S.C.R. . SUPREME COURT REPORTS 391

NANALAL ZAVER AND ANOTHER

v.

BOMBAY LIFE ASSURANCE CO. LTD.

AND OTHERS.

[SHRI HARILAL KANIA C.J., MEHR CHAND MAHAJAN,

MuKHERJEA and DAS, JJ.]

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

Outsidet· trying to get control of management by p11rchasing shores

-Issue of further shares-Offer of new shares to es;isting share­

holders-Validity of resolution and offer-Company in need of

funds-Additional motit1e to pret1ent outsidet· getting control-Bona

fides of resolution-Scope of s. 105-C.

A company was incorporated with a capital divided into 10,000

shares. After 5,404 shares had been subscribed, the directors of

the company, finding that a businessman. who had several other

businesses and who was likely to use the funds of this company

for his own businesses, was trying to get control of this company

by purchasing its shares, resolved to issue the remaining 4,596

shares and qffered . these shares to the existing shareholders in the

proportion of four new shares for every five she.res held by them.

Two of

the shareholders of the company instituted

.a suit age.inst

the company and the directors for the following reliefs: (i) a. decla­

ration that the resolution of the directors and the offer of shares

contravened

the provisions of section

105·.c of the Indian Com­

panies Act, 1913, and was therefore ultra vires and illegal; (ii) a.

declaration that the. offer of she.res was not made bona fide or in

the interests of the company and was therefore illegal ; a.nd (iii) to

restre.in the defenda.nts from allotting any shares in pursue.nee of

their offer :

Held

per KANIA

C.J., MAHAJAN, MUKHERJEA and DAB JJ.­

that inasmuch as the sh!Lres resolved to be issued were offered to

the existing shareholders only, and not to any outsider a.nd these

shares were also offered to the existing shareholders in proportion

to the she.res held by each member without making any discrimi­

natior.<,, between them the two requirements of section 105-C were

complied with and the resolution e.nd offer did not contravene tba.t

section even though 272 shares remained undistributed as a. result

of the offer

of four new shares for every five shares.

1950

May 4.

1950

N anal al Zaver

And A1wther

v.

Bo1nba y Life

Assurance Co,

A.nd Others

I<an;a C. J.

392 SUPREME COURT REPORTS (1950]

Held also per KANIA C.J., MAHAJAN, Mux1rnRJEA and

DAS JJ.-that the fact that one of the motives of the directors

in issuing further shares was to prevent an outsider who ha.d

not yet become a shareholder, from getting control of the

company did not render the resolution or the offer illegal inasmuch

as such

a motive could not in itself be said to be not in the

inherests of the company and even assuming that such a. motive

was

bad this

n.dditional 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.

J.,dgment of th• Bombay High Co!f.rt affirmed.

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 1 lth 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 arguments of the counsel are set

out in the judgment.

N.

P. Engineer (M. !JI. Desai and H.]. Umrigar

with him) for the appellants. -

l. C. Setalvad (G. N. Joshi with him) for respond­

ents Nos. 1 to 6 and 8 and 9.

1950. May 4. The Court delivered the following

Judgments:

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. IO 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 •

S.C.R. SUPREME COURT REPORTS 393

put up the price of the shares considerably. On the

18th September, 1944, at a board meeting of the direc­

tors the chairman drew attention of his co-directors to

the

attempt thus made by an outsider to corner the

shares

of the company. 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 Janu­

ary, 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 men­

tioned in that application to show why the company

iequired 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 renunciation 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 Uirectors 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.

1950

Nanalal

Zaver

,tfld Anothe 1 .

v.

Bombay Life

Assurance Co.

And Others

Kanta C.J.

1950

N an.alal Z ave,.

And Another

v.

Boin.bay Life

Assurance Co.

And Others

l{ania C. J.

394 SUPREME COURT REPORTS [1950j

The appellants are two shareholders of the com­

pany. They filed the suit,

out of which this present

appeal has arisen,

" for themselves and all other

aggrieved shareholders of the company." The defen­

dants are the company and eight directors. It is

contended in

the plaint that the whole issue of these

further shares and the idea of increasing the capital of

the company was mala

fide and with the object of

retaining

the control and management of the company

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

contravention 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 contended that the com­

. pany 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 rhe 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 com­

pany 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 ctlpital.

It was however urged on their behalf that as the issue

of these shares, although not

admitted in the written

f

,_

S.C.R. SUPREME COURT REPORTS 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

bona' 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 rnns 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 propor.

tion to the existing shares held

by each member

(irrespective

of class) and such offer shall be made by

notice specifying the number of shares fo which the

member is entitled

and 1imiting 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 given1hat 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."

On behalf of the respondents three answers were

submitted. 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

iifgued 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 directors had not committed any

50

19;;0

N a1Url al Z aver

A11d Aflother

v.

Bomb" y I;ife

Assurance Ca..

; nd Others

/(ania C. J.

1950

Nanalal Za1•cr

And Another

v.

Bo1nba y L(fe

·Assuran:c Co.

A1td Others

J(auia C. J.

396 SUPREME COURT REPORTS [1950}

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 express 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 contended that by the offer made by the direc­

tors

fo the shareholders there has been any discrimi­

nation amongst

the shareholders 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 share­

holders 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 resolu­

tion 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 proportion of four new shares

to five

shares held

by them. Inasmuch 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

fot 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 con­

tained in

the circular as an offer of the 4,596 shares.

That however does not establish the contention of

the

appellai:its. I find not~in? in the section to justify

the conclusion that the directors must offer all the

shares resolved to be issued in one lot to the share­

holders. I can conceive of numerous cases where a _;

limited company with a growing business does not

S.C.R. SUP~EME COURT REPORTS 397

require its capital to be called up at once. For instance,

soon aftel a company is formed it may issue shares of,

say a lakh of rupees required for the construction of

the buildings,

and after

. a year when it requires

ft'.lrther 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

shar~holders from time to time in that way. As

noticed before, the object of

the section is to prevent

discrimination amongst shareholders and prevent

the

djrectors 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 exception 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 tp.erefore on this. third ground this con-

tentio~. of the appellants should be rej~cted.

The appeal therefore fails and is dismissed with

costs.

1950

N anal al Z avu

And Another

v.

Bombay Llfe

Assu,.an -:e Co-.

And Ot/lus

[(a11ia C. J,

MAHAJAN J .-This is an appeal by special leave M11T1ajm1 J

from the judgment and decree of the High Court of

Judicature at Bombay (Chagla C.J. arid Tendolkar J.)

dated 11th March, 1948, confirming the judgment of

the said High Court in its Original Jurisdiction

(Bhagwati

J.) dated

IGth Nov~mber, 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 ques­

tions 'were answered in favour of the respondents by

the High Court.

'~ The Bombay Life Assurance Co. Ltd., the first

c;iefendant in the case, was incorporated in the year

--

1950

Jo.i~a11al11l Zl1't't'I"

And A11otlter

v.

Bo111hay l.rje

Ass11ranc.! Co,

And Others

398 SUPREME COURT REPORTS [1950)

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

industrialist of Kanpur, attracted by the soundness

of this concern, began purchasing

the shares of the

company with a view to acquiring a controlling inter­

est in its management. Soon after competition

started for the purchase of the shares of the company

between the Singhania group and the Maneklal Prem­

chand group who were in management of this company.

