in the

name of the transferee. Of course, if the trustee of his

own volition chose to obtain the new shares which appertain

to the shares already sold by him, on principles of equity

it could not be denied that the cestui que trust would have

been entitled to call upon the trustee to hand over those

shares to him on receipt of the amount spent by the trustee;

but if the trustee of his own volition is not prepared to

obtain those shares in his own name, it is difficult to see

on what principle of law or equity he can be forced to make

an application for obtaining those shares in his own name,

and then pass

(1) [1913] 1 Ch. 23.

136

them over to the cestui que trust after obtaining the amount

spent by him or after being otherwise

fully indemnified in respect of the payments made or to be

made, or liabilities incurred or to be incurred in future.

It is difficult to conceive any principle of equity which

obliges a person in the position of a constructive trustee

in respect of X number of shares to also become a

constructive trustee in respect of in additional, say, Y

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number of shares and thus become a trustee of X plus Y

shares. Such a burden is not a necessary consequence or an

incident of the original transaction of purchase and sale of

shares or of the legal relationship of trustee and cestui

que trust thus created. That relationship arises by reason

of the circumstance that till the name of the transferee is

brought on the register of shareholders in order to bring

about a fair dealing between the transferor and the

transferee equity clothes the transferor with the status of

a constructive trustee and his obliges him to transfer all

the benefits of property rights annexed to the sold shares

of the cestui que trust. That principle of equity cannot be

extended to cases where the transferee has not taken active

steps to get his name registered as a member on the register

of the company with due diligence and in the meantime

certain other privileges or opportunities arise for purchase

of new shares in consequence of the ownership of the shares

already acquired. The trustee can very well say to any

request made by the cestui que trust for the acquisition of

new shares that he is not prepared to put his name on the

register of members for any Additional shares, particularly

when the acquisition of those shares involves him in further

liabilities. In our judgment therefore neither on principle

nor on authority can it be held that Mr. Reddy could be

forced to acquire in his own name 384 shares which appertain

to the 484 shares sold by him to Sir Padampat. All that Sir

Padampat could call upon Reddy to do was to sign he

renunciation form in his favour of the shares offered put of

the new issue appertaining to the old shares and after

having obtained the renunciation form, to make

an application in his own name for the purchase of those

shares. This view can be sustained on the intelligible

principle that the transferor as a constructive trustee in

respect of the shares sold by him cannot retain any benefit

himself of the new issue which is annexed to the shares sold

by him and if any benefit arises out of that offer made

under section 105-C, that benefit must go to the

beneficiary, but more than that the beneficiary is not

entitled to call upon the trustee to do.

Mr. Pathak reiterated the argument that had been accepted by

the High Court that if the only duty of Reddy was to

transfer the offer made to him under section 105-C to Sir

Padampat after signing the renunciation, then in that case

Sir Padampat could not get the full advantage of that offer

because in that event the directors were not bound to allot

the shares to the person in whose favour they have been

renounced by the shareholder, while on an application made

by the shareholder they were bound to allot him the shares

offered. That disadvantage is certainly there but it has to

be borne in mind that the relationship of constructive

trustee and cestui que trust created on principles of equity

cannot be extended ad infinitum in respect of all future

acquisitions of rights annexed to the shares sold which

acquisitions may involve not only rights but liabilities and

obligations which the constructive trustee may not be

prepared to undertake, and in this situation the cestui que

trust may not be able to get all the benefits of the fresh

incidents annexed to the ownership of the shares that he had

purchased. He himself may be blamable for the loss that be

may have thus to suffer by his not having made an

application in time for getting himself registered on the

register of members and for not having taken proper steps in

law for getting his transfer recognised by the company if

the request made by him has already been refused by the

company. The equitable principle on the basis of which the

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legal relationship between the transferor and the transferee

arises cannot be worked in a manner so as to prejudice the

138

position of the constructive trustee and make him an

accounting party in respect of all privileges or fresh

offers that may be annexed to the shares sold for all time

to come.

