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HIGH COURT OF CALCUTTA
S.P. MITRA, J.
Kedar Nath Agarwal - Appellant
Versus
Jay Engineering Works Ltd - Respondent
Decided on : Apr 19, 1962
COMPANY - Further issue of capital - Offer of new shares - To whom to be made - Section 81 of the Companies Act, 1956 - Interpretation - Rights of a transferee of shares - Whether entitled to accept offer of new shares or exercise right of renunciation - Whether a bonafide purchaser for value without notice of a breach of trust has a higher right than an equitable right.
Fact of the Case:
The petitioner purchased 500 shares of the respondent company in June 1960. On January 13, 1961, the company passed a resolution under section 81 of the Companies Act, 1956, offering right shares to the shareholders in proportion to the shares held by them. The petitioner was registered as the holder of the 500 shares on February 27, 1961. The respondent No. 3, who had sold the shares to the petitioner, executed Letters of Renunciation in respect of 300 shares in favor of the respondents Nos. 4 and 5. The petitioner filed an application seeking an order to allot the new shares to him and to rectify the register of members of the company by entering his name as the registered holder of the new shares.
Finding of the Court:
The court held that the offer of new shares under section 81 of the Companies Act, 1956, was to be made to the "holders" of equity shares at the date of the offer, and not necessarily to the "members" of the company. The court further held that the respondent No. 3, having sold the shares to the petitioner, had no right to accept the offer of new shares or to execute Letters of Renunciation in favor of the respondents Nos. 4 and 5. The court also held that the respondents Nos. 4 and 5, even if they were bonafide purchasers for value without notice, did not have a higher right than an equitable right, as they had not specifically averred the consideration paid or the actual payment of it in their affidavit.
Issues: 1. Whether the offer of new shares under section 81 of the Companies Act, 1956, was to be made to the "holders" of equity shares or to the "members" of the company? 2. Whether the respondent No. 3, having sold the shares to the petitioner, had the right to accept the offer of new shares or to execute Letters of Renunciation in favor of the respondents Nos. 4 and 5? 3. Whether the respondents Nos. 4 and 5, even if they were bonafide purchasers for value without notice, had a higher right than an equitable right?
Ratio Decidendi: 1. The court interpreted section 81 of the Companies Act, 1956, and held that the offer of new shares was to be made to the "holders" of equity shares at the date of the offer, and not necessarily to the "members" of the company. The court reasoned that the legislature had deliberately departed from the language of the previous acts and regulations, which prescribed that offers of new shares were to be first made to the "members". The court also noted that the Act prescribed that bonus shares were to be issued to "members", but further shares for further issue of capital were to be offered to the "holders" of equity shares at the date of the offer. 2. The court held that the respondent No. 3, having sold the shares to the petitioner, had no right to accept the offer of new shares or to execute Letters of Renunciation in favor of the respondents Nos. 4 and 5. The court reasoned that the property in the shares passed to the petitioner as soon as the share certificate along with the relevant transfer deed was delivered to him, and that the respondent No. 3 ceased to be a "holder" of those shares from that moment. 3. The court held that the respondents Nos. 4 and 5, even if they were bonafide purchasers for value without notice, did not have a higher right than an equitable right, as they had not specifically averred the consideration paid or the actual payment of it in their affidavit. The court noted that in England, under the old system of pleading, a bonafide purchaser for value without notice had to aver the consideration and the actual payment of it.
Final Decision: The court granted the petitioner's application and ordered that the new shares be allotted to him and that the register of members of the company be rectified by entering his name as the registered holder of the new shares. The petitioner was also awarded costs from the respondents Nos. 2 to 5, while the company was directed to bear and pay its own costs.
1. THIS is an application for an Order, inter alia, (a) that the respondent Jay Engineering Works Limited be ordered to allot the new shares issued by it by resolution dated the 13th January, 1961, appertaining to the 500 shares held by the petitioner and bearing specified Serial numbers to the petitioner and (b) that the register of members of the respondent Jay Engineering Works Limited be rectified by entering the name of the petitioner as the registered holder of the new shares appertaining to the said 500 shares.
2. THE facts briefly are as follows: The petitioner purchased in June, 1960, the aforesaid shares; 300 of which were registered in the name of the respondent No. 3 Vinochandra Chunilal Mehta; and 200 of which in the name of the respondent No. 2 Sir Chunilal Baichand Mehta and Central Bank, Executor and Trustee Company Private Limited. The copies of the relevant transfer deeds signed by the registered holders, the receipts, the bills and other documents have been annexed to the affidavit in reply and marked 'a'.
On the 14th June, 1960, the petitioner wrote to its Bankers, The Punjab National Bank Limited enclosing the transfer deeds for 200 shares which stood in the name of the respondent No. 2 and requesting the Bank to take steps to have the shares registered in the petitioner's name. On the 16th June, 1960, a similar letter was addressed to The Punjab National Bank Limited by the petitioner in respect of 300 shares registered in the name of the respondent No. 3.
3. THE respondent No. 1, namely, the Jay Engineering Works Limited on October 15, 1960, had passed a resolution for increase of share capital of the Company. Then on January 13, 1961, a resolution was passed under section 81 of the Companies Act, 1956, offering Right Shares and the proposal was that two shares would be allotted for every three shares.
4. THE Letters of Allotment and Renunciation were sent out by the Company on the 31st January, 1961, offering two shares for every three shares held as on the 13th January, 1961.
It is alleged that in the first week of February, 1961, the respondent No. 3 executed Letters of Renunciation in respect of three hundred shares in favour of the respondents Nos. 4 and 5. It is alleged further that the respondent No. 2 did not receive any Letters of Allotment or Renunciation at all.
5. ON the 9th February, 1961, The Punjab National Bank Limited addressed letters to the respondents Nos. 2 and 3 asking for the Letters or Forms of allotment and renunciation and agreeing to indemnify the respondents Nos. 2 and 3 against any counter claims with regard to the shares. The petitioner was registered as the holder of 500 shares on the 27th February, 1961.
6. THEREAFTER the petitioner made attempts to acquire the Right Shares as well. But the Company, by its letter dated the 29th March, 1961 asked the petitioner to obtain an order from this court in respect of the right shares appertaining to the said 500 shares as disputes had been raised in regard to them. That is why the petitioner has made the present application.
I heard this matter on February, 1962 and decided on making an order in favour of the petitioner. Thereafter I felt that the various points raised in this application ought to be more thoroughly argued and I invited Mr. S. C. Sen, Barrister-at-Law to appear as amicus curiae. I have to express my deep gratitude to Mr. Sen for the assistance he has given me in coming to my conclusions.
7. BEFORE I come to the relevant provisions of section 81 of the Companies Act, 1956 it is necessary to look into corresponding provisions in the earlier English and Indian Acts.
8. ARTICLE 27 of Table 'a' to the English Companies Act of 1862 was as follows:-
"subject to any direction 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 specifying the numb
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