The result of this competition was

that shares which

.were ordinarily quoted at

250 went up as much as to

2,000 in March, 1945. A circular was issued by the

directors to the shareholders 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 chairman. This circular

does not seem to have

had much effect as the share­

holders

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 Singhania 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 meeting of the directors was held OJ} 21st

February, 1945, and it adopted the following resolu­

tion:--

1. That the capital of the company be increased

from Rs. 5,40,400 to Rs. 10,00,000 by the issue of the

'

/

S.C.R. SUPREME COURT REPORTS 399

remaining 4,596 ordinary shares of Rs. 100 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 ofthecompany,

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

~ompany 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 frac­

tional certificates shall be issued to such shareholders

in respect of their rights for fraction of a share, each

fractional certificate 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 pay­

able along with application for these new shares.

7. That all applications for shares in accordance

with this offer (including applications for shares made

in respect of

and accompanied by

fracticmal certi­

ficates

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

applyin,g Qil or before the 10th March, 1945, in

terms of tlie{(Tfer shall be· deemed to have declined to

participate in tliis new issue and all fractional certifi­

cates not presented as required on or before 10th March,

1945,

will

c~ase to have any validity and will not entitle

the hC\Jder to any rights.

~· 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

con­

sider best in the interests of the company.

1950

Nanalal Zaver

And Another

v.

Bomhay Life

Assurance Co.

A11tl Others

.UahajanJ.

1950

Nanalal Zavcr

And Another

Y,

&tuba y Life

Assurance Co,

And Others

J\lahajanJ.

400 SUPREME COURT REPORTS [1950J

· 9. 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 circu­

lars

to the shareholders.

11.

That a committee consisting of the

chair­

man and any one of the directors or the chairman

and any two of the directors be and are hereby appoint­

ed 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 shares

was not

bona fide made in the interests or for the bene­

fit 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

pepends 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 Assqciation

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 ..

S.C.R. SUPREME COURT REPORTS 401

increase of share capital, allnew 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

drcumstances 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 in­

creased

by a resolution of the

company·. It had no

application to cases where

the directors issued further shares within the authorised limits. The new section

introduced in 1936 is in these

terms:-. "Where the directors decide to increase the capi.,

tal 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 speci­

fying

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 intima­

tiou from the member to whom such notice is given

that he declines to accept the shares offered, the direc­

tors 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 share­

holders should

be given the first option to buy them.

The language employed in

th~ section admits of. three

possible interpretations : (

1) that its scope is limited

tQ

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 qi.pital whether made by increasing the nomi­

nal capital or by. issuing further shares with.in the

authorised capital ; (3) that the section has appllcation

only to ,cases where the directors issue· further shares

within the authorized limit.

· The learned counsel for the respondents contended

that the whole int(lnt and purpose of the section was to

limit the discretion 'of directors in' regard fo the· issue

1950

Nana/al Zavcr

And 111zotlla

\',

Bombay Ufe

A ssurancc Co.

A>ul Others

ltlalinja"l·

1950

Nanalal Zaver

And Anotlu·1·

v.

Boiirba y Life

Asst'1·ance Co.

And Others

Mahajan J.

402 SUPREME COURT REPORTS (1950]

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 con­

junction with the words 'decide

to increase the capital

of the company.' 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

compulsory. The section as drafted is liable to the con­

struction

that

whenever· the directors !lecide to in­

crease the capital of

the company by the issue of fur­

ther shares, even if it be a part of the authorized

capital,

the new shares must be first offered to the

existing shareholders. But this section should be read

in conjunction with clause (a) of section

50 under sub­

section (2) of which the directors have no power to in­

crease 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

commentators,

the matter has to be decided on the

language

of the Act itself. As already

pointtd out,.

the learned counsel for the respondents contended that

the above was the correct view as to the scope of the ,

' section. The learned counsel for the appellants how-

ever urged

that on a

proper interpretation of the

...

S.C.R. SUPREME COURT REPORTS 403

section its scope could not be limited only to cases of

issue of further shares

by creation of new shares by in­

creasing the nominal capital of

the company, but that

the language employed in the section also included

within

its ambit cases where there was a further issue

of shares by the directors, within the authorized

capital. The learned counsel laid considerable emphasis

on

the expression

" further shares " used in the section

and suggested that these words have been used advise­

dly instead of the expression "new shares " in order

to bring within the scope of the section increases in the

capital of a company whether within the authorised

limit or outside it.

The

third interpretation of the section finds sup­

port from the language employed by the legislature in

the opening part of the section, wherein it is said :

" Where the directors decide to increase the capital of

the company

by the issue of further shares .......

" The

directors can only decide to increase the capital

at their

own initiative when they issue further shares out of

the authorised capital. In no other case can the direc­

tors themselves decide as

to the increase in the capital

ot a company. Under section 50 the capital can only be

increased

by a resolution of the company.

Once the

company has increased the nominal capital, then the

directors can issue shares within the new limit. There­

fore the authority of the directors, strictly speaking,

in

respect to the increase of capital is limited to an

increase within the authorised limit. They cannot by

their own decision increase

the nominal

cap-ital of the

company. In view of this language the third inter­

pretation of the section seems more plausible.

The expression "capital of a company " is an am­

biguous phrase

and may mean either issued capital or

authorized capital according to the context. It has

been used in different senses in various parts of

the

· Act. In what sense it has been used in this section is

by no means an easy matter to decide, particularly in

view of

the fact that in spite of the introduction of this · ~ction in the Indian Companies Act in the year 1936r

article 42 still remains

as one of the articles to be

adopted by companies if they do not choose otherwise

51

1950

Nana/al Zat'el"

And Another

v.

Bombay Life

Assurance C<>..

A11tl Others

Mahaja1'].

!950

Na1ialal Zavcr

And Another

v.

Boml1a y Life

Assurance Co.

And Others

Mahajan/,

404 SUPREME COURT REPORTS [1950)

and this refers to cases of increase in the nominal capi­

tal of a company. In my opinion, for the purpose of

deciding the present case it is not necessary to pro­

nounce on the question as to the precise scope of the

section because I consider that on any interpretation of

it the appellants' contention has to be negatived. If the

interpretation suggested by the learned counsel for the

respondents is accepted, then the plaintiffs' contention

on the first question fails, because here there has been

no increase in

the capital of the company under

section

50. Conceding however for the sake of argu­

ment

(but not deciding) that the scope of the section

is as

it has been contended for by

Sir Noshirwan, the

question still remains " To what extent has there been

a contravention of its provisions

by the directors in

the present

case." So far as I have been able to see,

the resolution passed

by the directors is in accordance

with the provisions of

the section and does not

injuriously affect

the shareholders or the company,

and they cannot be said to have any cause of grievance

against it.

In other words, in my opinion, the resolu­

tion substantially complies

with the provisions of

section

105-C of the Indian Companies Act. The

directors offered all the new shares to the shareholders

in

the ratio of 4 to 5, as the shares of the company

were held in multiples of five

to a larger extent than in

any other multiple. The result of fixing this ratio is

that 272 shares remain outside the offer. In whatever

other proportion

the shares were offered, still a few

shares were.bound

to remain unoffered. If a liberal inter­

pretation is placed on the section, then

it has to be held

that the directors'

resolution substantially complies

with its provisions. On the other hand, if a technical and

literal interpretation is placed on the section, then the

directors were bound to offer the shares in the ratio of

4596/5404 in spite of the practical difficulties

that might

result in the actual working out of such a proportion,

and irrespective also of whatever absurdities or ano­

malies

might thus result. I am of the opinion that the

section has to be given a workable construction and

a.

construction that is businesslike in preference to a literal

construction which might lead to a deadlock. In each .

S.C.R. SUPREME COURT REPORTS 405

case it should be seen whether the directors have substan­

tially complied with

the provisions of the section or not.

The basic idea underlying

the section is that

whatever is given, is given to all the existing share­

holders

and is distributed equally and equitably be­

tween them.

It cannot be denied that all the share­

holders were offered

the further shares arid that they

were offered equally and equitably. Whatever is the

balance remains with the company with

the result that

the capital remains unincreased to this extent. In such

a situation it is difficult

to hold that the resolution

passed

by the directors has contravened the provisions

of section

105-C and has caused any detriment or in­

jury either, to the company or to the shareholders. Even

if

the resolution passed by the directors is held to be

in technical breach of the section, as it has caused no

injury

to anybody, the resolution cannot be held to be

void.

Under the law as it existed prior to 1936, if a

company iecorporated in its Articles of Association

article 42 mentioned in

the schedule to the Indian

Companies Act, then in the case of issua of new shares

the directors' discretion was curtailed inasmuch as

they were bound to offer these shares in the first in­

stance in proportion as nearly as the circumstances ad­

mitted to the amount of the existing shares to the exist­

ing shareholders

but in all other cases their discretion

remained unfettered.

It was open to a company not to

adopt article 42 and thus fetter the discretion of the

directors even in

the case of the issue of new capital.

After

1936. it has been made obligatory on the directors

to give the first option to buy further shares to the

existjng shareholders and without any favour to any­

one.

That being the intent and purpose of the section,

it has been fully carried out by the directors in the

present instance and has been carried out in a business­

like way because

the ratio in which they offered the

shares is the ratio which works to the convenience of

the largest number of shareholders as the shares of the

company are held mostly in multiples of five.

If the

~shares were issued in any other ratio, that would have

created some difficulty in the way of shareholders who

held shares in multiples of

five and who owned 2, 110

1950

N anal al Z aver

And Another

v.

Bombay Ufe

Assurn1t -;e Co-.

And Others.

M alwjan J.

] 950

Nanalal Zaver

And Another

v.

Bo11iba y Life

Ass11ran ;e Co.

And Others

Mahajan}.

406 SUPREME COURT REPORTS [1950]

shares. They would have been obliged to collect frac­

tions before they could claim a whole share and thus

make an application within the time allowed to exer­

cise the option. Where the language of a statute in its

ordinary meaning and grammatical construction leads

to a manifest contradiction of the apparent purpose of

the enactment, or to some inconvenience or

absurdity,

hardship or

injustice, presumably not intended, a

construction may be put upon

it which modifies the

meaning

of the words, and even the structure of the

sen­

tence. In my opinion, the section when it says "such.

shares shall be offered to the members " should be

construed liberally and not literally, as such an inter­

pretation would make th~ section workable and

would not in any way affect its intent and purpose,

the phrase "such. shares" meaning those shares which

admit of being so offered in a businesslike way.

It was argued that a liberal interpretatibn of the

section would result in the directors allottii:ig the bal­

ance of shares remaining out of the further shares

unoffered to their own friends

and relations and it

would operate to the detriment of the other

share­

holders. In this connection reference was made to

para 8 of the resolution above mentioned. In my

opinion this paragraph does not bear out the conten­

tion of the appellants because it has reference only 'to

shares not applied for, obviously shares not offered

and which could not be

taken up by the shareholders

cannot fall under

that description. That paragraph

applies only to cases where the shares could

be applied

for

and then no application was made in respect of

them.

It was not disputed that the directors

in., the

present case had not sold these shares to any one and

that these have remained unissued. It was urged

strongly

by the learned counsel for the appellants that

the section being imperative and its language being

unambiguous,

the

Court was bound to place a literal

interpretation on

it and 'the argument of. hardship or

inconvenience should not weigh with it. It was further

suggested that the directors could always give effect

to.,

the provisions of the section by increasing the capital

in a manner and to the extent that the further shares

..

S.C.R. SUPREME COURT REPORTS 407

<:ould be offered to the shareholders in such a propor­

tion that all the shares offered could be taken up by

them. In other words, it was contended that the section

not only fetters the powers of the directors in

the matt­·er of sale of shares but it also restricts their discretion

in the

matter of increase of capital and as to the

number

of further shares. This contention, if accepted,

would mean

that the legislature by enacting section

105-C indirectly enjoined on the directors that when­

·ever they decide to increase capital by issue of further

shares they should make the increase only to such an

·extent and in a manner as to enable the existing

shareholders to take the whole of it. If that was the

inten~ion of the section, there was nothing easier for

the legislature to say so. The section, on the other

1 hand, recognizes that the directors have a discretion in

the matter of the increase of capital when it says,

"'' when the directors decide to increase the capital of

a company." It means that it is within their absolute

discretion to take the decision whether to increase the

·capital or not. It is also within their discretion to say

to what limit and to what extent they will increase the

-capital. It is also for them to decide how many shares

and of what value ±h.ey will issue. Once they have

taken their decision,

it is then and then only that.

sec­

tion 10s~c comes into operation. At that stage they

have to offer the new shares to

the shareholders and at

that stage they can offer them

i.J;i a businesslike manner

io all of them equitably and equally and if out of the

shares offered some cannot be taken up by the share­

holders as they

do not fit in the ratio in which

th~

·Offer ha:; been made, the only result isthat those shares

Temain unoffered and thus unissued. I am therefore

-0f the opinion that the learned Judges of the Court of

appeal were right when they held

that under section 105-C the shares have to be offered to the existing

shareholde1s as nearly as the circumstances would

admit and that the section has to be given a business­

like construction

and should be construed liberally and i. that the charge of contravention of section 105-C can­

not be levelled against

the directors -so long as they .ha,ve not disposed of the unoffered balance contrary tb

1950

N analal Z aver

A11d Another

v.

Bombay Life

Assurance Co.

A".d Others

lYlahajan J.

1950

N anal al Z aver

And Another

v.

Bo111!Jay Life

Assrv-t11icc Co.

And Others

MaliajanJ.

408 SUPREME COURT REPORTS [1950)

the provisions of the section. The result . is that the

first contention of the learned counsel stands negatived.

The next question whether

the action of the direc­

tors in passing the resolution was not

bona fide seems

to be concluded by concurrent findings of fact of the

Courts below to the effect that the resolution was

passed because

the company needed additional funds

at the moment when the new issue was decided upon

and that the issue of shares was not due solely to the

desire on the part of the directors to keep themselves

in the saddle.

It is not the practice of this

Court ordinarily to

interfere with concurrent conclusions on questions of

fact reached

in the

Courts below unless those conclu­

sions have been reached on extraneous considerations

or by violating rules of procedure or by committing

any breach of some provision of law : vide Srirnati

Bibhabati Devi v. K urnar Rarnendra Narayan Roy (

1

).

