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Kanhaiyalal Jhanwar Vs. Pandit Shirali and Co. and ors. - Court Judgment

LegalCrystal Citation
CourtKolkata High Court
Decided On
Case NumberCivil Suit No. 2834 of 1949
Reported inAIR1953Cal526,[1953]23CompCas399(Cal)
ActsContract Act, 1872 - Section 172; ;Companies Act, 1913 - Sections 21(1) and 34
AppellantKanhaiyalal Jhanwar
RespondentPandit Shirali and Co. and ors.
Appellant AdvocateD.C. Sethia, Adv.
Respondent AdvocateG. Mitter, Adv. for added Defendant 3
Cases ReferredRajib Nath v. Chota Nagpur Banking Association Ltd.
- .....and as security for the guarantee, in or about november 1947, pledged to the plaintiff certain shares held by him in the orient movietone corporation ltd., which is defendant 3 in this suit. the plaintiff claims the amount of the promissory note against the debtor and the guarantor and also the enforcement of the pledge by the guarantor. he has proved the promissory note and the guarantee and is, therefore, entitled to the money decree claimed against pandit shirali & co. and hemmad. 3. the difficulty arises with regard to the other part of the plaintiff's claim, namely, his enforcement of the pledge. this claim is opposed by defendant 3, the orient movietone corporation ltd. i will call this defendant, the defendant company. it says that it has a prior charge over the shares. this.....

Sarkar, J.

1. In this suit there are three defendants but only one of them, namely, defendant 3, appeared to contest the claim. The other two defendants filed their written statements but did not appear at the hearing. The substantial contest is whether the plaintiff or defendant 3 is entitled to a prior charge over certain shares belonging to defendant 2.

2. The plaintiff alleges that on 1-8-1946, defendant 1, Pandit Shirali & Co., executed a promissory note for Rs. -37,500/- payable to him on demand and defendant 2, Hemmad, guaranteed the due payment of the promissory note and as security for the guarantee, in or about November 1947, pledged to the plaintiff certain shares held by him in the Orient Movietone Corporation Ltd., which is defendant 3 in this suit. The plaintiff claims the amount of the promissory note against the debtor and the guarantor and also the enforcement of the pledge by the guarantor. He has proved the promissory note and the guarantee and is, therefore, entitled to the money decree claimed against Pandit Shirali & Co. and Hemmad.

3. The difficulty arises with regard to the other part of the plaintiff's claim, namely, his enforcement of the pledge. This claim is opposed by defendant 3, the Orient Movietone Corporation Ltd. I will call this defendant, the defendant company. It says that it has a prior charge over the shares. This question of priority was the principal point argued in this case.

4. The defendant company also denied that the plaintiff had any pledge. As I have said, the plaintiff proved the pledge and produced the share scripts and transfers. These transfers are, however, completely blank except for the signatures of Hemmad and of a witness who attested Hemmad's signatures thereon. It does not seem to me that this condition of the transfers makes the pledge invalid and I did not understand learned counsel for the defendant company to contend seriously that it was so. It is well settled that the person to whom share scripts and transfers in blank as to the name of the transferee and the date of the transfer are given, has the authority of the transferor to fill up these blanks. See -- 'In the matter of Bengal Silk Mills Co. Ltd.' : AIR1942Cal461 .

This authority is presumed from the fact that the transferor did intend, by what he had done, to transfer the shares to the transferee or to such person as the transferee wanted, and as the transfer would not be complete in law unless these blanks were filled up, the transferee must be deemed to have been authorised by the transferor to fill up the blanks. If such is the principle, then the transferee must be deemed to have been authorised to fill up all blanks necessary to make the transfer effective in law. Further, to my mind, even if the transfers were held invalid that would not affect the question. The deposit of the share scrips themselves wouldbe sufficient to create a pledge thereon. The transfers, if in order, would have transferred the title in the shares to the plaintiff, but a transfer of title is not necessary to create a pledge, simple delivery of possession being enough. It must, therefore, be held that the plaintiff became a pledgee of the shares in or about November, 1947.

