Skip to content


Zamir Ahmed Raz Vs. D.R. Banaji - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberO.C.J. Appeal No. 80 of 1956, I.C. Petition No. 227 of 1951
Judge
Reported in[1957]27CompCas634(Bom)
ActsCompanies Act - Sections 84, 85(1), 86-I and 182
AppellantZamir Ahmed Raz
RespondentD.R. Banaji
Appellant AdvocateP.N. Bhagwati, ;R.J. Joshi and ;N.V. Vimadalal, Advs.
Respondent AdvocateR. Mathalone, Adv.
Excerpt:
.....on expiry of two months - appellant's name not included in registry - appellant not liable as director of company - held, inclusion of appellant in list of contributories unjustified. - indian succession act (39 of 1925), section 63: [s.b. sinha & cyriac joseph, jj] will validity - deceased, was a very wealthy person - he floated several companies - he left behind his daughters, s and j - he was suffering from various diseases including some neurological ones - for his treatment, he used to frequently visit united states of america accompanied by his wife and daughter - by reason of a will, he is said to have bequeathed 50% of his property to s and 50% to j in a letter addressed to the 1st respondent, viz., s, he is purported to have recorded that the he had given all his..........director may act before acquiring such qualification but that in any case (unless he is a special director) acquire the same within two months from his appointment.' 3. article 104 deals with the vacating of the office of a director and clause (a) provides that the office of the director shall ipso facto be vacated if he fails to obtain within the time specified in article 100, or any time thereafter ceases to hold, the share qualification necessary for his appointment. the provisions in the companies act correspond to these two articles. we are concerned with the old companies act, and section 85(1) provides : 'without prejudice to the restrictions imposed by section 84, it shall be the duty of every director who is by the articles required to hold a specified share qualification, and.....
Judgment:

Chagla, C.J.

1. An interesting and important question relating to company law arises on this appeal, and the facts that have to be considered are few and simple. The appellants were appointed on June 30, 1951, as additional directors of the company in liquidation of which the respondent is the official liquidator. The appellants attended two meetings of the board of directors on July 3, 1951, and August 24, 1951. On August 24, 1951, a petition was presented for winding up of the company and ultimately an order for winding up was made. On June 27, 1952, the list of contributories was settled and a certificate to that effect was issued on February 4, 1953. On July 6, 1956, the respondent liquidator applied to the learned Judge for placing the appellants on the list of contributories. The learned Judge acceded to that application and the appellants have come in appeal.

2. Under article 100 of the company, the qualification of a director is laid down, and that qualification is the holding of ordinary shares of the nominal value of Rs. 10,000 and the article goes on to state :

'A director may act before acquiring such qualification but that in any case (unless he is a special director) acquire the same within two months from his appointment.'

3. Article 104 deals with the vacating of the office of a director and clause (a) provides that the office of the director shall ipso facto be vacated if he fails to obtain within the time specified in article 100, or any time thereafter ceases to hold, the share qualification necessary for his appointment. The provisions in the Companies Act correspond to these two articles. We are concerned with the old Companies Act, and section 85(1) provides :

'Without prejudice to the restrictions imposed by section 84, it shall be the duty of every director who is by the articles required to hold a specified share qualification, and who is not already qualified, to obtain his qualification within two months after his appointment, or such shorter time as may be fixed by the articles.'

4. And section 86-I provides that the office of a director shall be vacated if - (a) he fails to obtain within the time specified in sub-section (1) of section 85 or at any time thereafter ceases to hold, the share qualification, if any, necessary for his appointment. Therefore, treating this matter as one of first impression and construing the articles of association and the corresponding provisions in the Companies Act, the position clearly in this. A director can act for two months without possessing the qualification required under the articles. If he wants to continue after that period, he must have the requisite qualification. If after the period of two months he does not possess the requisite qualification, he automatically vacates office. Therefore, two months' locus penitentiae seems to have been given to a director to acquire the necessary qualification. It is difficult to understand how from these articles and this provision in the Companies Act it is possible to submit that there is a contract between a director and the company that as soon as he is appointed he shall acquire the necessary shares, and that if he does not acquire the shares, the company will allot those shares to him and put him on the register. It would have been possible to take such a view if a director could have acted without the qualification and if he had not automatically vacated office. Then it could have been said that inasmuch as the articles require a particular qualification, and the director has acted without that qualification, in law he must he deemed to have contracted with the company that he would acquire the necessary qualification. But as the articles of the company provide for the vacation of the office of a director acting without qualification, there seems to be no scope for implying a contract on the part of the director to acquire the necessary shares. If article 104 was not there and if section 86-I did not find a place in the Companies Act and if there was no automatic vacating of office and if the director had continued in office although he did not acquire the necessary shares within the time limited by article 100, then there would have been considerable force in the contention that after the period of two months it must be assumed that there was a contract as between the director and the company that he would buy the necessary shares and acquire the requisite qualification.