The learned counsel for the appellants while conceding

that it was not open to him to challenge concurrent

findings of fact of

the

Courts below, urged that the

whole case has been looked at by them from an erro­

neous angle. It was contended that the Courts below

had misdirected themselves in their approach to the·

decision of the issue of bonafides. In this connection

emphasis was

laid on the following observations in

the·

judgment of the learned Chief Justice and on similar

observations occurring elsewhere

:-

"In this particular case it is urged and urged with

considerable force that the reason whiCh actuated the

directors on the 21st

February, 1945, in resolving to

issue new shares was the fear

that the Singhania group

would capture the company

and oust

the present direc­

tors from

their vantage point and take control of the

company itself. It may be that one of the factors that

weighed with the directors was that consideration. It

may even be that it weighed with them a great deal.

It may also be that the directors selected this particu­

lar time viz. the 21st February, 1945, for the issue of

•

these shares because of the impending danger of the

(1) 73 I.A. H6.

S.C.R. SUPREME COURT l<.EPORTS 409

majority of shares going into the hands of the Singha­

nia group with

the necessary consequences. If, with

all

that, it is established before the

Court that in fact

on the 21st February, 1945, the company was in need

-of funds, that the funds were required for the working

of the company, then

the

Court will not interfere with

-the discretion exercised

by the directors, because the

principle is obvious that if the new shares have been

issued because the company needs funds, then

it can­

not be said that the discretion vested in the directors

has been exercised not in

the interests of the company

or for the

purpo$e of the company. It is only when

that discretion is exercised solely for the personal ends

-of directors, for their personal aggrandisement, for

keeping themselves in power, then undoubtedly

that discretion cannot be said to have been exercised for

-the purpose of or in the interests of the company."

Reference was also made to the concluding part of

the same judgment which runs thus

:-

"Undoubtedly this is a case of high finance and.

we have been given a glimpse

of what high finance

can

be and there is great justification in what Mr. Amin

.has said as tq the manner in which some of the things

were done with regard to

the affairs of this company. :But ultimately we must come down to the one short

and simple question, was the company in need of funds

at the time when the directors decided upon the issue

of new shares,

and in my opinion there can be no doubt

on

the evidence led this case that the answer to that

question must be in the affirmative. If that be the

position all other consideratio_ns can be of

no avail or

-Of very little avail as against this central fact in this

~ase and as I am satisfied as to the central fact, I

would agree with the learned

judge who took the same

view

and came to the conclusion that the plaintiffs

have failed to discharge the burden which

lily upon

theni of establishing that the issue of new shares was

not bona fide and not in the interests of and for the

benefit

of the

compan:y."

It was argued that the learned Judges were not

-right in thinking that all other considerations were of

1950

N analal Z er-Jet

And Another

v.

Bombay Life

Assurance Co.

And Others

MahajauJ.

1950

Nanalal Zaver

;.lnd Anotlii.:r

v.

Bo1111'ay l~zfe

Assurance Co.

And Others

r.talu1ja11 J.

410 SUPREME COURT REPORTS (1950J

no avail and shoqlg be practically kept out of consider­

ation once

it

was-established that the company needed

funds.

It was said that it having been found that at

the time of the aforesaid resolution the directors were

·

considerably influenced by the consideration of keep--

ing out the Singhania group from capturing

the com­

pany,

and by the consideration of keeping themselves

in the saddle, it should have been held that they were

acting

with an ulterior motive, and that their decision

as to the need of the company for further funds was.

vitiated

by reason of the ulterior motive.

It is convenient here to state what the true

ap­

proach should be to a question of this nature when it

arises in a case. It is well settled that in exercising­

their powers whether general

or special, the directors·

must always bear in mind that they hold a fiduciary

position

and must exercise their powers for the benefit

of

the company and for that alone and that the

Court

can intervene to prevent the abuse of a power when­

ever such abuse is held proved,

but it is equally settled

that where directors have a discretion and are bona

fate'

acting in the exercise of it, it is not the habit of the

Court to interfere with them. When the company is

in no need

of further capital, directors are not entitled

to use their power of issuing shares merely for

the­

purpose of maintaining themselves and their friends in

management over the affairs of the company, or merely

for

the purpose of defeating the wishes of the existing

majority

of shareholders.

It appears to me that the learned Judges in the

Court below approached the decision of this question

in

the light of the principles stated above and

the­

contention of the learned counsel therefore does not

seem right. Where

the directors are not chargeable·

for breach of

trust so far as the company is concerned

and where their action is for the benefit of the com­

pany, then merely because in promoting the interests

of the company they also

prom~te their own interests

it cannot be held that they have not acted bona fide.

As it has been said in Hirsche v. Sims (

1

), if the true

effect of the whole evidence is that the defendants truly

(1) (189') A.C. 65•.

S.C.R. SUPREME COURT REPORTS 411

and reasonably believed at the time that what they

did was for the interest of the company, they are not

chargeable with dolus malus or breach of trust merely

because in promoting the interest

of the company they

were also promoting their own, or because

they after­

wards sold shares

at prices which gave them large

profits.

Both

the

Courts below have found as a fact that

to a certain extent in resolving to issue new shares the

directors were actuated by a fear that the Singhania

group would capture the company

and oust the present

directors from their vantage point and take control

of the company itself.

It was argued that this

motive was an ulterior motive and the exercise of

power

by the directors to achieve this objective by the

issue of further shares was an exercise of power for

the

purp.::>se for which it was not conferred. This argu­

ment would have had force if this was the main pur­

pose of the directors in issuing the further shares,

but

this is not the case here. As found by the High

Court,

the central fact working in the mind of the directors

was the necessity of further funds for the company

at

the moment they passed the resolution. That being so,

it seems to me that the existence of the other motive

does not make the action of the directors in respect of

the issue of further shares mala fide.

Moreover, in the present case it seems to

me that

the directors were on the defensive. They felt that

the attempt of the Singhanias to capture the control­

ling interest in the company

by paying high prices for

its shares must have been with a purpose, i.e., to make

use

of the funds of the company in their own concerns.

Some evidence

of this exists on the record. They

thought

that it was their duty as directors to protect

the company from such an attack and they felt that it

was beneficial to the company to protect it

from such

an attack. They did not keep the matter in secret but

informed all the shareholders about it. They first

attemptea to enter into the field of competition with

the Singhanias but it seems that they were not wholly

successful in their objective. They

then decided to

issue further capital 'by taking into consideration the

53

1950

/Ii .. a1u1lal Za'f)r•'"

A11d Another

v.

Bombay Life

Assurance Co ..

A11d Others

Mahajan/.

1950

.Nana/al Zav11r

1-111d AnothiJr

v.

Bonzba y Life

.Assurtu1ce Co,

And Otltcrs

Mal1ajanJ.

412 SUPREME COURT REPORTS [1950)

interest and the needs of the company

and its require­

ments in respect

of capital at the moment. They also

thought that by this

· action they would also be

able to keep out the Singhanias from capturing

the

company. They were under no obligation to

Singhanias

who had not yet even been entered as shareholders on

the register of shareholders. There was no dolus malus

in their mind as directors of the company, as affect­

ing the company or its shareholders. On the other

hand, they honestly considered it to be in the best

interests of the company to meet such an attack.