Mr. Pathak urged that his client was prepared not only to

pay the application money and the allotment money to the

trustee but was further prepared to indemnify him against

any future calls on those shares. It has to be remembered

that even the original 484 shares sold by Reddy to Sir

Padampat were partly paid up shares and Reddy was liable to

pay the amount of any call made on those shares, subject to

being indemnified when the time arose by Sir Padampat for

the amount paid on those shares. If Mr. Pathak's contention

is accepted, then Reddy will also become further liable for

future calls on the new 384 shares. He would be entitled

only to claim indemnity when an occasion arose. It is well

settled that a trustee is not entitled to claim indemnity

till he suffers an injury for which he has to be

indemnified. But the fact remains that the liability to pay

calls is for the time being his liability and not that of

the cestui que trust. Once his name is entered on the

register of shareholders, a mere right to claim indemnity

may, in a case like the present, when the time to claim it

arises, prove to be merely illusory. The shares may go down

in value, the company may go in liquidation, or the

financial position of the equitable owner of the shares may

deteriorate. In all these situations, the right of the

trustee to be indemnified in respect of fresh liabilities

accruing on the shares would be, as already stated, merely

chimerical, and the trustee would have to incur in those

situations personal pecuniary liability on account of the

shares. Therefore, the contention that the trustee is bound

to buy the new shares in his own name for the benefit of the

cestui que trust is not well-founded, because it involves in

its train pecuniary liabilities which the trustee may have

to incur personally and which he is not bound to undertake

under any system of law for the benefit of the cestui que

trust. We thus hold that Sir Padampat was not

139

entitled to call upon Reddy to make an application in his

own name for the acquisition of the newly issued shares by

investing his own money in the first instance and then

recovering it from Sir Padampat or by signing the

application form and sending it to Sir Padampat for

acquiring the shares in his name. All that he was entitled

to was to call upon him to send him the renunciation form.

This Reddy was prepared to do and offered to do so provided

the names of all the persons in whose favour renunciation

had to be made were disclosed to him. Admittedly this was

never done and Sir Padampat could not gain his object by

merely having the renunciation form, because the directors

of the company in the circumstances of this case would never

have granted his application, if made in his own name on the

basis of the renunciation form signed by Reddy. Sir

Padampat's or the receiver's suit therefore in this view of

the case could not have been decreed.

On the view expressed above, both the suits must fail. If

Sir Padampat had no right to call upon the trustee to buy

the newly offered shares in his own name for his benefit, a

fortiori, the receiver appointed by the court had also no

such right, and on this short ground the claim put forward

in both the suits has to be negatived.

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We are further of the opinion that even if it was held that

Reddy was under a duty to sign the application form and the

renunciation form and send them over to Sir Padampat to

enable the latter to obtain the newly offered shares in

Reddy's name, the requisition that was made on his behalf

directing the trustee to purchase these shares and to

exercise the option was ineffective and inadequate. On the

basis of that requisition, it was not possible for the

trustee to carry out the mandate of the cestui que trust,

and, that being so, on this ground also, the plaintiff was

disentitled to relief in the two suits.

The first requisition made by Messrs. J. L. Mehta and N. K.

Bhartiya on the 23rd February, 1945, was made on their own

behalf only and not on

140

behalf of Sir Padampat. It called upon Mr. Reddy to forward

the circular letter with his signatures on the forms annexed

to the letter, to enable them to apply for the newly offered

shares either in his name or in their or such other names as

might be decided upon by them. This requisition was not

considered adequate by the High Court and was left out of

consideration. Mr. Pathak also did not place much reliance

upon it. Both the courts below and Mr. Pathak however

placed reliance on the requisition made on the 28th

February, 1945, in the letter of Messrs. Craigie, Blunt &

Caroe cited in the earlier part of this judgment. In that

letter, it was stated as follows

"We are instructed by our clients, the parties to whom you

sold these shares, Mr. J. L. Mehta, Sir Padampat Singhania,

Lala Kailashpat Singhania, Mr. N. K. Bhartiya and others to

call upon you to apply for the additional shares and

fractional certificates now issued........"