5. The defendant company then says that, even if the shares had been pledged to the plaintiff in November 1947, it held a prior charge thereon. Its case is that, under an agreement between it and Pandit Shirali & Co.,. it had advanced large sums of moneys to the latter in connection with the exploitation of certain cinematographic films. It is stated that in February 1949 a sum of Rs. 61,095-13-9 was. due to the defendant company from Pandit Shirali & Co. under this agreement. It is further stated that, upon the defendant company pressing for payment of this sum, Hemmad interceded and guaranteed repayment. of the moneys.

According to the defendant company, upon such guarantee and upon Hemmad pledging; with the defendant company the shares mentioned above, it gave Pandit Shirali & Co. a year's time to pay. These facts, excepting the actual pledge, were established in evidence. It will be remembered that the share scrips were-lying with the plaintiff and had not admittedly been delivered to the defendant company. The verbal evidence and the minutes of the director's meeting of the defendant company show that there was only an agreement by Hemmad to pledge the shares but no actual, pledge. Such agreement, to my mind, is of no avail. It does not result in an actual pledge-as the scrips were not delivered in terms of the agreement. There is no evidence of any agreement creating a charge on the shares without a pledge. The result is that the defendant company cannot establish that in February, 1949, it acquired any right to the shares which would have been binding on the plaintiff. It is also clear that, even if it had acquired any rights then, such rights, must on the facts proved, have been of a kind which would have ranked in priority after the pledge-in the plaintiff's favour because the plaintiff's rights accrued earlier and no equity has been established entitling the defendant company to supersede the plaintiff.

6. The defendant company then contends-that it has, in any event, a lien on the shares under Article 39 of its articles of association.. That article is in these terms: 'The Company shall have a first and paramount lien upon all the shares registered in the name of each member (whether solely or jointly with others) and upon the proceeds of sale thereof for his debts; liabilities, and engagements, solely or jointly with any other person to or with the Company, whether the period for the payment, fulfilment, or discharge thereof shall have actually arrived or not and no equitable interest in any share shall be created except upon the footing and condition that Clause 16 hereof is to have full effect. And such lien shall extend to all dividends from time to time-declared in respect of such shares. Unless otherwise agreed the registration of a transfer of shares shall operate as a waiver of the Company's lien, if any, on such shares.'

7. On behalf of the plaintiff it is said that, the debts, engagements and liabilities men-tioned in Article 39 were those arising out of the company relationship and didnot include those arising out of an independent transaction e.g. the guarantee inthe present case. The binding force of an article arises from Section 21 (1), Companies Act. That section states:

'The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs and legal representatives, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act.'

In 'Hanutmal Boid v. Khusiram Benarsilal', ILR (1949) 1 Cal 199 (B), Das J. had to consider how far an article of a company, providing in very wide terms for reference to arbitration of disputes between the members inter se, constituted an arbitration agreement between them on which an application for stay winder the Arbitration Act could be based. He there held:

'The contractual force given to the articlesby Section 21 (1) is, by judicial decisions, limitedto matters arising out of the companyrelationship of the members as members.The statutory result does not extend beyondthat and does not convert the articles into acontract or covenant in reference to rightsentirely outside the company relationshipand does not affect or regulate the rightsarising out of a commercial contract withwhich other members have no concern.'

I am asked to apply this decision and. hold thatthe statute does not give a contractual forceto Article 39 so as to include within it the debtdue to the defendant company from Hemmadon the guarantee, on the ground that that is acommercial transaction outside the company relationship.

8. The judicial decisions on which Das J. 'based his view are decisions of English Courts on the corresponding section of the English Companies Act which is in the same terms as the section in the Indian statute. The extent of the contractual force given to the articles by the statute has always been and still is a question which cannot be regarded as fully settled. This is recognised in those judicial decisions themselves. One of the authorities, which Das J. called to his aid, is a passage in Halsbury's Laws of England (1932 Edition), Vol. V, Article 256 at p. 142. That passage, as the case before Das J., is concerned with the binding force of the articles as a contract between the members inter se. I am concerned with the binding force of the articles as between a member and the company. This position is considered in Article 255 at p. 140 of the volume in Halsbury's Laws of England already referred. It is there stated:

'The articles constitute a contract between the company and a member in respect of his rights and liabilities as a share-holder, and the company may sue a member and a member may sue a company to enforce and restrain breaches of the regulations contained in the articles dealing with such matters.'