The result therefore is

that it cannot be held that this

is one of those unusual cases where this

Court should

not give weight

to the concurrent findings of fact by

the

Courts below, or that it is a case where it can be

held that the High Court in arriving at its findings has

committed a breach of

any rule of procedure or law

and that there is no evidence to support the findings

that have been arrived at.

The result therefore

is that this appeal fails and is

dismissed

with costs.

DasJ.

DAS J.-1 agree that this appeal must be dis-

missed. As, however,

my decision rests on slightly

different reasons, I desire

to state them in my

judgment.

For the purpose of appreciating the questions

involved in

this appeal which has been brought

by the plaintiffs it will suffice to set out the following

facts.

The Bombay Life Assurance

Company, Ltd.

(hereinafter referred to as " the company ") was

incorporated in 1908

with an authorised capital of

Rs.

10,00,000 divided into 10,000 shares of Rs. 100

each. By 1945, 5,404 shares in all were subscribed,

and Rs. 25 per share had been paid on them. This

left 4,596 shares out of the

total authorised capital yet

to be issued. The plaintiffs are two of the shareholders

of

the company. Respondents 2 to 9 are the.directors

of the company of whom respondent 2 is the chair­

man of the board of directors. It appears that

-

S.C.R. SUPREME COURT REPORTS 413

from July, 1944, shares in the company began to be

purchased from the holders thereof by ·or in the

interest of SrFPadampat Singhania. This attempt to

buy up the shares on a large scale naturally resulted

in a sudden rise in the price of tP.e shares. This

abnormal rise in

the price could not but attract the

attention

of the board of directors.

On September 18,

1944, a board meeting was held at which the chairman

drew

the attention of his co-directors to the serious

implications

of the attempt of an outsider group to

corner the shares of the company.

It was decided at

that meeting that a circular should be issued

to the

· shareholders acquainting them of the tru«;l position and

the chairman was authorised to sign the circular.

Accordingly, on September 19, 1944, a circular was

issued

to the shareholders drawing their attention to

what was happening and exhorting them, in

· case they

wanted

to dispose of their holdings, to offer them to · the chairman. The result of the chairman and other

directors entering the arena was a race for purchase of

shares of the company which inevitably led

to a pheno-

·

menarrise 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. I.t may be

noted here

that the shares purchased by the Singhania

group

were not submitted for registration of the trans­

fers with the result

that their names have not yet been

entered on

the register of members. In the meantime,

on

January 8, 1945, an

applic;,i.tion was submitted by

the company to the Examiner of Capital Issues for

sanction for

a. fresh issue of capital, setting forth several

reasons

for

whieh 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.

0) 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

!950

Naualal Zat 1£~r

AIJd An-0tlter

v.

Bombay Life

AsSt11·a1tce C0r.

Aud Others

Das/.

1950

Na1tt1lal Zaver

And Another

v.

Bo1nba y Lift

Assurance Co.

Arid Others

DasJ.

414 SUPREME COURT REPORTS [1950)

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.register 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

IO, 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 contravenes

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 restrain­

ed 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 allotments 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 summarised shortly as follows :

S.C.R. SUPREME COURT REPORTS 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 com­

pany

but had been made

" merely with the object of

retaining or secqring to the second defendant and his

friends the control of the first defendant company,"

and

(iii) the issue and · offer of farther 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 concurrent finding of

fact has not been

contested before us and the next contention of the

appellants will have to be examined 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 fur­

ther 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 piea altogether.

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.

1950

N analal Z ave1'

And Another

'I•

BombP:V Life

Assurance Co.

And Others

Das.].

1950

N analal Zaver

And Another

v.

Bo1nbay Life

Assurance Co,

And Others

Das].

416 SUPREME COURT REPORTS [1950J

The contention of the plaintiffs before Bhagwati

J. as before us, was that the company was not in need

of any further capital in February, 1945, and

that the

directors of

the company decided to issue the further

capital

merely with a view to retain control of the

management of the company in their hands.

On the evi­

dence 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

obtainirig 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 saddle, 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

rrtotive 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

affaii:s so as to be able to assume a controlling hand

in its management for their own purposes rather than

for the benefit of the company.

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 com­

ing

to a conclusion on this point it has to be borne

in

mind_ that the Singhania group had only pur­

chased some shares from various existing shareholders

but did not submit the transfers of registration so

q.s to

get their names put upon the register of members: It

is· clear that until the Singhania group get their names

S.C.R. SUPREME COURT REPORTS 417

entered in the register of members, they are not share­

holders

but are complete strangers to the company.

It has been held in Percival v. Wright(

1

) that ordinari­

ly the directors are not trustees for individual share­

holders.

Even if

the· directors owe some duty to the

existing shareholders on the footing of there being

some fiduciary relationship between

them as stated in

some cases [see for example In re

Greshain Life Assur­

ance Society] (

2

), I see no cogent reason for extend­

ing 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

rela­

tionship existing between them and the Singhania

group.

In my opinion, the respondents 2 to 9 owed

no

duty to the

Singhania group and, therefore, the

motive to exclude them cannot be said to be 1nala fide .

per se. In North-West Transportation Company, Ltd.

v. Beatty (

3

) the Judicial Committee observed at

p. 601:

" But the constitution of the company enabled the

defendant 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,

tbe 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 capital, was, in the cir­

cumstances, evidence of

bad faith. Bhagwati J. dealt

(I) L.R.

(1902) 2 Ch. ,21. · (2) L.R. S Ch. App. 4'6 at p. ~~9.

(3) L.R. 12 A.O. 589.

1950

Nana/al Zavc1

And Another

v.

Bombay Life

Assura11.ci! Co.

A1'd Others

DasJ.

!950

N analal Zaver

A11d Another

v.

B0111ba y Life

Assurance Co.

Aud Others

Das}.

418 SUPREME COURT REPORTS [1950]

with the various acts of the directors relied upon by

the plaintiffs as indicating bad faith on the part of the

directors 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, was.

not 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

for 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 establish­

ing

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 directors 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 µpon to issue

further shares. The issue of further shares served tw<>

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 bene­

fit of the company. Rightly or wrongly, the directors

felt

that it was not in the interests of the company

t<>

allow the Singhania group a controlling hand in the

management of the affairs of the company. Their ap­

prehension evidently was that the Singhania group, ~f

and when they became shareholders, would use their

voting power in their own interests and to the detri­

ment of the company

by utilising the life fund of the

company for the purposes of their various other

in­

dustrial concerns. I find nothing in the evidence on

1

S.C.R. SUPREME COURT REPORTS 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 \Vere outsiders, from acquiring a control 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 esta­

blished before

the

Court that the company needed fur­

ther 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 tht various acts of the directors relied upon as evi­

dence of their

mala fules, 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 establish­

ed that the company was in need of further capital

for legitimate purposes, the fact that the directors uti­

lised such need for

the purpose of establishing them­

selves 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 motives would

render the issue

of further shares illegal and void. This

leads me to a consideration of the third sub-head on

the assumption that what I

have called the additional

motive was a bad motive.

It is well established that directors of a company

are in a fiduciary pJsition vis-a-vis the company and

53

1950

N analal Zavc·y

And Another

v.

Bombay Li/•

Assurance Co ..

And Others

DasJ.

