1. P.V. Damodara Reddi and D. Duraiswami Nayudu, each applied in writing for shares in the Indian National Agencies, Limited. These shares were of the face value of value of Rs. 1,000. Their applications were considered at a meeting of the directors of the company held on 12th April, 1942. The applications for shares appear to have been made in February, 1942. Each of the applicants was allotted two shares at the meeting of 12th April, 1942 and the minutes of that meeting recorded that, upon these allotments being made, the two applicants joined the meeting, that is, as directors of the company. As well as being present at the remainder of this first meeting, the applicants are said to have been present at a number of other subsequent meetings. The applicants were duly entered on the register of the members of the company.
2. Some eight months later, in about December, 1942, the directors of the company resolved to cancel the allotment of these shares to the applicants. The present applications are applications to rectify the register by reinserting the names of the applicants. The applications are numbered as Applications Nos. 2258 and 2259 respectively of 1944. I have heard these applications together.
3. It is said on behalf of the company that the resolution to remove these applicants' names from the register of members was passed in consequence of a report of the auditor of the company on the balance sheet of the company's affairs as at 30th November, 1942. In that report, the auditor expresses the view that the allotment of the shares to the applicants was ultra vires and that the allotments might therefore be cancelled by the directors.
4. Before proceeding further, I may say I am disposed to regard the removal by the company of the applicants' names from the register of members as wholly illegal. The register of the members of a company is a public document and I know of no provision in the Companies Act which permits the directors of a company or any officer of a company to make any alteration to the register in the circumstances alleged in the present case. If these members' names had been improperly added to the register, the remedy or the company was to apply to this Court under Section 38 for the rectification of its register and not to take upon itself to alter the register,
5. As, however, the question of the validity or otherwise of the allotment of these shares is now before me on the present applications, I think it would be more proper and suitable for me to dispose of these applications on the merits rather than to allow the applications on the ground stated above and leave the company to file similar applications again, if they are so advised.
6. The company claims that these allotments vere invalid by reason of the provisions of Article 5 of the articles of association. That article provides as follows:
The shares shall be under the control of the directors who may allot or otherwise dispose of the same only among the existing members but shall not without the consent of the company in general meeting allot or otherwise dispose of them to outsiders.
7. It is said that, as the allotments were made by the directors without the consent of company in general meeting, they are accordingly void and wholly inoperative.
8. Now Section 30, Sub-section 2 of the Act provides that a person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. The names of both the applicants were entered in the register of members and accordingly the only question to be decided is whether they agreed to become members of the company. If they did, then the applications must succeed.
9. An agreement to become a member of a company is usually constituted by an offer in the form of an application for shares and an acceptance of that offer by allotment. Admittedly each of the applicants made a written application and the only question is whether those applications were accepted by the company.
10. As I have earlier observed, the company, relying on Article 5 of the articles of association, contends that acceptance of the applicants' offers by the directors alone was entirely inoperative and accordingly there were no allotments. Further, it is urged on behalf of the company that the applicants must be deemed, whatever may have been the fact, to have contracted on the footing of the articles of association including, of course, Article 5. This is, I think, undoubtedly the case. As was observed by Lord Cairns, L.J., in Peel's case1:
If the memorandum and articles of association are in existence when he (the member) applies for shares, and if he agrees to take his shares on the footing of the memorandum and articles of association (which would seem to be the case here), then I think that he ought to be held bound to look to the memorandum and articles of association before he applied for shares.
11. But, in my view, this does not dispose of the matter. There are, I think, two grounds on which these allotments must, in the circumstances of this case, be regarded as valid and binding on the company. In the first place, I consider that the applicants are entitled to rely on the rule laid down in The Royal British Bank v. Turquand. (1856) 6 E.B. 327 In that case, the articles of the company gave power to borrow with the sanction of a general meeting and it was held that a lender need not enquire whether such sanction had, in fact, been given. He was entitled to assume that it had and it was held further that the absence of sanction could not affect his position. The rule is stated as follows in Palmer's Company Precedents, Fifteenth Edition, at page 70:
This rule is that where a company is regulated by an Act of Parliament, general or special, or by a deed of settlement or memorandum and articles registered in some public office, persons dealing with the company are bound to read the Act and registered documents, and to see that the proposed dealing is not inconsistent therewith; but they are not bound to do more; they need not inquire into the regularity of the internal proceedings--what Lord Hatherley called ' the indoor management.' They are entitled to assume that all is being done regularly.
12. Applying these rules to the present case, I, hold that the applicants were entitled to assume that the directors were acting regularly and that the sanction of the company in general meeting had, in fact, been obtained. That being so, the allotments cannot now be avoided by the company and the applicants must be regarded as persons who agreed to become members of the company. This, added to the fact that their names had been added to the register of members, constitutes them members of the company, and, as such, they are entitled to have their names re-entered on the register of the members from the date on which they have been improperly removed.
13. The other ground, which is equally strong and in favour of the applicants, rests on the peculiar circumstances existing in this company. At the time when the applicants made applications for shares, there were only six members of this company and all of them were directors. Five of them were present at the meeting at which the allotments were made. Now it is said on behalf of the company, that, despite that circumstance, the allotments were bad because the previous consent of the company in general meeting had not been obtained. But in this case, a meeting of the board of directors of the company and the company in general meeting are two descriptions of one and the same body and in these circumstances I find it altogether too technical to consider whether the six members of the company are or are not to be regarded as having sanctioned what five of their number did as directors. In this connection, reference may be made to the case of Express Engineering Works, Limited, In re.1, which concerned a private company of five members, all of whom were directors. It is unnecessary to refer to the facts of the case but the following passages from the judgments of the learned Judges of the Court of Appeal who dealt with that case are, I think, particularly apt. Lord Sterndale, M.R., at page 470, observed:
In the present case these five persons were all the corporators of the company and they did all meet, and did all agree that these debentures should be issued. Therefore it seems that the case came within the meaning of what was said by Lord Davey in Salomon v. Salomon & Co. (1856) 6 E. B. 327 : I think it an inevitable inference from the circumstances of the case that every member of the company assented to the purchase, and the company is bound in a matter intra vires, by the unanimous agreement of its members.
14. Later, Lord Sterndale says:
15. It was said here that the meeting was a directors' meeting but it might well be considered a general meeting of the company, for although it was referred to in the minutes as a board meeting, yet if the five persons present had said, ' We will now constitute this general meeting ' it would have been within their powers to do so, and it appears to me that that was in fact what they did.' Warrington, L.J., observed as follows:
It happened that these five directors were the only shareholders of the company, and it is admitted that the five, acting together as shareholders, could have issued these debentures. As directors they could not, but as shareholders acting together they could have made the agreement in question. It was competent to them to waive all formalities as regards notice of meeting, etc., and to resolve themselves into a meeting of shareholders and unanimously pass the resolution in question. Inasmuch as they could not in one capacity effectually do what was required but could do it in another, it is to be assumed that as business men they would act in the capacity in which they had power to act. In my judgment they must be held to have acted as shareholders and not as directors, and the transaction must be treated as good as if every formality had been carried out.
16. I accordingly allow these petitions and direct the rectification of the register of members of this company by the re-entry of the applicants' names with effect from the date when they were wrongfully removed by the company. The applicants will have their costs of these applications.