This requisition therefore purports to have been made on

behalf of 4 disclosed beneficiaries and some other

undisclosed cestuis que trust. It was not asserted in this

letter that the real purchaser of the shares was Sir

Padampat Singhania and the other persons mentioned therein

were merely his agents or benamidars. Moreover, it did not

disclose the names of all the beneficiaries. Legitimately,

therefore, in his letter of the 3rd March, 1945, Mr. Reddy

said that he was ready and willing to sign the renunciation

form in favour of the true purchasers, on his being

satisfied that those who are described as the purchasers of

his shares are the real and true purchasers by perusing the

transfer forms duly executed by them along with the share

certificates. It is difficult to understand how a

requisition made on the trustee by some disclosed and other

undisclosed beneficiaries could be regarded as a proper

direction to him, which he could be called upon to obey.

This requisition was therefore faulty in this respect, and

the trustee could not be said to have defaulted in his duty

in not carrying out

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such a requisition. Again, the indemnity offered in the

requisition is merely illusory, because in the letter the

extent of the liability of each beneficiary, whether known

or unknown, is not mentioned, and the trustee could not

ascertain from its contents the name of each and every

person liable for his claim for indemnity as and when the

occasion for it arose, or its extent. A mere bald statement

in the following words "Our clients agree to indemnify you

against each and every liability that you incur by applying

for these partly paid up shares" was in our opinion wholly

inadequate. The matter may have been different if along

with this requisition a bank guarantee safeguarding the

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trustee in regard to his future liabilities had been sent to

him as well as a cheque for the money required to be paid at

the time of making the application. We are also of the

opinion that in view of the allegations made in the plaint

and in view of the fact that all the share transfer forms

were subsequently signed by Sir Padampat Singhania alone,

this requisition cannot be said to have been made on behalf

of the plaintiff and on the basis of it he cannot be heard

to say that he made a proper requisition on the trustee

which the latter failed to carry out and was therefore

liable to him in damages for not carrying out his

directions. It is significant that no mention is made in

the plaint as to how the names of the persons contained in

the letter of the 28th February came to be mentioned

therein, and how the requisition was made on their behalf

when they had never signed the blank transfer forms.

It may also be observed that it was left to the option of

the trustee to pay from his own pocket the application

money, and then recover it from the bank. Such a demand

could not be made on a trustee and he could not be asked to

invest his own money for the benefit of the cestui que

trust. The trustee was under no obligation to find a heavy

sum of money and to invest it on the purchase of new shares

for the benefit of the cestui que trust, and to recover the

amount after having invested it in them. What the letter of

the solicitors in fact intended to

20

142

convey to Reddy was: "Pay yourself and obtain the shares, or

else, sign a blank cheque and send it to us and then we will

see to what extent we are going to make you liable by

putting your name on the register of shareholders." The

conclusion of the High Court on this point has been stated

in these terms:-

"Sir Jamshedji relies on the attitude taken up by his client

and has contended that he took up the right attitude by

enquiring as to who the real beneficiary was and to be

satisfied by the production of the relative transfer forms.

Now, if this had been the only attitude of Reddy much might

have been said in his favour. But unfortunately in this

very letter Reddy clearly declined any liability or obliga-

tion upon him to apply for these shares on behalf of his

beneficiary. Whether he knew that his purchaser was Sir

Padampat or not, as the learned Judge has held, or whether

there is force in Sir Jamshedji's contention that Messrs.

Craigie, Blunt and Caroe referred to the purchasers as Sir

Padampat and others, the fact remains that Reddy did not

accept his liability as a trustee and then agreed to

discharge that liability provided he was satisfied as to who

his purchaser was. He only wanted to be satisfied about his

purchaser in order to send to him the letter of

renunciation. That was the only question on which he wanted

to be satisfied. 'In view of the attitude taken up by Reddy

the plaintiff had no other course open to him except to file

the suit, and, therefore, in our opinion the learned judge

was right when he came to the conclusion that the plaintiff

was entitled to the relief he had claimed."

