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Anandji Visram Vs. the Nariad Spinning and Weaving Company, Limited - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai
Decided On
Judge
Reported in(1877)ILR1Bom320
AppellantAnandji Visram
RespondentThe Nariad Spinning and Weaving Company, Limited
Excerpt:
company - shares--prospectus--memorandum of association--material variance--lllegal powers. - - 9. but it was argued that such a provision, however intrinsically material, was contrary to law, and, therefore, null and void, and that, consequently, the insertion of it could not constitute a material variation of which the defendant would be entitled to complain......company to exercise all the powers given it by the memorandum of association, and amongst them the power in question. the act provides no means of rectifying or altering the memorandum of association except when the company wishes to change its name. the possibility must, therefore, be assumed of a majority of shareholders wishing to exercise the power in question. assuming its illegality, the defendant might probably by some proceeding, although what the right proceeding would be is not very clear, succeed in preventing the company from putting the power in exercise. but in the view of the possibility of his having to resort to legal proceedings, and to incur, it may be, considerable expense, to protect his rights, can it be said that this addition to the memorandum of association which.....
Judgment:

Michael Sargent, J.

1. The plaintiffs are a Joint-Stock Company incorporated under Act X of 1866, and seek to recover from the defendant, as the registered holder of 4 shares in the Company, the sum of Rs. 2,000 with interest, being the amount of two calls on the above shares. The defence set up is that the defendant is not a member of the Company, and that his name has been improperly placed on the register. There is but little (if any) dispute between the parties as to the circumstances under which the defendant became connected with the plaintiffs' Company. It appears from the evidence of Javerilal Umiashanker, one of the promoters of the Company, that he and his co-promoter prepared a Memorandum of Association, Exhibit A in this suit, and that some short time before the registration of the Company, which took place on 24th October 1874, he went to the defendant's place of business, and after stating to his Munim Kallianji Hansraj, the objects of the Company, and reading to him the substance of the clauses in this Memorandum of Association, proposed to him that his master should take some shares; that Kallianji said he would consider the matter, and that the Memorandum of Association might be sent to his master's office by Liladhur Haridas, a broker; that accordingly, a day or two afterwards, he sent the intended Memorandum of Association (Exhibit A) to the defendant's office by Liladhur Haridas, who had an: interview with Kallianji and also with another Munim of the defendant, named Mowji Hansraj. From the evidence of Liladhur Haridas and Mowji Hansraj it appears that Liladhur asked Kallianji and Mowji to subscribe for shares and to sign the deed, and that Mowji ultimately agreed to take 4 shares, and signed the deed as a subscriber for those shares. Mowji, however, says that he agreed to take the shares on the condition that the whole of the 400 shares, of which the capital of the proposed Company was to consist, should be subscribed for and allotted at the time of the registration of the Memorandum and Articles of Association, and it is not denied that the 400 shares have not been allotted up to the present time. The learned Judge, however, from whose decree this appeal is brought, was of opinion that the existence of such a condition was not established by the evidence, and it was, moreover, rendered highly improbable by the evidence that, notwithstanding the several notices served, and demands made on the defendant, his Munim remained wholly silent, and not until after the suit was instituted set up the defence on the ground of such alleged condition. No objection was taken to that finding, at least in express terms, in the grounds of appeal, but in any case we entirely agree with the learned Judge in the conclusion he arrived at on that part of the case.

2. Subsequently to the above interview between Liladhur Haridas and the defendant's Munim, namely on 24th October 1874, the Company was registered, and on that occasion the document registered as the Memorandum of Association of the Company, in pursuance of Section 17 of the Companies 'Act 1866, was not Exhibit A, which had been shown to the defendant's Munim as the intended Memorandum of Association, and signed by him as such; but another document, put in evidence as Exhibit No. 1, signed by only seven persons (of whom the defendant is not one), and differing from Exhibit A in several points, of which it is only necessary to mention two, being those which have been relied on as constituting material variances between the two documents. These are: 1st, that, although in Clause 4 of Exhibit A it is provided inter alia that a commission of 2-1/2 per cent. on sales should be allowed to the Secretaries, Agents and Treasurers, if the yearly profits of the Company amount to 5 per cent., or more on the paid-up capital, the word yearly was omitted in Exhibit No. 1, which was the document actually subsequently registered. 2nd, Clause 6 of the document shown to the defendant (Exhibit A) ran thus: 'The capital of the Company is Rs. 4,00,000 divided into 400 shares of Rs. 1,000 each, with power to increase.' In the document registered (Exhibit No. l) the 6th clause was as follows: 'The capital of the Company is Rs. 4,00,000 divided into 400 shares of Rs. 1,000 each, subject to be increased in accordance with the regulations of the Company and the legislative provisions for the time being in force in this behalf, and which said shares may be divided by a special resolution of the shareholders in general meeting into shares of Rs. 500 or Rs. 250 each.'

3. Section 22 of the Companies' Act of 1866 provides that the person signing the Memorandum of Association shall be regarded as a member, and taking the 17th and 22nd sections together the Memorandum here spoken of must be the registered Memorandum of Association. The Memorandum of Association of the Company which was registered has not been signed by the defendant's Munim. If, therefore, the defendant became a member of the Company, it must be because through his Munim (whose authority he has never repudiated) he agreed to become a member, and his name has been entered on the register of members. It is, however, contended for the defendant that he did not agree to take shares in the plaintiffs' Company, but in a projected Company the registered Memorandum of Association of which was to be the document he signed, and no other; but that in any case he ought to be relieved from his agreement to take shares,--1st, because Exhibit A was not registered as the Memorandum of Association of the Company; 2nd, because the Memorandum of Association differs materially from the one shown him as the intended Memorandum of Association; 3rd, because the Articles of Association differ materially from those contained in Table A of the first Schedule of the Act.

4. With reference to the first objection taken by the defendant, it is to be remarked that this case differs very materially from those in which a person has been induced to take shares on the faith of a prospectus. A prospectus, as Lord Cranworth says in Downes v. Ship L.R. 3 Ir. Ap. 343 'is in the nature of instructions only for the professional man to put into shape, in the same way as an agreement is often the foundation for a deed which may properly contain covenants and provisions not found in the agreement itself;' and the only question which can arise is 'whether the obligations incurred under the Memorandum do or do not go beyond those which would have been incurred under the prospectus'; but the Memorandum of Association is, to use an expression of Lord Cairns in The Ashbury Railway Carriage and Iron Company v. Riche L.R. 7 Ir. Ap. 653 'the charter of the Company, and defines the limitation of the power of the Company.'

5. The Company is, so to speak, identified by its Memorandum of Association. A person, therefore, who is asked to take shares in a projected Company of which he is shown the Memorandum of Association, and consents to do so, does so upon the full understanding that the document shown him, or a true copy of it, will be registered as the Memorandum of Association. The Company in which he agrees to take shares is the Company to be incorporated by the registration of that document as its Memorandum of Association, and no other Company. Lord Cranworth would appear to have taken that view in Re Overend Gurney & Co., when he says (L.R., 2 Eng. and Ir. Ap., 325; see p. 369): 'It was said that Mr. Oakes never agreed to become a member of the Company whose business is indicated by the Memorandum of Association actually filed. A change was made in that Memorandum of Association after he had agreed to take shares, and before it was filed. The change was not of any very great importance; but I am far from saying that if Mr. Oakes had, within a reasonable time after he agreed to take shares, examined the memorandum, and found that it differed, in however small a degree, from that on the faith of which he acted, he might not thereupon have repudiated his status as a shareholder.' We are strongly inclined to think, therefore, that the defendant is entitled to say, 'I never agreed to take shares in any Company of which the document shown me as Exhibit A, or at least a true copy of it, was not registered as the Memorandum of Association.'

6. But, however that may be, it is clear that the Memorandum of Association was, at any rate, the basis of the agreement to take shares, and that upon the analogy of those cases in which the Memorandum of Association has differed materially from the prospectus, the defendant must, in the absence of laches or other special circumstances, be entitled to relief, if the variances between the registered Memorandum of Association and Exhibit A, are material. In the present case no attempt was even made to charge the defendant with laches. Then are the variances here alleged material? With respect to the first variance relied on, viz., the omission of the word 'yearly' before the word 'profits' in Clause 4, we agree with the learned Judge, that, taking Clause 4 in the registered Articles of Association as a whole, the profits on which it is therein provided that the commission is to be calculated must be deemed to be the yearly profits. Such, we think, must be taken to be the meaning of the contracting parties, in the absence of any qualifying term, in a document of this nature. The omission was, therefore, a merely verbal one.

7. The second variance relied on as material, which consists in the insertion of words giving the Company the power by special resolution in general meeting to divide the shares previously fixed at Rs. 1,000 each into shares of Rs. 500 or Rs. 250 each raises a question of some difficulty. Before considering it, it is necessary to dispose of a counter-objection taken by the plaintiffs' counsel, viz., that Kallianji, the defendant's Munim, had himself expressed to Javerilal, the promoter, his regret that the shares were not of smaller nominal amount. We should feel considerable difficulty in accepting this statement of Javerilal; but in any case the contract which binds the defendant was not entered into on his behalf by Kallianji on the occasion of this alleged conversation, but by Mowji, another Munim, whose particular province it would appear to have been to manage such business, and that, too, two or three days subsequently, and nothing then passed that could have led the promoters to suppose that the defendant would not object to such a power.

8. That this addition was in its nature a material one, we think is plain. The nominal value of the shares necessarily determines in no small degree the class of persons who are likely to be members of the Company. The lowering of that value from Rs. 1,000 to Rs. 250 might certainly be expected to introduce a class of shareholders from whom the recovery of their contributions to the unpaid capital in case of dissolution would be rendered more difficult, and thus indirectly enhance the liability of the more wealthy members, who would have to make up the deficiency.

9. But it was argued that such a provision, however intrinsically material, was contrary to law, and, therefore, null and void, and that, consequently, the insertion of it could not constitute a material variation of which the defendant would be entitled to complain. The learned Judge of the Division Court acceded to this view. The case of In re The Financial Corporation L.R. 2 Ch. Ap., 714 was much relied on as establishing the first branch of the argument, viz., the illegality of the provision in question. The determination of this question was, however, not necessary for the decision of that case: and although Lord Cairns expressed a clear opinion that 'it would not be competent, even by unambiguous words in the memorandum, to obtain the power of reducing the shares.' Lord Justice Turner, on the other hand, whilst admitting that the Memorandum of Association could not be altered for the purpose of reducing the amount of the shares, refused to express any opinion, as being unnecessary for the decision of the case, 'upon the effect of the registration of a memorandum containing a provision not warranted by the statute.' The question has not, save on that occasion, so far as we are aware, been the subject either of judicial decision or comment, although the general view taken, by the Lords Justices, of the several sections relating to the Memorandum of Association of a registered Company was repeated by Lord Cairns in delivering judgment in the important case of Ashbury Railway Carriage and Iron Company v. Riche L.R. 7 Ir. Ap 653 and was adopted by the other Law Lords who took part in its decision. The question, therefore, whether a Company can reserve power to itself, as was done here, by its Memorandum of Association to diminish the amount of the shares, cannot, notwithstanding the dictum of so high an authority as Lord Cairns, be regarded as altogether free from doubt. The learned Judge of the Division Court, however, adopted the opinion of Lord Cairns without hesitation, and having pronounced the alteration illegal, and, therefore, as he says, 'inoperative or nugatory,' decided that it was also immaterial, because, as the learned Judge adds, 'it in no way alters the rights and liabilities of the defendant as created by the signature of the Memorandum of Association originally contemplated.' Doubtless, if the provision be an illegal one, it cannot alter the legal rights and liabilities of the defendant. But is it on that account necessarily immaterial? Does not the very fact of the provision in question forming part of the registered Memorandum of Association., which, as Lord Cairns says in the last-mentioned case, Ashbury Railway Carriage and Iron Company v. Riche L.R. 7 Ir Ap. 653, 'is as it were the Charter,' and defines the powers of the Company, make it material? Although the illegality of the provision might justify the Registrar of Joint-Stock Companies in refusing to register the Memorandum of Association and to issue a certificate of incorporation, still, when the Company has been incorporated it would prima facie be within the competency of the Company to exercise all the powers given it by the Memorandum of Association, and amongst them the power in question. The Act provides no means of rectifying or altering the Memorandum of Association except when the Company wishes to change its name. The possibility must, therefore, be assumed of a majority of shareholders wishing to exercise the power in question. Assuming its illegality, the defendant might probably by some proceeding, although what the right proceeding would be is not very clear, succeed in preventing the Company from putting the power in exercise. But in the view of the possibility of his having to resort to legal proceedings, and to incur, it may be, considerable expense, to protect his rights, can it be said that this addition to the Memorandum of Association which he signed is immaterial?

10. We have hitherto assumed, as the learned Judge has done, that the provision is illegal. But whatever the inclination of our own opinion may be, it is impossible to contend that the question must be regarded as settled, or even that it is altogether free from doubt. That the Company, therefore, should attempt to exercise the power, is not a mere possibility, but as probable, perhaps, and as fairly to be expected, as the exercise of any other of the powers which the Company possesses of regulating the conditions of its corporate existence. The defendant is, therefore, we think, entitled to say that whether his legal rights and liabilities are, or are not, affected by the introduction into the Memorandum of the power in question, his position is practically altered from what it would have been had the document he signed been adopted as the Memorandum of Association.

11. The decree of the Court below is, therefore, reversed, and the plaint dismissed with costs. The plaintiffs must also pay the defendant his costs of appeal.


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