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SUPREME COURT OF INDIA
4th May 1950
H.J. KANIA C.J.I., FAZL ALI, PATANJALI SASTRI v. MAHAJAN , B.K. MUKHERJEA AND S.R. DAS C.J.I.
Nandlal Zaver and another - Appellants
Versus
The Bombay Life Assurance Co., Ltd. and others- Respondents.
Civil Appeal No. 69 of 1949.
Advocates appeared
Shri N. P. Engineer, Senior Advocate Supreme Court (Messrs. M.M. Desai and B. J.Umrigar, Advocates, Supreme Court with him) instructed by Shri S. P.Varma, Agent-for Appellants. Shri M.C. Setalvad, Senior Advocate, Supreme Court (Shri G.N. Joshi, Advocate Supreme Court with him), instructed by Shri Rajinder Narain Agent-for Respondents 1-6, 8 and 9.
The respondent company was incorporated in 1936 with an authorised capital of Rs. 10 lakhs divided into 10,000 shares of Rs. 100 each. By 1954 5404 shares were subscribed and Rs. 25/- per share were called on eachof ~hem. The remaining 459,6 shares were issued in February 1945 at a premium of Rs. 75 per share and call of Rs. 25 per share, after obtaining the sanction of the Examiner of Capital Issues. The shares were offered to the shareholders shown on the register of members in the proportion of four further shares for every five shares held by them. The last date for submission of the application and payment was 10th March 1945. The directors and their friends in the next few days applied and were allotted 1,648 shares. By 6th March 1945,2204 shares were allotted to shareholders who had applied for the same.
Two shareholders of the Company filed a suit "for themselves and other aggrieved shareholders of the company". It was contended in the plaint that the whole issue of their 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, that the resolution of the directors and the offer of shares contained in the circular letter were in contravention of S. 105•C of the Indian Companies Act, 1913 and that the company was not in need of capital and the issue of further shares was not made bona fide for the benefit or in the interest of the company but had been made "merely with the object of retaining of securing to defendant 2 and his friends the control of defendant company". It was further prayed that the company and directors should be restrained from proceeding with the allotment of shares.
Held1 : (1) Section 105-C of the Indian Companies Act as worded does not prevent the directors from issuing shares to existing shareholders from time to time in the above manner. The object of the section is to prevent discrimination amongst shareholders and prevent the directors from offering shares to outsiders before they are offered to the shareholders. So long as these two requirements are complied with, the action of the directors in selecting the time when they will issue the shares as also the proportion in which they should be issued is a matter left to their discretion and it is not the province of the court to interfere with the exercise of that discretion. This is of course subject to the general exception that the directors are not to act against the interest of the company or mala fide. No such question arises in this case.
(2) It is impossible to construe S. 105•C in the light of Regn. 42 in Sch. 1, Table A of the Act. The cardinal rule of interpretation of statutes is to construe provisions literally and grammatically 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 interpreting the section may introduce words to give effect to what it conceives to be true intention of the Legislature. It is not any and every inconvenience that justifies adoption of this extreme rule of construction. Section 105•C literally construed is quite intelligible 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 justify the reading of the words "as nearly as circumstances admit" in the section so as to give business efficacy to it. Therefore, on a strictly literal construction of the section the directors must perforce offer all the further shares to the share- holders in proportion to their holdings. (Per Mukherjea and Das JJ.)
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 in-
1. Affirming A.I.R. 1949 Born. 56.
justice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. Therefore, S. 105-C when it says "such shares shall be offered to the members", should be construed liberally and not literally, as such an interpretation would make the section workable and would not in any way affect its intent and purpose, the phrase, "such shares" meaning those shares which admit of being so offered in a business-like way. (Per Mahajan J.).
(3) It is well established that directors of a company are in a fiduciary position vis-a_vis the company and must exercise their power for the benefit of the company. H the power to issue 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 Courts interference in such a case is the existence of relationship of trustee and of cestui que trust as between the directors and the company. H the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing share-holders then the very basis of interference of the Court is absent.
(4) The conduct of the directors could not be judged on the basis of any assumed fiduciary relationship existing between them and the group, that the directors owed no duty to the group and therefore, the motive to exclude the group could not be said to be mala fide per se. That assuming that the motive to exclude the group was a bad motive, it did not prejudicially affect the company or the existing shareholders and the presence of such further motive could not vitiate the good motive of finding the necessary funds for the company.
JUDGMENT :-
( 1. ) This is an appeal from the decision of the High Court of Judicature at Bombay. The respondent company was incorporate in 1908 with an authorised capital of Rs.10. lakhs divided into 10,000 shares of Rs. 100.00 each By 1945. 5, 404 shares were subscribed and Rs. 25.00. per share were called on each of them. Four thousand five hundred and ninety-six 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 put an the price of the shares considerably. On 18/09/1944, at a Board meeting of the directors the Chairman drew attention of his co-directors to the attempt thus made by an outsider to corner the shares of the 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.12.00or 14 /were paid per annum is dividend began to be quoted in the market at about Rs. 2000.00 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 8/01/1945 an application was submitted by the company to the Examiner of Capital. Issues for sanction of a fresh issue of capital. Several reasons were mentioned in that application to show why the company required additional capital. Such application had become necessary owing to war regulations. The Government granted the sanction on 16th February 1345 and the communication was received by the company on 20th February. On the next day a Board meeting was held at which the directors decided to issue the remaining 4596 shares at a premium of Rs. 75/-per share and to call Rs. 25.00 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 10/03/1945. The directors and their friends in the next few days applied and were allotted 1, 648 shares. By 6/03/1945, 2204 shares were allotted to shareholders who had applied for the same.
( 2. ) The appellants are two shareholders of the company. They filed the suit out of which this present appeal has arisen. 'for themselves and all other aggrieved shareholders of the company.' The defendants are the company and eight directors. It is contended in the plaint that the whole issue of these further shares and the idea of 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 contended that the resolution of the directors and the offer of shares contained in the circular letter were in contravention of S. 105 c, Companies Act. There were further prayers restraining the company and direction from proceeding with the allotment of shares. It was contended that the company was not in need of capital and the issue of further shares was not made bona fide for the benefit or in the interest of the company but had been made "merely with the object of retaining or securing to defendant 2 and his friends the control of defendant 1 company''.
( 3. ) Considerable evidence was led in the trial Court on the question of bona fides. The trial Court held that the issue of new shares was bona fide and the appellate Court
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