5. Now, having dealt with our first impression, let us turn to the authorities and see what they have to say about it. We will first turn to Palmer's Company Precedents, but before we deal with this learned author it is necessary to state that prior to the English Companies Act of 1900 there was no provision in the Act for a director who did not acquire the qualification shares to vacate his office. It was only in 1900 that, the English Companies Act made this provision which corresponds to the provision in our Act. With this background we will see what Palmer has got to say on this question. At page 579 Palmer sets out a clause of model articles of association which is 84a, and that clause is very significant :

'A director may act before acquiring his qualification, but shall in any case acquire the same within one month from his appointment : and unless he shall do so, he shall be deemed to have agreed to take shares sufficient to make up his qualification from the company, and the same shall be forthwith allotted to him accordingly.'

6. Therefore, an implied contract is incorporated by this clause itself, and having stated what the old law in relation to a clause similar to the one set out, viz., 84, the learned author goes on to say at page 579 :

'But the Act of 1900 materially affected the operation of the clause, for in specifying one month as the time within which the director must acquire his qualification the clause fixes within the meaning of section 3 of that Act a 'shorter time' than two months, and, accordingly, at the end of the month, the director, if he has not obtained his qualification, vacates office. Now it may be that notwithstanding this the company might act on the clause, and allot him his qualification - that is to say, the shares which he agreed to take. But if no allotment is made prior to a winding up, it would seem that the ex-director should not be held liable in a winding up to be placed on the list of contributories for the shares, for, the company not having accepted the offer whilst it was a going concern, it is not just and equitable to place him on the list of contributories in the winding up.'

7. Therefore, it is rather significant that even when Palmer is discussing the new Act in the observations just made by him he assumes that the articles contained a clause like 84a and in view of that article he expresses the opinion that notwithstanding the new provision in the Act with regard to the automatic vacating of office, the company may allot shares to the director under this clause. But even there he makes it clear that it is only on the allotting of the shares that the company is deemed to have accepted the offer made by the director accepting office under a clause similar to 84a, and therefore he says that if there is no allotment and a winding up takes place, the director cannot be placed upon the register.

8. Now let us see what the facts here are in the light of these observations. The appellants were appointed directors on 30th June, 1951. Admittedly no shares were ever allotted to them and the company was wound up within two months of their appointment. It is possible to take the view that they ceased to be directors or they ceased to function as directors on 24th August, 1951, which was less than the period of two months permissible under article 100, and they having ceased to be directors on 24th August, 1951, there was no obligation upon them to acquire the shares required by article 100. If the other view for which Mr. Mathalone contends is accepted, viz., that notwithstanding the winding up the appellants continued to be directors although shorn of all their powers, even so two months after 30th June, 1951, they would cease to hold office by reason of article 104, and having ceased to hold office it is difficult to understand how it could be urged that there was any express or implied contract under which they were bound to take the qualifying shares. Even if we were to assume - an assumption which is difficult to make - that some element of contract has been introduced by reason of article 100, the utmost that one can go to, as said by Palmer, is that article 100 constitutes an offer by the directors, which offer can only result in a concluded contract provided the offer is accepted by the company allotting the shares. So even from this point of view there was never a contract between the company and the directors, the company never having allotted any shares to the directors at any material time.

9. We might also look at the other learned author on company law, viz., Buckley. At page 61 Buckley deals with the decisions under the old law where there was no provision for the vacation of office of a director, and the learned author disagrees with the principle enunciated under those decisions even under the old law, and this is what the learned author says :

'The principle involved in the above decisions, namely, that a director who might originally have obtained his qualification shares where he pleased, came after a reasonable time under a contract to take them from the company, is not easy to follow. It would seem to confound duty with contract.'

10. With regard to the present law this learned author is more emphatic and categoric :

'The question, however, is now of little importance, as section 182, post, which applies to all companies, whether formed before or after the 1st January, 1901, prescribes the consequences of a director failing to qualify within a specified time, and such consequences appear to be wholly inconsistent with any implication of an agreement by the director to subscribe his qualification shares.'

11. Therefore, the view of the learned author is - with which we entirely agree - that where we find in the law a consequence prescribed for not acquiring the qualifying shares, it is impossible to imply that there was a contract to acquire those shares.