1910

Nana/al Zaver

Ancl Another

v.

Bo1nba y Life

.Assiirance Co.

And Others

Das J,

420 SUPREME COURT REPORTS (1950]

must exercise their power for the benefit of the com­

pany.

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 detriment of the company, the

Court ·will

interfere and prevent the directors from doing so. The

very basis

of the

Court's interference in such a case is

the existence of the relationship of a trustee and of

ces(ui que trust as between the directors and the

company.

The first case to be referred

to is that of Fraser

v. Whalley('). In that

case a new company was in­

corporated in 1859

by an Act of Parliament. By that

Act also certain existing railway companies were au­

thorised

"to acquire, take and hold shares in the

undertaking of the company, and

for such purpose to

create new shares in their undertakings." The exist­iQg companies in 1861 passed resolutions authorising

their directors to exercise this power. The resolutions

were, however,

not acted upon and the existing com­

panies

did not

iEsue 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 contemplated 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

toke 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 gene­

ral 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 thaf

the directors purporting to act on the resolutiens of

(1)

(186l) 2 H. & M. 10.

•

' \,

~

('

'\-

i

-.

S.C.R. SUPREME COURT REPORTS 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 pur­

pose 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. Harbottle

(2 Hare, 461) as to that, but if the directors can clan­

destinely 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

tha~ 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 contemplated by

that resolution were not

availaHc, 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 pur­

pose

of acquiririg 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

company. The issue of shares in that case was not

for the purpose of taking up shares in the new company

for which purpose alone

the power conld be. exercised,

1950

Na11a/al Zav<:I'

And Another

v.

Bombay Life

Assttra11cc COi..

1lnd Others

Das/.

1950

Nana/al Zavcr

And Another

v.

Bo11zba y Lif~

Assuran::e Co

An,I Others

DasJ.

422 SUPREME COURT REPORTS [1950)

but that it was being exercised, wholly and solely for

quite a different purpose, namely, of maintaining them­

selves 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 necessary statu­

tory majority for passing a special resolution while, at

the same time, not conferring upon the minority the

power to demand a

poll." Byrne]. granted an injunc­

tion restraining the defendant from holding the confirm­

atory meeting

and observed :

" I 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 pur­

pose of enabling them to raise capital when required

for

the purposes of the company. There may be occa­

sions 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

sta,tutory 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 parti­

cular interest, I do not think that is a fair and bona

fal,P 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

(I) L.R. (1903] 2 Ch. 506.

...

S.C.R. SUPREME COURT REPORTS '123

for the purpose of altering the rights of parties under

the articles, I think I ought to interfere."

Piercy v. S. Mills & 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 pos­

sessed under the articles.

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 Pmit

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 -0ver 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 majo;rity of the shares of the company,

·and they were entitled, so long as that majority

remained, to have their views prevail in accordance

with th{)regulations of the company, and it was not,

in· my opinion, open to the directors, for the purpose of

-conyerting 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.

(ltiOJ 1 Ch. 77.

1950

N a11al al Z avc1"

;ind Anotlrcr

v.

Bombay Life

Assurance Co.

A1'd Others

Das J.

1950

N

analal Z

aver

Ana Another

v.

Bot1WaJ' Life

Assurance Co.

And Others

Das/.

424 SUPREME COURT REPORTS (1950)

It will oe 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 res­

pect to what they conceived to be in the best interests of

the company. Those cases w~e not cases of mixed moti­

ves

at all. The only motive operating in those cases in

the minds of the directors was detrimental to the inter­

ests of existing shareholders and, therefore,

to the com­

pany itself.

Our attention was drawn to .Palmer's Com­

pany Law, 18th Edition, p. 183, where it is stated that

"in exercising their powers, whether general or special,

directors

must always bear in mind that they are in a

fiduciary position, and must exercise

their powers for

the benefit of

the company, and for that

alone." Rely­

ing on the words "and for that alone," it is urged

that the power to issue shares must be exercised

wholly and solely for the benefit of

the company, that

there must not be any other motive whether or not

that other motive is injurious to the company and

that if that power is exercised for that purpose and

also for some other purpose then irrespective of the

nature of that other purpose the directors would be

guilty of an abuse of their power. I am not prepared

to read the passage in the way urged by learned

counsel for the plaintiffs. None of the cases cited

on

that point in Palmer's

Company Law was concerned

with mixed motives at all. In none of th.em was there

any motive beneficial to the company or to the existing

shareholders.

In my view what that passage means

is that the power must be exercised for the benefit of

the company and that as between the directors and

the company there must be no other motive which

may operate to the detriment of the company. If the

directors exercise the power for the benefit of the com­

pany

and at the same time they have a subsidiary

motive which in no way affects the company

or its

interests or the existing shareholders then the very basis

of interference of the Court is absent, for, as I have

pointed out,

the

Court of equity only intervenes in order

I

r

S.C.R. SUPREME COURT REPORTS 425

to prevent a breach of trust on the part of the directors

.and

to protect the

cesliti que trust, namely the com­

pany and possibly the existing shareholders. If as

between

the directors and the company and the

existing shareholders there is no breach of trust or bad

faith there can be no occasion for the exercise of the

equitable jurisdiction of the

Court. I find support for

my views in the following observations of their Lord­

ships of the Judicial Committee in Hirsche v. Sims(

1

):

"If the true effect of the whole evidence is, that

the defendants truly and reasonably believed at the

time

that what they did was for the interest of the

company,

they are not chargeable with dolus

nialus or

breach of

trust merely because in promoting the

interest of

the company they were also promoting their

own, or because they afterwards sold shares

at

priCes

which gave them large profits."

Ori the facts of this case the concurrent finding is

that the company was in need of funds and, therefore,

the issue of further shares was clearly necessary and

is referable to such need. The further motive of keep­

ing

out the Singhania group, who are not yet share­

holders

but are strangers, does not prejudicially affect

the company or the existing shareholders and the

presence

of such further moti\'e cannot vitiate the

good motive

of finding the necessary funds for the

company.

In my judgment it is impossible to hold

that the issue of fresh shares was, in the circumstances,

illegal or

v0id.

Re (iii) :-Learned counsel for the plaintiffs

contends

that both the

Courts below were in error in

holding

that there has been no contravention of the

provisions

of section

105-C of the Indian Companies

Act. That section is in the following terms:-

" vVhere the directors decide to increase the capital

of the company

by the issue of further shares snch

shares shall be offered to the

memlwrs in proportion

to the existing shares held by each member (irrespec­

tive

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

(1)

(1894] A.C. 654, at pp. 660.GGl.

1950

Nana/al Zat't'r

And Anotlic•

v.

Bombay L1je

Assurance Co.

And Others

DasJ.

1950

N analal Z aver·

And Another

v.

Bombay Life

Assurance Co.

And Others

Das].

426 SUPREME COURT REPORTS (1950l

not accepted, will be deemed to be declined ; and after

the expiration of such time, or on receipt of an

intimation from the merober 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 was added to the Indian Companies.

Act in 1936.

The first question is whether

the section contem­

plates increase of capital above the authorised

limit,

or only below the authorised limit. Learned Attorney~

General appearing for the company urges that the words

"further shares" must be read in conjunction with

the words " decide to increase the capital of the

company " and, so read, must mean shares which are·

issued for the purpose of increasing the capital beyond

the authorised capital. He contends that section

)05-C has no application to this case. Section 50 deals

with, among other things, alteration of

the conditions

of the Memorandum

of Association of the company by

increasing its share capital by the issue of new shares.