9. It would not be wrong to presume from the reasoning employed by Das J. that he would have expressed his agreement with this statement of the law, if he had to consider acase between the company and a member. Thequestion is, what are 'rights and liabilities as a share holder?' Can it be said that the debt of Hemmad on the guarantee is as a shareholder? I think, it can. In -- 'Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd., (1886) 12 AC 29 (C), a similar decision was arrived at. That is one of the cases on which the statement of law read from Halsbury is based. One Easby held some shares in Briggs Son & Co. Ltd. The articles of Briggs Son and Co. Ltd.. contained a provision, being Article 103, similar to Article 39 in the defendant company's articles before me. Briggs Son & Co. Ltd., carried on business as coal proprietor while Easby was a coal merchant. Easby purchased coal from Briggs Son & Co. Ltd., and became indebted to it for the price of coal purchased. It was held by the House of Lords that Briggs Son & Co. Ltd., had a lien on Easby's shares of the amount due to it from Easby. Lord Blackburn in his speech put the position in these words at pp. 33-34:

'John Faint Easby, a coal merchant, became a proprietor of a number of shares in the respondent company, and obtained certificates for them. This property in the shares was, by virtue of the 16th section of the Act already quoted, I think, bound to the company as much as if he had (at the time he became holder of these shares) executed a covenant to the company in the same terms as Article 103, but I do not think it was bound any further.

John Faint Easby filed a petition for liquidation on the 31st of December 1883, being then indebted to the company. He had been a customer of the respondent company, and owed them a considerable sum at that date. He still continued the registered holder of the shares, and, if there had been no more in the case, it is not now at least disputed that the respondent company would have had a first lien on the shares.'

It is impossible to find any distinction between the debt that Easby owed to Briggs Son & Co. Ltd., and the debt that, in the case before me, Hemmad owes to the defendant company. I, therefore, come to the conclusion that the defendant company has, by virtue of Article 39, a lien on Hemmad's shares for the debt due to it from him on the guarantee.

10. I have already said that the shares were pledged to the plaintiff in or about November 1947 and Hemmad's guarantee to the defendant company was in February 1949. The question then arises, who has the priority, the defendant company under its lien or the plaintiff under its pledge? On this point -- 'Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd.', (C) is again an authority. There Easby had pledged the shares with the Bradford Banking Co. Ltd. as security for the balance due and to become due on his current account with the banking company. The Banking company had given notice of the pledge to Briggs Son and Co. Ltd., who replied that Easby was indebted to them and under their articles, they had a first and paramount lien on the shares, A question arose as to who had the priority and it was held that Briggs Son & Co. Ltd. had priority in resoect of the money that had become due to it before the Bradford Banking Co. Ltd. had given notice of the pledge but not in respect of the moneys that became due to it subsequent to the notice. It was held that the service of the notice decided the question, ofpriority. Lord Blackburn put the matter thusat p. 36:

'The first mortgagee is entitled to act on the supposition that the pledger who was the owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says, 'the hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second.''

11. The position then, applying the same principle here, is that, the security created by the lien in favour of the defendant company is not impaired till it had notice of another security created on the same shares. Now, the security created by the lien, it has to be remembered, is in respect of moneys due in present or to become due in future. This is what Article 39 provides. In the present case it does not appear that any notice was given by the plaintiff to the defendant company of the pledge in his favour. It follows that the lien in favour of the defendant company was never impaired and covered all moneys due by Hemmad under the guarantee whether they became so due before or after the pledge to the plaintiff.

