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Sree Ayyanar Spinning and Weaving Mills Ltd. Vs. V.V.V. Rajendran and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberSecond Appeal Nos. 185 and 186 of 1972
Judge
Reported in[1973]43CompCas225(Mad)
ActsCompanies Act, 1956 - Sections 81
AppellantSree Ayyanar Spinning and Weaving Mills Ltd.
RespondentV.V.V. Rajendran and anr.
Appellant AdvocateS. Mohan and ;D. Raju, Advs.
Respondent AdvocateR. Gopalaswami Iyengar and ;B.R. Ramesh Bapu, Advs.
DispositionAppeals allowed
Cases ReferredIn Sharpley v. Louth and East Coast Railway Co.
Excerpt:
.....of section 81 - section 81 applies when company proposes to increase its subscribed capital by allotment of shares to public - what has been done was only to tide over financial difficulties of company by allotting preferences shares to all creditors-directors of company - in such circumstances where shares were treated as paid up adjusting amounts due by company to various creditors, section 81 cannot have application - held, resolution clearly in contravention of section 81. - - in my view the continuous and consistent conduct of the plaintiffs at the time of the passing of the unanimous resolution and subsequently shows that they were willing parties for the allotment of shares if the shares had been allotted against their will, they would have questioned the same in..........also attended the meeting held on june 22, 1967, and approved the minutes of the earlier meeting held on march 10, 1967, wherein the unanimous resolution was passed, that they also attended the subsequent meetings which considered and approved the annual accounts of the company for the years 1966-67, 1967-68 and 1968-69 and signed the balance-sheet for all the above years, that in the balance-sheets the preference shares allotted to the plaintiffs were included and shown under the head ' issued and subscribed capital' and that, therefore, the plaintiffs by their conduct in acquiescing in the allotment of the seven preference shares are estopped from questioning the validity of the allotment of the shares in these suits. as regards the claims for the balance of rs. 1,300, the company.....
Judgment:

Ramanujam, J.

1. These second appeals arise out of the suits filed by the respondent in each against the appellant-company for recovery of the sitting fees due to them as directors of the company. The plaint allegations in both the suits are substantially the same. The plaintiffs in both the suits were shareholders of the defendant-company, hereinafter referred to as The company, till October 3, 1969, when they resigned their offices. As per Article 14 of the articles of the company they were entitled to sitting fees at the rate of Rs. 100 for each meeting of the board of directors attended by them while they were directors. According to the plaintiffs a sum of Rs. 2,000 was due to each of them on that account. The practice of the company has been to credit the sitting fees in the company's books as and when they accrued due, leaving it to the directors to draw it at their convenience. It is the common case of both the plaintiffs that when the total amount payable to each of them as sitting fees came to Rs. 700, the then managing director requested them to agree to accept seven preference shares of Rs. 100 each in lieu of the payment of the sum of Rs. 700, that the plaintiffs, however, were not amenable to that request but that the managing director sent the share certificates for seven fully paid preference shares which the plaintiffs firmly refused to accept and returned and that, therefore, they are entitled to get the entirety of sitting fees of Rs. 2,000 each due to them.

2. The company resisted the suits contending that the suit claims relate to the internal administration of the company and as such it is not maintainable in a civil court. It also contended that though the directors are entitled to a sitting fees of Rs. 100, for every meeting, the company with a view to conserve the little liquid cash it had, approached the directors with a request that they should take preference shares in the company in discharge of its dues to them by way of sitting fees which wasaccepted by all the directors, that they had passed a unanimous resolution on March 10, 1967, allotting the shares to the various directors including the plaintiffs, that both the plaintiffs were present in the meeting, that they had not demurred to the allotment of seven preference shares to each of them, that they had also attended the meeting held on June 22, 1967, and approved the minutes of the earlier meeting held on March 10, 1967, wherein the unanimous resolution was passed, that they also attended the subsequent meetings which considered and approved the annual accounts of the company for the years 1966-67, 1967-68 and 1968-69 and signed the balance-sheet for all the above years, that in the balance-sheets the preference shares allotted to the plaintiffs were included and shown under the head ' Issued and subscribed capital' and that, therefore, the plaintiffs by their conduct in acquiescing in the allotment of the seven preference shares are estopped from questioning the validity of the allotment of the shares in these suits. As regards the claims for the balance of Rs. 1,300, the company stated that the claim is premature as all the directors had agreed to wait till the financial position of the company improves.