The very idea of

alteration of the memorandum by the

issue of new shares clearly indicates that it contem­

plates

an increase of the share capital above the auth­

orised capital with which the company got itself regis­

tered. This increase can only be done

by the company

in a general meeting as provided in sub-section

(2)

of section

50. This increase above foe authorised

limit cannot possibly be done by the directors on

their own responsibility. Section 105-C, however,

speaks of increase

of

capital by the issue of further

shares. The words used are capital and not share capital

and further shares and not new shares. It speaks of

increase

by the

directors.· Therefore, the section only

contemplates such increase of capital as is

within the

competence of the directors

to decide upon. It clearly

follows from

this that the section is intended to cover

a case where the directors decide

to increase the

capital by issuing further shares within the authorised

limit, for

it is only within that limit that the directors

can decide to issue further shares, unless

they are

precluded from doing even that by the regulations of

S.C.R. SUPREME COURT REPORTS 427

the company. It is said that section 105-C becomes

applicable

after the company in a general meeting has

decided upon altering

its memorandum by

in­

creasing its . share capital by issuing new shares.

If the company at a general meeting has decided

upon

the increase of its share capital by the

issue of new shares, then it is wholly inappropriate

to talk of the directors deciding to increase

capital, because

the increase has already been

decided 'upon

by the company itself. Further, after

the company has at a general meeting decided to

increase its share capital by the issue of new shares,

the increased capital becomes its authorised capital

and then if the directors under section

105-C decide to

increase

the capital by the issue of further

shares,

then this decision is nothing more than a decision to

raise capital within the newly authorised limit.

Finally, if section 105-C were to be held applicable to

the case of an increase of capital above the authorised

limit then such construction

will lead to anomalous

results

so far as the companies which have adopted

Table

A, for the section is not consonant with

Regula­

ticn 42 of Table A which, as will be shown hereafter,

applies to increase of capital beyond the authorised lim­

it. If the Legislature intended that sedion 105-C should

apply to all companies in the matter of increase of

capital above the authorised limit, then the simplest

thing would have been to make Regulation 42 a

compulsory regulation, instead of introducing a section

which in its terms differs from Regulation 42

an<l

which therefore makes the position of companies which

have adopted Table A anomalous. It appears to me,

tbc.:rdore, for reasons stated above, that section 105-C

becomes applicable only when the directors decide to

~ncrease capital \Vithin the authorised limit by the

issue of further shares. In this view of the matter that

section is clearly applicable to the facts of this case.

The next question is whether the directors have,

in

t11e

matter of issuing and offering further shares in

the pre::ent case, been guilty of any contravention

of the provisions of this section. Learned counsel for

5(

1950

N anal al Zave,.

And Another

v,

Bombay Life

A.~surance C<A

And Others

Das}.

1950

Nana/al Ztroer

And Another

v.

Bombay Life

.Asstwance C:o.

And Others

Das}.

428 SUPREME COURT REPORTS [1950]

the plaintiffs contends tpat they have, because they

have not offered the whole lot of shares to the share­

holders in proportion

to the existing shares held by

them. It is pointed out that although the directors

decided to issue 4,596 further shares they have only

offered four shares to every five

shares held by the

shareholders which works out at 4,323~ shares which

leaves 272i shares in the hands of the directors

which they have reserved power unto themselves ti;>

dispose of in such manner as they think fit. Learned

Attorney-General appearing for

the company sub­

mits:

(a) That section

105-C should be construed in

the light of Regulation 42 in Table A of the Indian

Companies Act, 1913 ;

(b) That in order to prevent absurdity and to

give business efficacy to the section, the words " as

nearly as circumstances

admit

" should be read into

the section ; and

( c) That in any event the directors have not con­

travened the provisions of the section even if the same

be literally construed.

Each of these points requires serious consideration.

As to

the first point it should be remembered that

section

105-C was introduced in thi: .Act only in 1936.

There is no counterpart

of it in the English Act even

now.

Prior to 1936 there was no check on the powers

of

the directors to issue blocks of shares, within the

authorised limit, to themselves or to their nominees,

unless their powers were circumscribed

by the Articles

of Association.

One of the mischiefs of the managing

agency system which prevails in

this country was that

the managing agents, who usually dominated the

board of directors, could, to secure their own position,

induce

the board

to issue blocks of preference shares to

the managing agents or their nominees. To check this

mischief section 105-C was introduced in the Indian

Act in 1936. As regards the increase of capital beyond

j

S.C.R. SUPREME COURT REPORTS 429

the authorised limit it could only be done by the

coµJ.pa.ri.y. The shareholders could, while sanctioning

such increase, protect themselves · by giving special

directions to the directors as to

the mode of disposal

of the new shares.

In the model Regulations set forth

in Table A of the 1882 Act under the heading '' Increase

of

Capital" are grouped three Regulations 26 to 28.

Regulation

27 was

in. the following terms :

"(27) Subject to any directions to the contrary

that may be given by the meeting that sanctions the

increase

of capital, all new shares shall be offered to

the members in proportion to the existing shares held

by them, and

such offer shall be made by notice speci­

fying 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 the 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."

In Table A of our present Act under the heading

"Alteration of Capital " are to be found three corres­

ponding Regulations 41 to 43. Regulation 42 is as

follows:-

" (42) Subject to any direction to the contrary

that may be given by the resolution sanctioning the

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 notices from the company

of general meetings in proportion,

as nearly as the

cir­

cu.mstances admit, to the amount of the existing shares

tO Wpich they are entitled. The offer shall be made

by n0tice specifying the number of shares offered, and

limiting a time within which the offer, if not accepted,

will be deemed to be declined,

and after the expiration

of

that time, or on the receipt of an intimation from

the person to }Vhom the offer is made that he declines

to accept the shares offered, the directors may dispose

1~50

Nana/al Z<nnr

And Anuthi:r

v.

Bombay Lift

.Assurance Co,

A"d Oth•rs

Das].

430 SUPREME COURT REPORTS [1950)

1950

Narzalul Znt•.:r

And Aiiotl1cr

of the same in such manner as they think most bene­

ficial to the company.

The directors

may likewise so

dispose of any new shares which (by reason of the ratio

which the new shares

bear to shares held by persons

entitled

to an offer of new shares) cannot, in the opinion

of the directors, be conveniently offered under this

article."

Bo111b11 ~v Life

Ass11ra11~e Co.

·And Others

DosJ.

The words underlined are new and are not to be

found in Regulation 27 of Table A of the 1882 Act.

The scheme of the 1882 Act, as of our present Act, and

the language used in the two regulations quoted above

clearly indicate, to my mind,

that they deal with that

kind of increase of share capital which involves an

alteration of the conditions of the memorandum which

the company alone can do

by issuing new shares.

These Regulations do not purport to deal with increase

of capital which is within the competency

of the direc­

tors to decide upon.

In that kind of increase of capital

beyond the authorised limits these regulations give

the

directors certain latitude, subject, of course, to any

directions to the contrary that may be given by the

resolution of the shareholders in general meeting sanc­

tioning such increase. The only difference between

Regulation

27 of 1882 and Regulation 42 of our present

Act is

that under the last mentioned Regulation, in the

absence of any direction to

the contrary, the discretion

of the directors has been widened

by the introduction

of

the words underlined above. This company was

incorporated in

1908 under the Act of 1882. It did

not adopt the Regulations of Table A of the 1882 Act

but article 45

of" its Articles of Association proceeds

more

or less on the lines of Regulation 27 of Table A

of the 1882 Act. The discretion given to the directors

under article 45 is, therefore, obviously narrower

than

that left to the directors under Regulation 42 of Table

A of the present Act. Then came section

105-C in

1936. As already pointed out, that section deals with

. increase of capital within the authorised limit · which

the directors can decide upon without reference to the

. shareholders in a general meeting of the company. :;i.:he

legislature had before it both Regulation 27 of Table

S.C.R. SUPREME COURT REPORTS 431

A of 1882 and Regulation 42 of Table A of the Act of

1913.

It chose to adopt the language of Regulation 27

in preference to

that of Regulation

42. The absence

in section 105-C of the words I have underlined in Re­

gulation 42 cannot

but be regarded as deliberate. And

I can conceive of very good reasons for

this departure.

In the case of increase beyond the authorised limit,

that can be done only by the company in general

meet­

ing and the shareholders can protect themselves by

giving directions to the contrary and, therefore, subject

to such directions a wider latitude

may safely be given

to the directors.

But in the case of increase of capital

within the authorised limit which the directors may do

without reference to

the shareholders the legislature

did not think

it safe to leave an uncontrolled discretion

to the directors. The mischief sought to be remedied

re­

quired this curtailing of the directors' discretion. In

my judgment it is impossible to construe section 105-C /

in the light of Regulation 42 for several reasons.

Regulation 42 and section 105-C do not cover the same

field

and cannot be said to be in pari materia. The

omission of the underlined words was obviQusly

deli­

berate. The difference in the language of the two pro­

visions in the same statute cannot be overlooked as

merely accidental. And lastly

the reading of these

words

of Regulation 42 in section

105-C will frustrate

what I conceive to be the undertying reason for the

introduction

of the section. In my judgment the first

point urged

by the learned Attorney-General which

found favour with the

Courts below cannot be accepted.

The second point urged

by the learned

Attorney­

·General is founded on the supposed necessity of intro­

ducing the words "as nearly as the circumstances

admit" to avoid the absurdity which may flow from

a literal construction of section 105-C. It must be

remembered

that the cardinal rule of interpretation of

statutes is to construe its provisions literally and

gram­

matically giving the words their ordinary and natural

meaning.

It is only when such a construction leads

to

an obvious absurdity which the legislature cannot

be supposed to have intended

that the

Court in

1950

N a11alal Zavcr'

,fotl Another

v.

Bombay Life

,i:\ssura1tce Co.

Anti Others

DasJ.

1950

Nanulal Zawr

And Another

v.

Bo1nbay Life

Asslfran:e: Co.

AndOt~rs

DasJ.

432 SUPREME COURT REPORTS [1950)

interpreting the section may introduce words to give

effect

to what it conceives to be the true intention of the 'legislature. It ·is not any and every inconvenience

that justifies adoption of this extreme rule of construc­

tion. The section literally construed is quite intelli­

gible and may easily be applied to many cases where

the further shares issued bear a uniform and round

proportion. Merely because a literal construction of

the section leads to inconvenient result in a particular

case cannot, in my opinion, justify the application of

such a drastic rule of construction as is urged by the

Attorney-General. Even in this case there would have

been no inconvenience if the directors decided for the

issue of 4,053 shares which could have been offered in

the proportion of three shares to every four shares held

by each shareholder. It is true that ordinarily it is

for

the directors to judge as to the exact amount of capital

needed

by the company but in arriving at their decision

they cannot overlook

the limitations put upon their

power

by the section with respect to the proportion in

which the further shares are to be offered by them to

the shareholders. Further, the supposed inconvenience

can be easily avoided

by a reference to the share­

holders in a general meeting

by asking them to in­

crease the share capital beyond the authorised limit

to

such an amount as would permit proportionate dis­

posal of the further and new shares. In my opinion

there

is not sufficient force in the contention which

should induce the

Court to depart from the ordinary

and golden rule of interpretation I have mentioned

above.

The last point urged

by the Jearned Attorney­

General appears to me to be of substance.

On a strictly

literal construction of the section

the directors must

perforce offer all the further shares to the

shareholder&

in proportion to their respective holdings. Section

105-C comes into operation after the directors have

decided

to issue further shares. The section does not

in terms provide that such offer must be made

all at

once or at any particular point of time and I see no

reason to import

any such requirement in .the section.

S.C.R. SUPH.EME COURT REPORTS 433

The underlying object of the section is to effect equit­

able distribution of the further shares. Here the

shares have been offered in the proportion of four shares

to every five shares. There can be no suggestion of

favouritism in this offer.

Every shareholder will get his

proportion if he

so desires. The majority will ren.ain

the

majority if every one takes up the shares offered

to him.

It is true that 272-4/5 shares remain in hand.

At best although issued they have not been offered to

anyone. I do

not agree that under clause 8 of the

directors' resolution the directors can dispose of those

272-4/5 shares

i.n any manner they please before offer­

ing

them proportionately to the existing shareholders.

That clause, on a true construction of the resolution as

a whole, covers only those

shares which have been

actually issued but have not been applied for. In point

of fact

the directors have not yet allotted any of these

272-4/5 shares.

If and when the directors allot these

shares otherwise

than in due course of law, i.e., with­

out offering them to the shareholders,

the share­

holders will then have cause for complaint

and may

then come to

Court for redress. It is said that 272-4/5

shares cannot in.future

be offered to so many

share­

holders in a reasonable proportion. If it cannot be

done, these odd shares will remain in hand until

the company at a general meeting decides to increase

the share capital by issuing new shares and then these

odd shares together with new shares will be easily

capable of being offered to

the shareholders propor­

tionately. These special considerations which arise in

the case of

this company by reason of its own peculiar

-circumstances cannot, in

my opinion, affect or alter

the meaning

and effect of the section. From all that

I can see, up to the present time, there has been no

contravention

of the provisions of section

105-C. In

my view the directors have substantially complied

with the requirements of the section and the plaintiffs

can have no grievance.

They rushed to

Court prema­

turely.

For the reasons stated above, I am clearly of

-0pinion that the conclusions of the Courts below were

1950

Nana/al Z,1~·cr

And Another

v.

Bombay Life

t1.<1s1iraucc Co .

.-1nd Others

DasJ.

1950

N anal al Z avct'

And Anotl1cr

v.

Bonibay Life

Assurance Co.

And Others

Muklierjca J,

434 SUPREME COURT REPORTS (1950]

i:ight and no ground has been made out for interfering

with the same. The result, therefore, is

that this

appeal is dismissed with costs.

MuKHERJEA J.-. I agree that this appeal should be

dismissed and I concur substantially in the reasons

which have been given

by my learned brother Mr.

Justice Das in his judgment.

Appeal dismissed.

Agent for the Appellants: 5.

P. Varma.

Agent for the Respondents: Rajinder Narain.