12. It was then said that notice of the pledge had been given to one of the directors of the defendant company. No such notice was, however, pleaded and no issue was raised as to whether any such notice had been given. And naturally, no evidence was led on the question. It is, therefore, not open to the plaintiff to rely on any notice. Furthermore, I do not think that the defendant company had in fact any notice of the pledge to the plaintiff. It is said that Hemmad himself was a director of the defendant company and as he knew of the pledge, having himself made it, the defendant company must also be deemed to have known of it, for a director is an agent of the company and notice to an agent is notice to the principal. It is said that it was so held in -- 'In the matter of Union Sugar Mills Co. Ltd.' : AIR1933All607 .

In that case it appeared that one Debi Dutt was a director of the company and held under its articles 'all powers exercisable by the directors' in the management of the company's affairs. The company had under its articles a Hen on the shares held by Debi Dutt. But Debi Dutt pledged the shares with another person to secure advances received by him from that person. The question arose, whether the lien or the pledge had the priority. It was held, following -- 'Rainford v. James Keith & Blackwan & Co. Ltd.', (1905) 2 Ch 147 (E), that notice to the directors even in their personal capacity was notice to the company. It was also held that as the director was the agent of the company notice to him was notice to the company and the only exception was where the agent was acting in fraud of the principal. With regard to the last proposition, I think, it states the law too broadly.

The correct proposition may be gathered from Bowstead on Agency (10th Edn.) Art.110, p. 222 and it is that, knowledge acquired by an agent otherwise than in the course of his employment on the principal's behalf is not imputed to the principal. In pledging the shares to the plaintiff, Hemmad was not obviously acting as the director of the defendant company and his knowledge of the pledge was, therefore, not the knowledge of . the defendant company. Now coming to -- 'Rain-ford v. James etc. Co. Ltd.', (E) on which also the Allahabad case is based, it appears that the rules of a company provided that no transfer of shares would be effected without the production of the scrips. Notwithstanding this, however, the directors allowed a transfer of certain shares to be registered without the scrips being produced, relying on a statement of the transferor that the shares were lying with a friend but not as security. Under the terms of the arrangement relating to the registration of the transfer, the price of the shares was paid by the transferee, not to the transferor but to the company in reduction of the transferor's liability to it. The arrangement had in reality been 'made for the benefit of the company. The shares had, however, been actually pledged by the transferor to another person, who thereafter produced the scrips and the transfer deed signed by the pledger and asked the company to register a transfer in his favour. The company refused. The pledgee then brought an action claiming relief for the wrongful registration of the transfer by the company and was held entitled to recover the price of the shares from the company. It was said, that the transferor's statement that the shares were lying with another person put the company on enquiry about the right of that person in the shares and the company was affected with notice that that person might have a charge on the shares. Furthermore, it appeared that the directors of the company, who were in charge of making the arrangement allowing the registration of the transfer in favour of the first, transferee and the appropriation of the price paid by him towards the company's dues from the transferor, had in fact notice of the pledge. As the notice was received by the directors while acting as director that is to say, in the course of their employment under the company, the company, it was held, must be deemed to have notice of the pledge. The matter was put in this way by Stirling L. J. at p. 161 :

'Where the company in which the shares are held sees fit to deal with the shares for its own benefit, then that company is liable to be affected with notice of the interest of a third party, and is affected with such notice if it is brought home to the agents who managed the transaction on its behalf.'

On these grounds the company was made to refund the price of the shares appropriated by it, to the pledgee. This case, therefore, turned on the fact that those who made the bargain on behalf of the company, had notice of the plaintiff's rights. When, in making the bargain, they acted as agents of the company and had notice of the plaintiff's rights, the notice must, of course, be imputed to the company.

13. The facts in the present case are different. The agreement of guarantee by Hemmad was made on behalf of the company by its directors other than Hemmad. Such directors had no knowledge of the pledge by Hemmad and Hemmad's knowledge of the pledge cannot be imputed to the defendant company, for suchknowledge was not received by Hemmad asagent of the company. In making the pledge he was in fact acting for himself and not the company. The Allahabad case may be justified by reason of the special provision in the articles of the company there concerned, making Debi Dutt, in substance, the sole director of the company. In the case before me there is no such, provision. I am unable, therefore, to agree that -- 'In the matter of Union Indian Sugar Mills Co. Ltd.', (D) covers the present case.

14. It was then said that the defendant company had waived its lien because it entered into the agreement f9r pledge with Hemmad in February 1949. 'Rajib Nath v. Chota Nagpur Banking Association Ltd.', AIR 1948 Pat 443 (F) was cited as an authority for this contention. There, the defendant bank had an article substantially the same as Article 39 before me. The bank brought a suit against one of its shareholders for a debt due to it and obtained a money decree and in execution thereof the shares of the debtor were put to sale expressly stating that they would be sold free of incum-brance and itself purchased the same. The bank then realised that such a purchase would be bad, as it would result in reduction of its share capital without an order in that behalf from the Court under S. 55(1), Companies Act. It thereupon allowed the shares to stand in the debtor's name and subsequently purported to sell them in the exercise of. its lien under the articles, to some of its directors. The debtor's heirs having sued to set aside the sale, the suit was allowed. One of the grounds of the decision was that the bank's conduct in the previous suit, amounted to a waiver of the lien upon which it could not afterwards rely. The learned Judges based their decision on a passage in Halsbury's Laws of England. (Hailsham Edition) Article 738 p. 584 and two cases cited in support of that passage. The passage states that a lien is waived or destroyed where a party claims to retain goods on grounds different from those on which he rests his claim for lien and makes no mention of the lien. This statement of the law is clearly meant to apply to possessory liens and not to a non-possessory lien created by contract giving rise to an equitable charge, as was the case before the learned Judges of the Patna High Court and as is the case before me. I am unable, therefore, to hold that that case decides the question in the case in hand.

15. There is no doubt, however, that a contractual lien may also be waived. The question is, was there such a waiver in the present case. The law as to waiver of a contractual right may now be set out from Halsbury's Laws of England (Hailsham Edn,), Vol. VII, Article 285 p. 204:

'A contract may be discharged, either wholly or in part, before there has been any breach of it, by a waiver of. the right to insist upon its performance. Waiver is based on fresh contract or estoppel. Where, for instance, one party consents at the request of the other to extend the time for performance or to accept performance in a different mode from that contracted for...... if the new arrangement is in fact carried out, the obligation of the other party under the contract is discharged to the extent to which the promisee has waived his rights.'

16. It is true that if a person having a eontractual lien creating an equitable charge in his favour accepts a pledge of the goodsover which he has the lien, the lien disappears by waiver, for the pledge is a higher security than the equitable charge and the acceptance of it implies an intention to give up the lower security. As is stated in the passage just read from Halsbury, in order to have this effect the pledge must have been created, or to put it in the language of that passage, 'the new. arrangement must in fact be carried out.' Now, in the present case there was only an agreement to pledge which had never been carried out. The pledge had never in fact been made in terms of the agreement to make it. It cannot be said that a mere agreement to take a pledge amounts to a waiver of the existing lien. There is in such a case no executed contract giving up the lien, nor any conduct creating an estoppel against the exercise of the rights under the lien. In the Patna case there may have been waiver because an order for sale had actually been made expressly providing that the sale would be without any incumbrance. I am, therefore, unable to hold that, in the case in hand, the defendant company had waived its lien.

17. There will, in the result, be a decree for Rs. 43,000/- with interest on judgment and costs against defendants 1 and 2. Such costs are certified for two counsel.

18. There will be a declaration that the plaintiff is a pledgee of the shares mentioned in the plaint but such pledge will rank in priority after the lien thereon in favour of defendant 3. The plaintiff will pay the costs of this suit of defendant 3.

19. There will be an order that the shares may be sold by the Official Receiver of this Court and out of the sale proceeds defendant 3 will be paid the sum of Rs. 42,435/0/11. After payment of this sum to defendant 3 if there is any balance left that will be paid to the plaintiff in protanto satisfaction, of the decree made in his favour against defendants 1 and 2.

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