3. On the above pleadings which are common to both the suits, the trial court proceeded to consider the sustainability of the claims of the plaintiffs. At the stage of the trial no oral evidence was adduced by either of the parties and they only produced documents in support of their contentions. The trial court held that exhibit A-1, the minutes of the meeting of the board of directors of the company held on March 10, 1967, exhibit A-17, the agenda for the meeting to be held on March 10, 1967, and exhibit B-6, the attendance register, showed that a unanimous resolution had been passed allotting preference shares to such of those members who are entitled to get the sitting fees including the plaintiffs, that seven shares with specific numbers had been allotted to each of the plaintiffs, that the plaintiffs were also parties to the unanimous resolution, that exhibit A-7, the day book of the company showed that a sum of Rs. 700, which had been credited on March 1, 1967, in the plaintiffs' ledger page had been debited on March 10, 1967, being the value of seven preference shares as soon as the unanimous resolution had been passed. Exhibits A 8 to A 16 are adjustment vouchers prepared on the same day showing that Rs. 700, towards the value of the seven shares, has been adjusted against the names of the plaintiffs. The trial court, therefore, found that the plaintiffs in both the suits were consenting parties to the allotment of preference shares to them, that they have not chosen to question the resolution in general or the allotment of shares in particular in any of the subsequent meetings held on June 22, 1967, June 22,1968, and July 17, 1969, which they had admittedly attended. It also found that the profit and loss account and the balance-sheet as on March 31, 1969, had been approved and signed bythe plaintiffs and that the said balance-sheets showed the total number of shares issued and subscribed which also included the shares allotted to the plaintiffs. It, therefore, held that the plaintiffs are bound by the allotment of the shares and cannot recover the sum of Rs. 700 each adjusted as the value of the seven preference shares allotted to each of them. As regards the balance of Rs. 1,300, the trial court held that the case of the defendant that all the directors of the company agreed not to press the claim till the financial position of the company improved cannot be a sufficient defence. It, therefore, passed a decree for the said sum in both the suits.

4. On appeal, the lower appellate court not only upheld the decree for the sum of Rs. 1,300 but also passed a decree even in respect of the sum of Rs. 700 which had been adjusted towards the value of the seven preference shares. The lower appellate court has held that the allotment of shares was without any application from or the consent of the plaintiffs, that, therefore, they are not bound by the allotment of shares made on March 10, 1967, and that the mere fact that the plaintiffs have attended the various meetings and participated therein will not stand in the way of enforcing their claim for the said sum of Rs. 700 each which was admittedly due to them by way of sitting fees. The lower appellate court also held that the allotment of preference shares on March 10, 1967, was in contravention of Section 81 of the Companies Act. Aggrieved against the decision of the lower appellate court the defendant has come in appeal.

5. The two substantial questions that have been urged before me are ; (1) whether the plaintiffs can question the allotment of shares made by the board of directors of the company on March 10, 1967, and (2) whether the said allotment of shares is in contravention of Section 81 of the Companies Act as has been held by the lower appellate court. The view taken by the lower appellate court that the plaintiffs are not bound by the allotment of shares made on March 10, 1967, is based on the following circumstances :

(1) the plaintiffs did not apply for allotment of any preference shares,

(2) when the share certificates were sent the plaintiffs immediately repudiated the factum of allotment and sent back the share certificates which showed that they were not willing parties to the allotment of shares,

(3) the mere fact that the plaintiffs signed the minutes or the balance-sheets cannot bind them if they established that there was no binding contract as between them and the company as regards the allotment of preference shares. The question is whether the above circumstances could justify the conclusion taken by the lower appellate court. The lower appellate court proceeds on the basis that there cannot be any allotment of shares unless there is an application in writing by the plaintiffs to the company seeking allotment of shares. The provisions of the Companies Act nowhere provide that there must be a written application for allotment of staresand, therefore, there can be an oral application for the purpose and an allotment made on the basis of such an oral application. If there has been an oral offer from the plaintiffs for the allotment of shares which had been accepted by the company and if an allotment is made by the company on the basis of that offer, it cannot later on be questioned on the ground that there was no application in writing.