12. Mr. Mathalone has relied on two English decisions. One is Molineaux v. London, Birmingham and Manchester Insurance Co. [1902] 2 K.B. 589 and Mr. Mathalone tells us that that is the only case he has come across which has dealt with the position arising under the law after the English Companies Act of 1900 was passed. It is rather necessary carefully to look at the facts of that case. The plaintiff had the necessary qualifying shares, which were 50 shares. A subsequent resolution was passed increasing the qualification to 250 shares. After the resolution was passed the plaintiff acted as a director and he actually signed a copy of the share prospectus in which his name appeared as a director. Subsequently he resigned, and the court held that the plaintiff had not vacated his office within the meaning of section 3, sub-section (2), of the Companies Act, 1900, which provided for the vacating of office. In other words, although he had ceased to possess the additional qualification required by the resolution of the company, he did not vacate office. In other words, he continued to act as a director without acquiring the additional shares which was the qualification necessary in order to enable him to act as such, and it is in the light of these facts that we must look at the observations of Lord Justice COZENS-HARDY on which reliance is placed :

'On principle, and apart from authority, it seems to us that a person who accepts and appointment as director, knowing that the holding of a certain number of shares is a necessary qualification, and acts as director, must be held to have contracted with the company that he will, within a reasonable time, obtain the requisite shares either by transfer from existing shareholders or directly from the company.'

13. Therefore, the observations apply to the case of a director acting as such without the necessary qualification and it is by reason of that conduct that Lord Justice COZENS-HARDY said that an inference may be drawn that he has contracted with the company to buy the shares. But these observations cannot possibly apply to a case where the director does not act without qualification. In fact he cannot, because he vacates office. Lord Justice COZENS-HARDY was dealing with a case where in fact the director acted without qualification and did not vacate office, and, with respect the principle is clearly intelligible. If the law does not provide for vacating of office and a director knowing that certain qualification is necessary in order to enable him to act as a director does act without acquiring the qualification, then the law would presume that there was an implied contract between him and the company to acquire that qualification.

14. Now, in the case before us the appellants have acted as directors without the qualification shares because in law qualification shares were not necessary and they were authorised to act in law for a period of two months without the necessary qualification. This case would have applied to the facts of our case if the appellants had acted as directors after two months without acquiring the qualification shares. But that case could never have applied to our case because after two months automatically by reason of the law they would have vacated office and they could not have continued to act as directors. There is rather a significant sentence in the judgment of Lord Justice COZENS-HARDY at page 596 where he says :

'His position (that is, the position of the plaintiff in the case) is is not the same as it would be if his name were not on the register, and the liquidator were seeking to make him a contributory.'

15. Therefore, the other distinguishing feature which Lord Justice COZENS-HARDY has emphasised is that he was dealing with a director who was already a member of the company, his name being on the register, and he is at pains to point out that his position might have been different if for the first time the liquidator was seeking to put a director on the register. This is exactly the case before us. The appellants are not on the register of the company and the liquidator is seeking to place them on the register.

16. The second case to which our attention has been drawn is an earlier case which was decided under the old law, reported in Salisbury-Jones and Dale's case [1894] 3 Ch. 356, and the question that fell to be considered was whether a director who resigned before the qualifying period was under an obligation to take the qualification shares from the company, and the Court of Appeal, Lord Justice LINDLEY dissenting, held that he was under no obligation. Now, it is very instructive to note that this decision was arrived at although there was a clause in the articles of association of the company to the effect :

'A director may act before acquiring his qualification, but shall in any case acquire the same within three months from his appointment, and unless he shall do so he shall be deemed to have agreed to take the said shares from the company, and the same shall be forthwith allotted to him accordingly.'

17. LORD HERSCHELL L.C. and Lord Justice DAVEY make it quite clear that but for these last words in the clause just set out there would be no question of the director being under any obligation to acquire the shares, and therefore, what the court had to consider was whether the last clause applied and because of the last clause there was an obligation upon the director to acquire the shares. Therefore, when the court' considered as to whether there was a contract or not, it did so only when there was an express provision in the article that the director shall be deemed to have agreed to take the shares under certain circumstances. Mr. Mathalone has relied on the dissenting judgment of Lord Justice LINDLEY. Undoubtedly Lord Justice LINDLEY is a very famous name in English judicial history, but even famous Judges sometimes find themselves in a minority and their mere fame does not entitle the court to overlook the judgment of the majority. But even turning to the judgment of Lord Justice LINDLEY, it is clear that all that that learned Lord Justice was doing was to construe the particular article to which reference has been made, and where he dissented from the majority was that while the majority thought that the director having resigned before three months the provision in the clause that he shall be deemed to have agreed to take the shares did not come into operation, Lord Justice LINDLEY thought that the more natural and less forced meaning of the article was that once he accepted a directorship, whether he resigned thereafter or not, he should be deemed to have agreed to take the shares from the company. Therefore, neither the judgment of the majority, nor the dissenting judgment of Lord Justice LINDLEY is of much assistance to the contention of the respondent that the appellants should be put on the list of contributories.

18. The result, therefore, is that we must differ from the view taken by the learned Judge. The appeal will, therefore, be allowed with costs and the order passed by the learned Judge will be set aside. The order for costs passed by the learned Judge will also be set aside and the respondent will be ordered to pay to the appellants the sum of Rs. 120 being costs of the chamber summons. The order for costs against the liquidator is limited to the assets of the company in his hands.

19. Liberty to the appellants' attorneys to withdraw the sum of Rs. 500 deposited in court.

20. Appeal allowed.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //