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Des Raj Sher Singh and ors. Vs. Ratti Ram and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtPunjab and Haryana High Court
Decided On
Case NumberCivil Original No. 72 of 1959
Judge
Reported in[1962]32CompCas201(P& H)
ActsCompanies Act, 1956 - Sections 155
AppellantDes Raj Sher Singh and ors.
RespondentRatti Ram and ors.
Appellant Advocate K.S. Thapar and; Surjit Kaur, Advs.
Respondent Advocate C.L. Lakhanpal and; R.R. Tuli, Advs.
DispositionPetition dismissed
Cases ReferredNanalal v. Bombay Life Assurance Co. Ltd.
Excerpt:
.....superintendence under article 227 of the constitution. - the allottees of these shares had contracted in good faith with the company and they were entitled to assume that the acts of directors in making allotment of shares, were within the scope of their powers......share capital of rs. 50,000/- divided into shares of rs. 100/- each and rs. 25/- is paid on each share. 270 shares had been subscribed by 36 shareholders. it is stated in the petition that the company is making large profits and have been distributing dividends at very high rates of 25 per cent. per share and above.out of the seven directors, it is alleged that four directors, namely, ratti ram, ram kishan das, hari chand and parma nand have formed themselves into one group and with a view to monopolise the company and to utilise these funds in their own way they have improperly and illegally issued shares to their friends and relatives without offering them to the existing members. it is said that this allotment was irregular and illegal having been made solely with a view to injure.....
Judgment:
ORDER

Tek Chand, J.

1. This is an application on behalf of thirteen petitioners under Section 155 of the Companies Act for the rectification of the register of the members of Jai Hanuman Trading Company (Private) Limited Jind Mandi. The company was registered on 30th of April 1952 with authorised share capital of Rs. 50,000/- divided into shares of Rs. 100/- each and RS. 25/- is paid on each share. 270 shares had been subscribed by 36 shareholders. It is stated in the petition that the company is making large profits and have been distributing dividends at very high rates of 25 per cent. per share and above.

Out of the seven directors, it is alleged that four directors, namely, Ratti Ram, Ram Kishan Das, Hari Chand and Parma Nand have formed themselves into one group and with a view to monopolise the company and to utilise these funds in their own way they have improperly and illegally issued shares to their friends and relatives without offering them to the existing members. It is said that this allotment was irregular and illegal having been made solely with a view to injure the company and to secure a permanent majority.

Out of the 18 respondents impleaded by the petitioners, the application is contested by 16 whohave filed a single written statement. These respondents are 1 to 9 and 11 to 17. They include the persons to whom the new shares had been allotted. It is stated that out of the seven directors, three directors were in minority, namely, Lachhmi Narain, Jagdish Rai and Chhabil Das, who are-creating impediments in the way of a smooth and efficient working of the company.

It was denied that the new shareholders were friends and relatives of the four directors alone as they were also related to some of the petitioners. The charge of an irregularity and illegality was also denied. It was stated that the company required funds to extend its business and the allotment of new shares was necessary. Applications for new shares were being received from time to time and, almost every year fresh, allotments were being made. On the pleadings of the parties the following issue was framed :

'Whether the names of the respondents are entered on the register of members of the company without sufficient cause?'

2. The petitioners produced two witnesses. P.W. 1 is Rameshwar Das, the Manager of the Company. He stated that upto November, 1959, 276 shares had been allotted and On each share Rs. 25/-had been paid. In the year 1952-53 dividend at seven per cent had been declared and in the next year the dividend was Rs. 20/- per share. In the year 1954-55, dividend was paid at Rs. 25/- per share and in the year 1955-56, Rs. 30/- per share was declared as dividend and Rs. 20/- per share in the next year.

In the year 1956-58, only Rs. 5/- was paid per share as dividend but no dividend was declared in the year 1958-59. This company works as commission agents and brokers for persons entering into forward contracts in respect of the various commodities in the town of Jind. These forward contracts take place through the company. The company takes responsibility for payments of money due from the contracting parties. It was also stated by this witness that a sum of Rs. 26,000/- was lying to the credit of the company for distribution as profits, and Rs, 19,700/- was set apart for charities.

In the beginning of November, 1959, about Rs. 95,000/- stood to the credit of the company in the Punjab National Bank in current account in addition to a sum of Rs. 45,000/- in fixed deposit. The company had also purchased postal certificatesworth about Rs. 5,000/- and in November, 1959, a sum of Rs. 14,000/- was also available for distribution as profits.

3. In November, 1959, 61 shares of Rs. 100/-each on which Rs. 25/- per share had been Paid, were allotted to 12 persons, 2 out of whom were old share-holders. This was on 3rd of November, 1959. The objection of the petitioners relates to the allotment of these 61 shares.

4. This company was floated in 1952 with 30 members who owned 64 shares. In 1953, one more member was added and in 1954 three more persons joined. In the year 1955, there was an addition of 8 members and in 1956 of six. Shares were not allotted to anybody in the year 1957 or 1958. The directors in minority did not object to the allotment of any shares prior to November 1959.

5. Shri Lachhmi Narain, Director, appeared as P.W. 2. He stated that he had been a director of the company ever since its formation. He was present at the Directors' meeting of 3rd November, 1959 when 61 shares were allotted and that he objected to the allotment of these shares on the ground that the new members were not trading members and the new shares were being allotted with, a view to create a further majority in favour of the party of the Chairman. He said that the object of getting a majority for the Chairman's party was to afford accommodation to those who were on friendly terms with him.

6. The contesting respondents produced Ratti Ram the Chairman of the company as R.W. 1. He deposed that the meeting of the directors held on 3rd of November, 1959, was attended by all the seven directors when the new shares in question were allotted and this was done as the company needed capital. He further stated that all the applications had been considered in the meeting. He admitted that out of the new shareholders, two persons Rameshwar Das and Chhana Mal were distantly related to him.

In the cross-examination, Ratti Ram stated that tho company was engaged in commission agency business and did not invest any money or did any business of its own. Exhibit P.W. 1/1 is a copy of the resolution passed at the meeting of the Board of Directors held on 3rd of November, 1959. Four directors including the Chairman voted for the resolution and it was opposed by three directors, namely, Messrs. Lachhmi Narain, Chhabil Chand and Jagdish Rai.

7. Mr. K. S. Thapar, learned counsel for the petitioner has argued that taking into consideration considerable funds at the disposal of the company and further that no expenses were incurred in the form of investment, it was totally unnecessary to issue further capital. He also said that the company had been making huge profits when the paid up capital did not exceed Rs. 6,900/-; there were 276 shares on which Rs. 25/- had been paid. He contended that on the new 61 shares now issued, the company had received a sum of Rs. 1525/- only and this amount could not materially add to the company's funds which were already very considerable and far in excess of its requirements.

He also commented upon the high rates of dividend which were being paid. He wanted this Court to draw an inference that in the circumstances the allotment of 61 new shares was not in the interest of the company and had been made in order to help the friends and relations of the Chairman. Mr. Thapar has also relied upon three English decisions. In Fraser v. Whalley, (1864) 2 H and M 10 : 144 R. R. 7, it was held that directors of a company could be restrained from exercising a power to issue shares where their object was not to benefit the company but to create votes in order to control or influence a meeting of the sharer holders. It was found that an issue of shares in that case was not a matter of internal management of the company but it was in the nature of an attempt on the part of the directors to prevent the management from being legitimately carried on. In that case, it was found as matter of fact that a gross breach of trust had been committed and the Court interfered to prevent it. This decision rests upon its peculiar facts and for the application of the principle, the broad facts of this case have to be borne in mind.

8. The next authority to which reference was-made by Mr. Thapar is Punt v. Symons and Co., Ltd. 1903-2 Ch. 506. In this case it was held that where shares had been issued by the directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of sharea by obtaining a majority of voting power, the company ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. Byrne, J. said that on the evidence, he was clear that the said 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 statutory majority lor passing a special resolution while, at the-same time, not conferring upon the minority the power to demand a poll.

While granting an injunction restraining the defendant from holding the confirmatory meeting, he said, '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 for the purpose of altering the rights of parties under the articles, I think I ought to interfere.''

9. The third decision to which my attention was drawn is Piercy v. S. Mills and Co. Ltd., 1920 1 Ch. 77. In this case, the principle of the two cases referred to above was applied and it was held that a power to issue shares in a limited company given to directors for the purpose of enabling them to raise capital when required for the purpose of the company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and 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 their control or the control of themselves and their friends, over the affairs of the com-pany, or merely for the purpose of defeating the wishes of the existing majority of shareholders.

10. The principles underlying these three decisions are unexceptionable and the facts upon which they were decided, were peculiar to each individual case, and what this court is called upon is, to see, if on the facts of the instant case any principle of law has been violated. In reply to the above arguments of Mr. Thapar, Mr. B. R. Tuli, learned counsel for the contesting respondents said that no objection was taken by the three directors, opposed to the allotment of 61 new shares at the Board's meeting held on 3rd of November, 1959, on the ground that the company did not need funds but their opposition was on the ground that the directors wanted to create a permanent majority in their favour and desired to benefit their relations.

He also urged that the profits of the company in certain years may have been high but the company was also paying income-tax at the rate of 91 per cent, which left very little out of the profits for the company. He also maintained that there was no allegation of any coercion, aggrandisement, or expropriation and that the relationship of the new shareholders exclusively with the directors in majority had not been proved. He relied upon a single Bench decision of the Calcutta High Court in which the three English decisions referred to above had been considered.

In Jhajharia Brothers, Limited v. Sholapoor Spinning and Weaving Co. Ltd., AIR 1941 Cal 174, Ameer Ali, J. referring to the three English cases said,

'In those cases the directors issued the shares. They issued the shares being a minority in the company and a majority in directors' meeting with the object of becoming a majority in the company. The obvious distinction, whether it be fundamental or not is that here the increase of capital, although initiated by the directors, is the act of the majority itself. Generally speaking, you cannot charge a majority in the company with wrong in adding to the voting power of the directors. So far as I know there is no inherent wrong in that. A majority can increase its own majority, generally speaking, unless there be an element of expropriation or coercion.'

The above observations applied with force to this case.

11. The decision of the Supreme Court in Nanalal v. Bombay Life Assurance Co. Ltd., 1950 SCR 391 : (AIR 1950 SC 172), was also cited. The trial Court had held in that case that the issue of new shares was bona fide and the appellate Court had also come to the conclusion that the object ofthe 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, and both the Courts held that the company was in need of capital.Mahajan, J. cited with approval the following observations of the learned Chief Justice from thejudgment under appeal :

'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 cannot be said that the discretion vested in the directors has been exercised not in the interests of the company or for the purpose 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.'

Mr. Tuli said that according to the balance sheet of the company for the year 1959, the current liabilities of the company amounted to Rs. 2,72,588 including a sum of Rs. 2,41,431 as settlement accounts of trading members. He said that in the absence of proved mala fides, it should be assumed that majority of the directors when issuing fresh capital were having the interests of the company in view and that although the company by issuing 61 shares received only Rs. 1525 but there was also 75 per cent. liability undertaken by the new share-holders in respect of the uncalled share money.

12. I do not think that it is for this Court to go into the question whether the company was in fact in need of further funds. On this record the data furnished is meagre on which it cannot, be said definitely that the object was to benefit certain friends and relations at the cost of the company, it is not substantiated on this record that the Chair-man in fact has acquired a definite and Permanent majority. It was rather conceded by the petitioners, counsel that the majority was now on the petitioners' side. Loyalties of the share-holders in this case as in most cases fluctuate and in this case it has not been shown that the directors in issuing new shares had been motivated by ulterior considerations.

No objections had been raised by anybody including the directors in minority to the allotment of new shares which had been made prior to 1959. I do not think that I will be justified in invoking my powers under Section 155 of the Companies Act on the facts placed on record in this case. I cannot persuade myself to come to the conclusion that the names of the new shareholders had been entered on the register of members of the company without sufficient cause.

The contesting respondents had paid full consideration and consequently their names had been entered on the register of members. The allottees of these shares had contracted in good faith with the company and they were entitled to assume that the acts of directors in making allotment of shares, were within the scope of their powers. Moreover the matter relates to the internal management and I do not think that a case has been made out for interference by this Court with the decision of the majority of directors.

After giving careful consideration to the arguments of the learned counsel, I am not satisfiedthat the petitioners have made out a case for interference by tin's Court under Section 155 of the Companies Act 1956. In my view, the petition is devoidof merit and is dismissed with costs.


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