6. In this case the plaintiffs were in the position of creditors of the company, and in the meeting of directors held on March 10, 1967, by a unanimous resolution the allotment has been made and the plaintiffs' accounts had been debited with the value of the shares. It is also significant to note that even the share certificate numbers allotted to the plaintiffs have been given in the resolution as against their names. Admittedly, the plaintiffs attended the meeting and participated in the proceedings, and the plaintiffs have nowhere stated that there was no such unanimous resolution. Even in exhibits A-3 and A-4 the protests made by the plaintiffs as soon as the share certificates reached them, they have not stated that there was no unanimous resolution on March 10, 1967, allotting the shares. There they have merely stated that they had not made any application for allotment of shares. Having regard to the fact that the unanimous resolution had been passed at a meeting which was attended by the plaintiffs, which fact is not disputed, it must be taken that they were willing parties to the unanimous resolution. The resolution came up for confirmation in the next meeting which was also attended by the plaintiffs. Even at that stage no protest was made against the said resolution. The balance-sheets prepared subsequent to the said allotment of shares for a period of three years had been seen and approved by the plaintiffs in the subsequent meetings held on June 22, 1967, June 22, 1968, and July 17, 1969, which they had attended. The question is whether without questioning the validity of the said unanimous resolution passed on March 10, 1967, the plaintiffs can question the allotment of shares as such only on the ground that they have not made any written application. Exhibit A-1 is the proceeding of the meeting held on March 10, 1967, and it is found therefrom that item 27 of the agenda was for considering the applications for preference shares. The resolution is stated to have been unanimously passed, that the shares applied for by the members should be allotted to them, and the plaintiffs' names are found as numbers 46 and 47 in the list of persons to whom shares had been allotted. Under Section 194 of the Companies Act the minutes of a meeting recorded by the company shall be evidence of the proceedings. Therefore, even though it has not been shown that there were written applications from the plaintiffs for allotment of shares, the minutes show that there should have been an oral application, by the plaintiffs along with others for allotment of shares. Thisappears to be clear also from the circumstances under which the unanimous resolution came to be passed. The company's financial position was not sound and, therefore, the amounts due to the various directors as sitting fees were agreed to be adjusted by allotment of preference shares and this all the directors agreed and the allotment of shares had been done unanimously. In my view the continuous and consistent conduct of the plaintiffs at the time of the passing of the unanimous resolution and subsequently shows that they were willing parties for the allotment of shares If the shares had been allotted against their will, they would have questioned the same in the various meetings held subsequent to March 10, 1967, but in all the subsequent meetings they have not demurred and they have been approving the minutes as well as balance-sheets prepared after such allotment. It appears that the plaintiffs willingly agreed for the allotment of the shares on March 10, 1967, but have chosen to resile from the contract for allotment of scares with some ulterior motive. I do not, therefore, agree with the finding of the lower appellate court that the plaintiffs are not bound by the resolution to which they were parties.

7. Jones v. Bellegrove Properties Ltd., [1949] 1 All E.R. 498 . was a ease where the plaintiff lent a certain sum in 1936 to a company in which he was a shareholder. At the annual general meeting of the company held on December 31, 1946, at which the plaintiff was present as a shareholder, the accounts for the years 1939 to 1945 were presented. In an action by the plaintiff to recover the money lent, the company pleaded that the action was barred by limitation. But, the plaintiff contended that the entry in the balance-sheet showing the total sum due to the various creditors constituted an acknowledgment of his debt and that notwithstanding that the accounts were presented to him in his capacity as shart holder and not as a creditor, his right of action must be deemed to have accrued on the date of the acknowledgment. In that case it was held that even though the debt due to the plaintiff had not been specifically and separately shown, the general entry giving the amount due to the creditors is sufficient to constitute an acknowledgment. The principle of the above decision has been followed and applied by this court in Rajah of Vizianagaram v. Official Liquidator, : AIR1952Mad136 . In Sharpley v. Louth and East Coast Railway Co., [1876] Ch. D. 663a shareholder in a company filed a bill to have his contract to take shares declared void on the ground of deception and misrepresentation by the company by reason of its having commenced its business before the minimum share capital was subscribed. The court in that case held that the shareholder is not entitled to the relief claimed as he had taken up the administration of the company as a director after the commencement of the business and thus acquiesced in the company carrying on the business and that in consequence of the act of acquiescence he hasentirely lost his right to resile from the contract to take shares. The finding of the lower appellate court that the plaintiffs are not, therefore, bound by the allotment of the shares made on March 10, 1967, has, therefore, to be set aside.

8. On the question as to whether the allotment of shares made on March 10, 1967, has contravened Section 81 of the Companies Act, it is seen that clause 6 of the articles of association of the company enables the directors to issue and allot shares in the capital of the company in payment or part payment for any property sold or transferred or any goods or machinery supplied, or for services rendered to the company in or about the formation or promotion of the company or the conduct of the business, and any shares which may be so allotted may be issued as fully paid up shares, or as partly paid up. It is this power which the directors had exercised in making the allotment of preference shares on March 10, 1967. The above provision deals with a special situation where the directors have been given the discretion to allot shares in lieu of payment of dues to the various creditors. Such an allotment of shares cannot, in my view, come under the scope of Section 81 of the Companies Act. That section applies when the company proposes to increase its subscribed capital by allotment of shares to the public. It cannot be said that in this case there has been an issue of further capital for the company. What has been done is only to tide over the financial difficulties of the company by allotting preference shares to all the creditors who were also directors of the company. In such circumstances where the shares are treated as paid up by adjusting the amounts due by the company to the various creditors, Section 81 cannot have application. Thus the view of the lower appellate court that the resolution is hit by Section 81 of the Companies Act appears to be erroneous.

9. Besides, even if the allotment of shares is held to offend Section 81, still it will only be voidable at the instance of shareholders who could be aggrieved against the non-allotment of shares to them. A shareholder who has been allotted a share cannot question the same on the ground that similar offer was not made to all shareholders.

10. The result is the second appeals are allowed; the decrees and judgments of the lower appellate court are set aside and those of the trial court are restored. There will, however, be no order as to costs. No leave.


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