We have not been able to appreciate this line of thought.

The attitude adopted by Reddy could not cure the defects in

the requisition alleged to have been made on behalf of the

plaintiff. If the directions given to the trustee were of

an inconclusive nature, and were in law ineffective, then

the trustee could not be mulcted in damages for not obeying

them, even if his attitude was not what it should have been.

The plaintiff is not entitled to damages unless and until

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lie

143

proves that he made a proper and effective demand on the

trustee and this the trustee failed to carry out. On this

ground also, both the suits are bound to fail. Mr. Pathak

argued that the plaintiff was entitled to reliefs A and B,

both in his suit as well as in the receiver's suit and that

the receiver's suit was wrongly dismissed by the High Court.

We are unable to agree. In our opinion, the High Court

rightly held that the receiver appointed in the suit of Sir

Padampat could not acquire the newly issued shares in his

name. That privilege was conferred by section 105-C only on

a person whose name was on the register of members. The

receiver's name admittedly was not in the register and the

company was not bound to entertain that application. Mr.

Pathak argued that that may be so but the receiver was not

making an application in his individual right but he had

been armed by the court with power to apply in the right of

the defendant Reddy. The fact however is that the receiver

made the application in his own name. Even if Mr. Pathak's

contention is right the company was no party to the suit

filed by Sir Padampat against Reddy and that being so, no

order could be issued to the company in that suit to

recognize the receiver as a shareholder in place of Reddy.

The matter might have been different if the company was a

party to the suit and was ordered by the court to register

the receiver's name in place of Reddy for the 484 shares

purchased by Sir Padampat and was also ordered to issue new

shares in the name of the receiver. It is not necessary for

us to offer any final opinion on the question if the court

would have been within its right to direct his name to be

included in the register, even if the company was impleaded

in the suit filed by Sir Padampat against Reddy. We are

however quite clear that the company not having been

impleaded in that suit, it was not bound to issue the now

shares in the name of a person whose name was not already in

the register of members even if he represented a person

whose name was already in the register. The High Court was

thus right in dismissing the receiver's suit. We are also

of the opinion that the appellate bench of

144

the High Court was also right when it declined to grant

reliefs A and B of the plaint to Sir Padampat. The sanction

given to the company to issue new capital had lapsed long

before Bhagwati J. granted reliefs A and B to the plaintiff.

It was an extraordinary procedure in a civil suit to direct

a company which was no party to the original suit to obtain

fresh sanction for the issue of new shares and then allot

them to the plaintiff It seems to have been overlooked that

if sanction to issue new capital was somehow obtained, that

capital would also have to be distributed as directed by

section 105-C and could not be allotted by the directors in

favour of any particular shareholder. In the altered

situation that arose after the institution of the suit, if

the plaintiff succeeded, the only relief that could be

granted to him was the relief of damages. We are however

unable to grant the relief to the plaintiff in view of our

finding that Reddy could not be compelled as constructive

trustee to buy new shares in his own name for the cestui que

trust and further in view of our finding that even if he

could be compelled to acquire those shares in his own name

for the cestui que trust he could not be said to have

defaulted in his duty in carrying out the directions of the

cestui que trust as in this case no proper and valid

requisition was made by the cestui que trust on the trustee

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for the acquisition of those shares. The plaintiffs in the

two suits are therefore not entitled to any relief

For the reasons given above, we allow Reddy's appeal No. 53

of 1950 and dismiss the cross appeal of Sir Padampat as well

as the receiver's appeal No. 52 of 1950 and dismiss both the

suits, but in the circumstances of this case we will make no

order as to costs in both the suits throughout.

Appeal No. 53 allowed.

Appeals Nos. 52 and 54 dismissed.

Agent for the appellants in Appeals Nos. 52 and 54 and the

respondent in Appeal No. 53: S. P. Varma.

Agent for the respondents in Appeals Nos. 52 and 54 and the

appellant in Appeal No. 53: Rajinder Narain.

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